A.Y. 2018-2019 (Second Semester) Atty.

Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

CORPORATION LAW
TRANSCRIPT OF EH404

TYPES OF BUSINESS ORGANIZATIONS: corporation.

As to At least two At least five incorporators
1) Sole Proprietorship composition persons
As to powers Depends on what Based on what is provided
An individual does business. The owner personally conducts
exercised the partners in the Corporation Code
business. He can do it under his own name or he can do it under
agree upon for as and any incidental powers
a business name.
long as it is not which are expressly
contrary to laws, granted
The essence of a sole proprietorship is that the person doing the
morals, good
business is the business. The business is not a separate entity
customs, public
from the owner.
order or public
policy
2) Partnership
As to the As a general rule, Only the board of directors
management a partner can acting as a board can bind
A partnership is both a contract and a business organization.
bind the the corporation.
partnership Individually, a director
A partnership is where two or more individuals contribute
cannot bind the corporation.
money, property, or industry for the purpose of sharing profits
They have to act as a board
among themselves.
As to liability A partner can be General rule, all the
held liable with stockholders will be held
The partnership has a separate personality from its owners. It is
his personal liable up to the extent of
a business organization that is created by mere consent. Aside
property their contribution. They
from being a business organization, it is also contractual in
cannot be liable beyond
nature. It is created by mere consent of the parties and thus
what they contributed. This
there is no need to register or go through a process to create a
is what is known as limited
partnership. The moment the partners agree as to how much
they would contribute and what the business of the partnership liability.
will be, the moment that there is consent, a contract of As to the When a partner As a general rule, a
partnership is created. transfer of transfers his stockholder does not need
interest interest, the the consent of other
3) Corporation person to whom stockholders in order to
his interest is transfer his shares.
The most common type of business organization. A corporation transferred to
is an artificial being created by operation of law, having the right does not become The transferee does not
of succession and the powers, attributes and properties a partner automatically become a
expressly authorized by law or incident to its existence (Sec. 2, automatically, he stockholder. He has to take
B.P. Blg. 68 [Corporation Code of the Philippines]). needs the the deed of assignment to
consent of the the corporate secretary and
Essence of a corporation is found in its definition under Section other partners. have the transfer recorded
2 of the Corporation Code (CCP or B.P. Blg. 68) in the books. The moment
If this is done, the that the transfer is recorded
previous in the stock and transfer
Difference between a partnership and a corporation:
partnership is book that is the moment
PARTNERSHIP CORPORATION
considered that the transferee
As to creation Made by mere Upon approval of the dissolved and a becomes a stockholder.
consent or Securities and Exchange new one is The duty of the corporate
agreement of the Commission (SEC) created. The secretary is merely
parties evidenced by the issuance change in ministerial. The moment the
of the certificate of ownership transferee presents the
incorporation changes the deed of assignment, he has
partnership. to record the transfer in the
The creation of a stock and transfer book.
corporation requires the Consent is not required
intervention of the state
As to The death of a The death of a stockholder
because it is created by law
successional partner dissolves does not dissolve the
and not by mere contract.
rights the partnership. corporation. Rather, his
There has to be compliance
shares are transmitted to
with the legal process
his heirs. This is because a
before there can be a
corporation has the right of

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

succession. provided by law. Anything beyond that, the corporation is not

Attributes of a corporation: authorized anymore.
1. Artificial Being
2. Created by operation of law Types of powers based on the 4th attribute:
3. Successional Rights 1. Express Power – expressly provided or stated by law
4. Power and attributes or properties expressly provided for by law 2. Implied Power – based on or incidental to the express power of the
corporation
Artificial Being
It has a separate legal personality created by fiction of law. It is Anything beyond the express or implied power, the corporation has
considered a separate juridical entity from its stockholders. no authority to execute.

Created by Operation of Law PIERCING THE CORPORATE VEIL

In order to create a corporation is mere agreement is not sufficient. It
has to have the consent of the state done through the submission of
requirements to the SEC. The consent of the state is manifested by Liability of Corporations
the issuance of the certificate of incorporation. GR: Only the corporation can be held liable even if it was the
member of the board who signed the contract in behalf of the
The articles is what you file to the SEC, your charter documents and corporation.
articles but that is not the manifestation of consent yet. Such consent
is manifested through the issuance of the certificate of incorporation. The consequence of having a separate and distinct personality is that
it can enter into contracts under its own name and incur obligations
Created by Law Created by operation of law solely in its own name. It is not the obligation of its BOD, Officers and
stockholders.
Creation of Local Government After complying with the
Units through passage of a procedure found in the
A stockholder of a corporation does not have any right to a land
charter (in the form of a law). Corporation Code, it will give
purchased by a corporation even though he/she provided the funds
rise to the creation of a
(in the form of investment of stock).
corporation.
Corporations created by law Corporations created by
Regardless of how the corporation sourced its funds and from which
are governed by its charter operation of law are governed
stockholder, it does not matter. The moment the investment is made,
by the Corporation Code
that investment turns into the property of the corporation, solely of the
corporation. The stockholder does not have any claim because the
Right of Succession
law considers the corporation as a separate and distinct personality .
Means that if there is a change in the stockholders or board of
Is there an exception to this rule that it is separate and distinct to its
directors, the corporation continues to exist.
stockholders?
This right of succession comes from its right of being an artificial
XPNs: (Doctrine Of Piercing the Corporate Veil)
being. No matter what happens to your stockholders, it will continue
1. Defeat of public convenience
to exist as an artificial being separate and distinct from its
2. Fraud Cases
stockholders. Death of a stockholder does not affect the existence of
3. Alter Ego Cases
the corporation.
Reason behind piercing the veil:
Death and incapacity are those involuntary transfers. The succession
There is a need to pierce to veil to protect the law against injustices
also applies to voluntary transfers for corporation. Even if there is a
because they hide behind the corporate existence in order not to
transfer of shares the corporation still exists.
incur liability.
In the transfer of shares:
Existence of a corporation as a separate entity is given by law as a
GR: Consent of other stockholders is not needed
concession for:
XPN: When the article of incorporation expressly provides.
1. Convenience and
Powers and Attributes 2. To facilitate business and economic transactions.
The corporation also has powers and attributes given by law and
incidental to its existence. It means that a corporation can: But in reality, is there a person there? Do you have a real person
1. Sue in its own name there? No, its incorporeal. However, if that fiction and artificial entity
2. Acquire properties is now being used to commit fraud or harm the public, courts will now
3. Enter into contract disregard the separate entity of the corporation and make the
stockholders liable for whatever liability of the corporation. It will
This fourth attribute is a direct result of a corporation being an consider the illegal act of the corporation the same as that of its
artificial being. stockholders.

This means that because a corporation is created by operation of law Solidbank Corporation v Mindanao Ferroalloy Corporation
as a separate and distinct entity, the powers is limited to only that Facts:
prescribed by law and any power incidental to the express powers

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Respondents, as officers, secured loans from the bank in the name
of the corporation. The corporation was not able to pay. Thus, a
collection suit was filed against the officers and the corporation itself.
SC said that the corporation has a separate personality from its
officers and the latter signed not in their personal capacity but on
behalf of the officers who signed cannot be held liable.
Argument of Solidbank to implead officers of Ferroalloy:
By virtue of a loan where the loan documents were signed by Cu and
Jong.
A corporation is merely an artificial being, there is no real person
there. It has to act through its representatives. It cannot sign
contracts by itself so it needs to have authorized personnel signing
the contract on its behalf.
When these officers sign the contract in behalf of the corporation,
does it mean that they now become liable same with the
corporation?
No, they are not liable. Merely acting as a representative of the
corporation or signing documents in behalf of the corporation will not
render them liable.
What would make them liable? Pierce the veil of corporate entity.
Is there any other way to hold them liable without piercing the veil?
What is the essence of signing twice?
When they signed the first time, it was not really them personally
signing. It was the assent of the corporation. If they had signed a
second time, that would mean that they are binding themselves
personally as co-maker or a co-debtor of the corporation which would
make them solidarily liable.
GR: An officer is not liable for the contracts he enters into in behalf of
the corporation.
XPN (As ruled in the Solidbank Case): That officer voluntarily made
himself liable. This is allowed that as an officer, you act as a co-
maker, guarantor or surety of a corporation. If you do that, there is no
need to pierce the veil because you are already solidarily liable with
the corporation.
SC found: Officers were merely acting as representatives of the
corporation so they are not liable.
TN (based on a question of a student): In piercing the veil, even if
you are not a representative of that corporation in the transaction, by
virtue of the fraud committed by the corporation against the public,
you will be held liable. This is different from the provision in the code
which provides for liability of officers.
Zambrano v. Pclil Carpet Manufacturing Corp
Facts:
Employees of Phil Carpet were terminated due to serious losses of
the company. The procedures for termination were followed and they
signed a quitclaim. But, they filed a complaint against the company
alleging that there was an unfair labor practice because Phil Carpet
ceased its operations to transfer its assets to Pacific Carpet hence,
their termination. They allege that both companies are one and the
same.
EH 404 | UNIVERSITY OF SAN CARLOS
GR: A corporation as an artificial being has a separate and distinct
personality from its stockholders, directors, officers and any other
legal entities.
What was the relationship between Phil Carpet and Pacific Carpet?
Pacific Carpet was a subsidiary wholly owned by Phil Carpet. This is
other than they have the same officers, BOD, equipment, business,
clients. Phil Carpet was the parent company, it owned all of the
outstanding shares of Pacific Carpet.
Does this mean that rules on artificial personality applies?
SC: A corporation has a personality separate and distinct from the
persons composing it as well as from any other legal entity to which it
may be related. So not just its stockholders, BOD or officers but also
its subsidiaries or parent companies, affiliates, they are separate and
distinct from each other. Separate legal fiction not only applies to
natural persons but also to juridical entities.
Example:
 A, a natural person owning 100 % of X and Y Corp:
 A is a separate entity from X Corporation.
 A is also a separate entity from Y Corporation.
What about X and Y here? They are owned by a common person,
are they considered as one entity?
GR: They are separate entities. A corporation has a personality
separate and distinct from the persons composing it as well as from
any other legal entity to which it may be related.
What else needs to be present for the veil of corporate fiction to be
pierced?
The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely:
1) Defeat of public convenience as when the corporate fiction
is used as a vehicle for the evasion of an existing
obligation;
2) Fraud cases or when the corporate entity is used to justify
a wrong, protect fraud, or defend a crime; or
3) 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.
Alter Ego Cases:
The layman’s definition is that it is a dummy/representative, it has no
will of its own and is controlled by another entity.
Grounds in order to apply the Doctrine of Piercing the Corporate Veil
under Alter Ego Cases:
1. Control Test
2. Fraud Test
3. Harm Test
Case law lays down a three-pronged test to determine the application
of the alter ego theory, which is also known as the instrumentality
theory, namely:
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
(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
plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test.
This test requires that the subsidiary be completely under the control
and domination of the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate
entity will be ignored.
It seeks to establish whether the subsidiary corporation has no
autonomy and the parent corporation, though acting through the
subsidiary in form and appearance, "is operating the business directly
for itself."
The second prong is the "fraud" test.
This test requires that the parent corporation's conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful. It examines
the relationship of the plaintiff to the corporation. It recognizes that
piercing is appropriate only if the parent corporation uses the
subsidiary in a way that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or fundamental
unfairness."
The third prong is the "harm" test.
This test requires the plaintiff to show that the defendant's control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection between the
fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the
plaintiff should be established.
The plaintiff must prove that, unless the corporate veil is pierced, it
will have been treated unjustly by the defendant's exercise of control
and improper use of the corporate form and, thereby, suffer
damages.
As to control, it is not just owning shares but complete control over
the company and the fraud test means that the control is used to
perpetrate fraud then you pierce the corporate veil and the 3 rd is
harm, so not just a fraud but a harm done to another. So all in all
control is used to perpetrate fraud, fraud then causes harm. This is
what needs to happen in order to apply the alter ego doctrine.
EH 404 | UNIVERSITY OF SAN CARLOS
The case requires that all 3 must be present before the veil of
corporate entity can be pierced. In this case there was control in the
form of ownership of Pacific but the other 2 were not present.
What was proven here?
What was proven was that there were legitimate business losses and
that the Pacific was already incorporated before the losses, the
laborers knew what they were signing when they signed the
quitclaims.
The SC said in this case is that mere ownership by a single
stockholder or another corporation of all or nearly all of the capital
stock of a corporation is not nearly sufficient ground for piercing the
veil.
Control by itself is not enough there has to be fraud and harm, so if
these three are present that is the time you can use the alter ego
doctrine to pierce the veil, it was duly proven that Phil Carpet was
really losing1.
Martinez v CA
Facts:
In this case, CLL which is a foreign corporation engaged in the
importation of molasses from the Phil which are obtained from a
company called Mar Tierra which is a domestic company and the
president if Mar Tierra was Wilfred Martinez.
Who was Wilfredo to CLL?
CLL has nominee shareholders and one of them was a firm also
owned by Wilfredo which was Baker Mckenzie (their firm here in the
Phil is Quisumbing Torres). Baker was a nominee stockholder but the
beneficial ownership was vested in Wilfredo Martinez, Lacson et.al
RJL owned some of the shares of Mar Tierra which was 42% owned
by petitioner Ruben Maritnez. Ruben had nothing to with CLL he was
neither a beneficial owner nor a stockholder of CLL. He was a
stockholder of RJL.
CLL purchases molasses from Mar Tierra through letters of credit 2.
1
Their audited financial statements were audited by SGV one of the biggest auditing firms in the
country and because it is true that there really were substantial losses, under the Labor Code this
is one of the authorized causes for terminating employment, since there was a valid ground the
liability of Phil Carpet can’t be transferred to Pacific Carpet.
2
Letters of credit is a financial device where in an ordinary case, you have a buyer who wants to
buy but is afraid to pay because the goods may not arrive at the same time you have a seller who
wants to sell but is afraid that the payment will not arrive, this is used when the two are in different
places, you make sure that there is payment and delivery.
We have the letter of credit, the buyer goes to a bank applying for a LOC, when that is granted the
bank will now inform the seller that the bank has a letter of credit in your favor from the buyer so
now you can deliver the goods and ship them then present to us the shipping docs. When the
documents are presented then the bank will pay the seller, it is now an undertaking of the bank to
pay. The seller knowing that he can get paid can now ship them then bank will inform the buyer
that the goods have been delivered and it has paid on the buyer’s behalf so now the buyer will be
the one to pay the bank.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
This is how CLL and Mar Tierra did their business and their bank was
BPI. The bank transferred funds to Mar Tierra upon instructions of
CLL, so what happened next was that there was a non-payment of
$340k.
CLL had Money market placements3 with BPI so the arrangement
was that the bank will deduct the deposit from the amount that was
paid to Mar Tierra. The bank did not do this because at the time the
money market placements were not matured and so instead of
deducting it from the deposit, it recorded as a receivable from CLL
meaning CLL owes the bank.
When the placements matured, the bank did not collect but they
allowed withdrawal from amount. So at the end of the day there was
no more money in the account of CLL but CLL still had an obligation
to the bank.
The bank filed a case against CLL, Wilfredo and Ruben, He was
included because he was one of the signatories of the account.
Ruben questions why he was impleaded because he had nothing to
do with CLL.
The bank filed a case for the payment of the 340k against CLL,
Wilfredo et.al and Ruben.
Why was Wilfredo and Lacson liable in the RTC and CA?
Because they signed and agreed that they bound themselves
solidarily with CLL while Ruben Martinez was made liable by the RTC
because he owned shares in RJL.
RJL owns share with Mar Tierra and Mar Tierra and CLL had
common stockholders and that he was a co-signor in the bank
account, so they ruled that Ruben was liable because of such
connection they pierced the veil.
Is this valid?
No. The SC said that the mere fact the majority stockholder of Mar
Tierra is RJL and that Ruben along with Jose and Luis Martinez
owned 42% of the corporate stock does not mean that they had
complete domination over Mar Tierra.
There was no showing that Ruben even benefitted of the transaction.
Just because he was a signatory, does not mean that he can be
made liable. Control alone does not warrant piercing the veil.
The SC said that the mere fact, therefore, that the businesses of two
or more corporations are interrelated is not a justification for
disregarding their separate personalities, absent sufficient showing
that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights
So Ruben was held not liable, Wilfredo and Lacson were liable.
How does the case of Tan Uy differ from Martinez or Zambrano,
because we said that mere ownership of stock does not pierce the
corporate veil?
3
Financial instrument with high liquidity and short maturation periods – definition from Google
EH 404 | UNIVERSITY OF SAN CARLOS
In this case, the corporation was used to evade the liability from the
other corporation. It would cause harm, thus the corporate veil may
be pierced.
An important fact in this case was that Hammer and Goldkey
commingled their assets. Meaning one corporation benefited from
the other’s loan. Even without an express finding of fraud on the part
of Goldkey, by the mere fact that it benefited, then it should be held
liable.
Ordinarily, control alone is not sufficient, unless there is a finding of
fraud and harm. But an exception is this case of Uy, where the
commingling of assets is considered sufficient ground to consider
them as one entity.
CIR v. Norton and Harrison Company
Facts:
Norton was a retail company engaged in distribution of merchandise,
while Jackbilt was a corporation engaged with manufacturing of
concrete blocks.
Norton had an arrangement with Jackbilt to be its exclusive
distributor of such concrete blocks. Eventually Jackbilt was absorbed
by Norton. CIR raised the question of the relationship between the
two corporations.
CIR wanted to base their tax liability on Norton’s sale to the public,
while Norton only based it from their purchase from Jackbilt.
What was wrong with the scheme used by Norton and Jackbilt?
The scheme used was that Norton and Jackbilt essentially separated
their report for their income. This scheme would allow Norton to file
its own tax, as well as Jackbilt with its own tax. They added another
layer of transaction to lower the base of the two corporations.
However, if they considered it to be one entity or one transaction, it
would have been bigger. By structuring their transaction to a middle
man, they increased the cost which the CIR found to be a scheme to
evade taxes.
Remember, there can only be alter ego allegations if there is fraud
present.
The Supreme Court found that this transaction was merely done to
evade taxes. And take note that Jackbilt was wholly owned by
Norton. It used Jackbilt, a separate entity, to perpetrate fraud. By
piercing the veil, we disregard the sales made by Jackbilt.
Thus, there was control by Norton, and fraud and harm caused to the
government. You apply piercing the veil.
Student: Atty, would it have made any difference if the circumstances
of the case showed that Norton did not exercise total control over
Jackbilt?
Probably, if they found that there was really an arms length
transaction between Norton and Jackbilt, then yes they could have
defended that point.
The problem is, adding another layer of transaction, they lowered
their revenue. With this, the lower rate applied.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Now, under the BIR there is what we call the transfer pricing
regulation. If you are dealing with an associate, the BIR has the right
to look into how much you are pricing the transaction. If the
transaction is below market, the BIR may asses you based on market
price.
In this case, it is similar to what the BIR can do, but remember this
case was decided way before there was a regulation. So they used
piercing the veil.
Student: Comparing this case (CIR Case) to the Tan Uy case, there was specific
mention of commingling of assets. Does such circumstance have greater weight
as compared to other circumstances like wages, and same employees?
The general rule is that there should be control, fraud and harm. But if there is
commingling of assets, meaning the other corporation enjoyed what was
fraudulently obtained by the first corporation, then you don’t need to prove fraud
and harm. Automatically, the control will be considered alter ego. Even if you
didn’t participate in the fraud, but you enjoyed the fruits of such fraud, then it
would be considered as ground for piercing the veil.
But if there is a co-mingling of assets, meaning the other corporation was able to
enjoy what was fraudulently obtained by the first corporation, you don’t need to
prove fraud and harm. Automatically, the control (by the other corporation) is
considered alter ego because you enjoyed the fruits, because you co-mingled
your assets, it will be considered as a ground for piercing the veil.
Student1: How do you quantify “might result into fraud”, because in the book I
read, if there’s control, it says if there’s an indicia that a transaction might result to
fraud then it may be a ground to pierce the veil of corporate fiction.
Atty: So when you say “might” there’s no fraud yet? So what is the basis of the
case? Isn’t it basic that you can’t file a case if there’s no harm done to you? You
can’t just question the arrangement of two corporations on the chance that it
might result to fraud when it did not even happen to you. You have no standing.
So for now, just get back to what you read and come back to me if there was
something you did not understand. From the way you described it now, “might
result to fraud” I don’t see what case you can file to pierce the veil. Just check it
out and let me know.
Like for the case of CLL and Mar Tierra, there it alleged CLL was just a sham and
Francisco Motors Corp v. CA
Facts:
Francisco Motors filed a case for a sum of money against the
spouses Manuel alleging they still had a balance for the purchase of
a jeep body. As a defense in a counter claim, Gregorio Manuel said
he still has a balance on his legal fees when some of the
stockholders of the corporation availed of his services in the estate
proceedings of Benita Trinidad.
The trial court ruled in favor of the Manuels saying that you can just
compensate whatever you owed each other.
Francisco Motors was not agreeable with the decision of the trial
court and brought the matter up to the Supreme Court saying it
cannot be liable for the debt to Gregorio Manuel. They insisted that
Francisco motors corp. is an entity that is separated and distinct from
the stockholders who availed of the services of one of the spouses
Manuel.
What was the ground of the CA when it ruled there can be
compensation?
The CA said that the incorporators and BOD of Francisco Motors
Corp. are the heirs of Benita Trinidad whose estate was settled by
Gregorio Manuel. So what the spouses were saying was whatever
the stockholders owed Manuel, the corporation also owed Manuel.
EH 404 | UNIVERSITY OF SAN CARLOS
On what principle?
The CA said that the veil of corporate fiction is recognized in this
jurisdiction for convenience and justice. So in this case, to pierce the
veil of corporate fiction is warranted to compensate Gregorio Manuel.
IOW, the CA countenanced piercing the veil to hold the corporation
liable for the debts of one of its stockholders, which is something
new. Because all the while, it’s making the stockholders liable for the
obligations of the corporation. But now it’s the other way around.
Was this a sound argument?
It was not a sound argument and the Supreme Court upheld the
position of Francisco motors and aside from reiterating the doctrine of
the veil of corporate fiction, it cited that the nature of the transaction
of the spouses Manuel that it was clearly a private transaction that
Francisco motors had nothing to do.
What is the basis for piercing the veil again?
The SC said the veil of corporate fiction may be pierced if there is a
finding that the two seemingly separate and distinct corporation has
dominate control over the other and that injury and harm was caused
to another person.
That’s Alter Ego Principle. In this case can you apply the rationale for
piercing the veil?
No. Because in this case, although the stockholders of Francisco
Motors Corp. are the heirs of Benita Trinidad, the SC said that you
are applying it in reverse. And here, there was no finding that
Francisco Motors Corp. was just an alter ego, an adjunct or used
merely as an agent of the late Benita Trinidad.
The SC said there is no hard and fast rule on how piercing the veil
can be applied. It is not in the corporation code, but was created
because of jurisprudence. But ordinarily it is this way.
You have a corporation, separate and distinct from its stockholders.
But when this legal fiction is used to commit fraud to third persons
then you disregard it and you go straight to the stockholders.
Because this legal entity is just created for convenience and to
facilitate business transactions. If this is used to perpetrate a fraud,
you use the doctrine of piercing the veil of corporate entity and make
the stockholders, officers, directors liable.
Now the question is if you can apply it the other way around. The SC
said there is no rule prohibiting that. But you have to look at the
reason of that doctrine. The reason of that doctrine is that legal fiction
cannot be used to defraud the public. Now, if this legal fiction is not
used to defraud the public, there is no reason to pierce the veil. So
the corporation remains to be a separate entity.
In the first place, the liability was ONLY PERSONAL TO THE
STOCKHOLDERS. It was them who owed the lawyer. You cannot
say that because they defrauded the public, you can hold the
corporation liable. The corporation had nothing to do with it. There
was no fraud.
The SC said the piercing the veil doctrine does not apply in the case
not because it’s the other way around but there is no reason to apply
it. To apply piercing the veil, there must be fraud. And that is not
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
present in this case. So the corporation cannot be held liable for the
liability of the stockholders because there is no ground to pierce the
veil because there was no fraud.
RATIO TAKEN FROM THE CASE:
The rationale behind piercing a corporation's identity to remove the
barrier between the corporation and the persons comprising it, to
thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed
activities. It is not applicable in the present case.
The personality of the corporation and those of its incorporators,
directors and officers in their personal capacities ought to be kept
separate. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed
against the corporation without violating basic principles governing
corporations.
Moreover, every action — including a counterclaim — must be
prosecuted or defended in the name of the real party-in-interest. It is
plainly an error to lay the claim for legal fees of private respondent
Gregorio Manuel at the door of petitioner (FMC) rather than individual
members of the Francisco family.
Kukan International Corporation v Hon. Amor Reyes
Facts:
Kukan Inc. has a bidding and won by Morales. Morales delivered his
obligation by supplying and installing the signages of the buildings for
Kukan Inc. Kukan only paid a partial amount of the obligation, thus,
there was still a balance left unpaid.
Despite demands, Kukan refused to pay resulting Morales to file a
case in court for the collection of the remaining amount. Kukan
subsequently defaulted in the trial by not appearing in court.
RTC ruled in favor of RTC allowing Morales.
The sheriff in executing the court judgment went to the address of
Kukan International to levy the assets as ruled. However, during the
execution, the occupant of such address explained that the assets to
be levied was actually owned by Kukan International and not Kukan
Inc, being a different corporation they are separate and distinct from
each other thus, the decision cannot be validly applied to them.
Morales then filed a motion to pierce the veil for the purpose of
executing the judgment againt Kukan International. In effect Morales
was trying to shortcut, rather than filling a case to pierce the veil and
having to go through all over again. Morales wanted the judgment
against Kukan Inc to be enforced to Kukan International concluding
that they are one and the same entity. He is thus using the piercing
the veil theory to enforce a judgment against a different entity to
another identity making it liable.
The SC opined that it is not a valid approach. Morales should file
another case against Kukan International. The elements should have
applied:
(a) dissolution of the corporation
(b) both corporation was comprised by same owners or
stockholders and transferring of assets
(c) intention to defraud
EH 404 | UNIVERSITY OF SAN CARLOS
Although Kukan Inc was actually dissolved, other elements were not
proven. Chua in this case (owner) owns more than 40%, the SC said
that mere ownership is not enough to justify the application of the
doctrine of piercing the corporate veil. Even if the remaining elements
were present, the motion will still not be allowed. The decision at that
time was already executory. Thus, it can no longer be changed.
The essence of piercing the corporate veil is to safeguard against
fraud, thus there is a need to establish that the corporation was used
to defraud and there was harm done. The ultimate result of piercing
the veil is to hold the stockholders of the corporation liable. Piercing
the veil creates liability. The doctrine is to be used to make the
stockholder liable for the obligation of the corporation.
Hence, asking the court to disregard the corporate entity and the
liability will attach to the stockholders. You use it in order to make the
person liable for an obligation. But SC said, piercing the veil cannot
be used to acquire jurisdiction. Acquring jurisdiction is not under the
Corporation code but subject to the technical rules under the Rules of
Court.
Even if its true that there are grounds to pierce the veil, doing it
through a motion during the execution phase of the case is not the
proper way. Because piercing the veil may establish liability but it
does not acquire jurisdiction over the other entity as they are still
separate entity.
General Rule is that a corporation as artificial being, used for
convenience and to facilitate economic transaction. But the moment
this fiction is used to circumvent the law or to defraud then the
corporation maybe be pierced making the stockholders liable to the
obligation.
If there is no fraud then you cannot use piercing the veil doctrine,
similar to Francisco and Zambrano case. It is a substantive law use
to create obligation and not a procedural rule that can be use to
acquire jurisdiction.
The SC in Kukan said that Morales is not prohibited from filling
another case, but it must be on the proper procedure and do it all
over again. Because you cannot acquire jurisdiction by saying that
piercing the veil, instead file a case against the other corporation first
of filed a case against them together.
Based on the case:
(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.
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.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

The suggestion that KIC is but a continuation and successor of You have corporation A owning corporation B 100% of the
Kukan, Inc., owned and controlled as they are by the same shares. Corporation A being the corporation in control is
stockholders, stands without factual basis. It is true that Michael the parent corporation. Corporation B is the corporation
Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock being under the control of corporation A is the subsidiary.
of both corporations. But such circumstance, standing alone, is
insufficient to establish identity. There must be at least a substantial If Corporation A owns and controls Corporation B and C –
identity of stockholders for both corporations in order to consider this B and C are affiliates.
factor to be constitutive of corporate identity.)
Corporation A owns 100% both corporation B and C.
Corporation A is the parent company as regards to
corporation B and C. As regards to corporation A,
corporation B is a subsidiary. As regards to corporation A,
corporation C is a subsidiary. As between corporation B
and C, they are affiliates of corporation A.
TYPES OF CORPORATION
1. Stock corporations – those whose purpose is to derive profit and 7. As to number of persons who compose them
there will be dividends distributed among stockholders.
2 essential elements: a. Corporation aggregate – a corporation consisting of more
1. Capital must be divided into shares of stock than one member or corporator.
2. Authorized to distribute its shares in the form of b. Corporation sole – it is a religious corporation which consists
dividends of one member or corporator only and his successor. (Section
2. Non-stock corporation – its purpose is for general welfare or other 110)
purposes not intended for profit.
Example: chief archbishop, bishop, priest, rabbi
Other classifications of corporations:
1. Whether for private purpose 8. As to whether they are for religious purposes or not
a. public corporation- created by law; formed by the government a. Ecclesiastical corporation – organized for religious purposes.
for public welfare; b. Lay corporation – organized for a purpose other than for
b. private corporation- created by operation of law; its purpose is religion; it may either by eleemosynary or civil.
for profit
9. As to whether they are for charitable purposes or not
2. Whether they are open to public or not
a. Eleemosynary corporation – one established for charitable
a. open corporation- membership is open to the public purposes or those supported by charity.
b. closed corporation- membership is limited within the family b. Civil corporation – one established for business or profit.
3. Their legal right to corporate existence 10. As to State under or by whose laws they have been created
a. de facto corporation- acting as a corporation without statutory a. Domestic corporation – incorporated under Philippine laws.
authority or grant by the State b. Foreign corporation – formed, organized or existing under any
b. de jure corporation- granted authority by the State laws other than those of the Philippines.
4. Whether true sense or limited So the last one you mentioned is as to place of incorporation. But the
higher classification before the place of incorporation, what other
a. corporation by estoppel- there is no corporate entity. The classifications would there be? Classification as to the nationality
persons, by their acts and admissions, are precluded from
claiming the non-existence of a corporation to avoid liability.
The liability is individual, not of the corporation. NATIONALITY OF A CORPORATION
b. corporation by prescription- acting as corporation without
statutory authority for a period of time Classification as to nationality is based on:
1. Place of Incorporation (What matters here is where the
5. Their relation to another corporation corporation is created)
a. Domestic corporation – that which is incorporated
a. Parent/holding corporation- owns other corporations. It has under the laws of the Philippines.
control over these corporations b. Foreign corporation – that which is incorporated under
b. Subsidiary corporation- a corporation controlled by other laws other than the Philippines.
corporation, known as a parent corporation
c. Affiliated corporation- one related to another by owning or 2. Based on stockholding:
being owned by common management a. Filipino-owned
b. Foreign-owned
Example:

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
There can be a domestic corporation that is foreign owned and a
foreign corporation that is Filipino national.
Example:
A corporation is organized here in the Philippines but the
stockholders are Japanese nationals.
A corporation can be organized under the Corporation Code even if
100% of its stockholders are foreign. The corporation code allows
such.
The only limitations are provided for under the Constitution and
special laws that corporations engaged in nationalized activities
where a certain percentage of ownership is reserved for Filipino
nationals. It is found in the Foreign Negative Investment List.
Foreign Negative Investment List
This is issued every 3 years. It lists down which corporations are
engaged in nationalized activities whose ownership is limited to
Filipino citizens. Outside of the FNIL, there is no requirement of
Filipino ownership. Meaning a 100% foreign owned corporation can
register their corporation under Philippine law. And that corporation
would be considered as domestic but foreign owned.
A corporation which is foreign can also be considered as a Philippine
national.
Example:
The corporation is organized with the laws of Japan but the
corporators are Philippine national.
If organized abroad, it has to be 100% Filipino citizens stockholdings
in order to be considered as Philippine national. In determining
whether domestic or foreign, the rule is simple.
Where are they incorporated? So if incorporated in the Philippines
regardless of their stockholdings, they are domestic. If incorporated
abroad, again regardless of stockholdings, that’s foreign.
Which of this two, based on nationality, place of incorporation or
stockholdings, is relevant under the corporation code?
Only the place of incorporation because if it is a domestic
corporation.
Does foreign corporations matter as far as the corporation code is
concerned? Where does it matter?
It matters when the foreign corporation intends to do business here in
the Philippines because if a foreign corporation intends to do
business and it forms a subsidiary, the subsidiary becomes a
domestic corporation. In which case, no further license is required.
But if the foreign corporation does not want to put up a subsidiary
here in the Philippines but if it intends to do business here in the
Philippines, it has to secure a license either as a branch or a
representative office from the Securities and Exchange Commission.
A foreign corporation cannot do business in the Philippines unless it
secures a license from the SEC. A domestic corporation does not
EH 404 | UNIVERSITY OF SAN CARLOS
need a license anymore because its Articles of Incorporation is
license enough.
That is why this is relevant as to the corporation code, the place of
incorporation. What about corporations as to stockholdings? Where
is this relevant? What is the governing law? Here it is the Foreign
Investment Act.
Under the foreign investment act, corporations are classified as
Philippine nationals or foreign owned corporations. And it matters as
to the type of activity that a corporation is authorized to do because I
have mentioned earlier that there are some activities which are
reserved for Philippine nationals. This one matters as to the type of
business a corporation can engage in.
So what are the tests to determine or identify a Philippine national as
opposed to a foreign corporation?
We have the control test and the Grandfather rule.
CONTROL TEST v. GRANDFATHER RULE
Control Test - Under this test, once it is clearly established that an
entity in 60% owned by Filipino citizens, further inquiry on the
ownership of the corporate shareholders is not necessary. The
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. (Taken from De Leon)
This is found in FRIA in which in case of corporate layering, in order
for the ultimate investee corporation to be considered a Philippine
national, each of the corporate stockholders and the investee
corporation:
“at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of
the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in
order that the corporation shall be considered a
Philippine national; (as amended by R.A. 8179).”
Grandfather Rule - a method of determining the nationality of a
corporation which is owned in part by another corporation by
breaking down the equity structure of the shareholder corporation.
(Taken from De Leon)
This is the test that aside from looking at the majority control, you
also take a look at the ultimate ownership of a corporation. Trace
back the ownership of a corporation to its roots. You must also take a
look at the indirect ownership.
TAKE NOTE: (from Tanya basin ganahan mu i-insert sa atong notes)
Grandfather rule; Example:
If there is a 24% indirect foreign ownership but there is another
company (Corporation C) who owns 40% of Corporation D, you now
have 40% direct foreign ownership. The total will now be 64% foreign
ownership (24% indirect, 40% direct).
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

In this case, Corporation B will no longer be a Philippine National MDMI 3,331 @ 1K 3,331,000 2,803,900 33.31%
because the foreign ownership is now more than the 40% limit. The
rule is, as long as it is 60-40, if you use the control test, it is always The petitioners alleged that using the Control Test in FIA, they have
Philippine national. If you use the grandfather rule, it will always be a sufficiently conformed the 60%-40% requirement. Using the FIA, the
foreign national or a non-Philippine national. McArthur would be a qualified holder of a MBSA. It is sufficient to
look at the shareholdings of each company. If each company is
In other words, after passing the control test, so you have the 60-40. 60%owned by Filipino citizens and its board of directors is owned by
Meaning 60% authorized capital stock outstanding and entitled to 60% Filipino Citizens, then that is a qualified Philippine National.
vote must be owned by Filipino citizens and the BOD are 60%
Filipinos for both corporations. After passing that, they have to MMC’s investment in McArthur would be considered 100% Filipino
undergo the grandfather rule? citizen. You do not bother to look at that the 60%, there is a foreign
ownership by MDMI. That is the control test.
Only in certain instances if there is doubt as to the ownership.
The owners of the three mining companies used the same structure
Narra Nickel Mining v Redmont (facts from Tanya notes) in all three corporations.
Facts:
The SC said that it is ludicrous to limit the application of the said word
Redmont took interest in mining and exploring areas in Palawan.
“doubt” only to the instances where the stockholdings of non-Filipino
After inquiring, it learned that areas were already covered by Mineral
stockholders are more then 40% of the total stockholdings of the
Production Sharing Agreement (MPSA) applications of petitioners
corporation.
Narra, Tesoro & McArthur.
The corporations interested in circumventing our law would clearly
Petitioner McArthur through its predecessor-in-interest Sara Marie
strive to have 60% Filipino ownership face value because that is the
Mining, Inc (SMMI) applied and was issued MPSA & Exploration
legal requirement. It would be senseless for these applying
Permit (EP). These were later on transferred to Madridejos Mining
corporations to state in their respective articles that they have less
Corp (MMC) and assigned to McArthur.
than 60% Filipino stockholders since the application would be denied
instantly. Thus, various corporate schemes and layering are utilized
Petitioner Narra acquired its MPSA from Alpha Resources & Devt
to circumvent the application of the constitution.
Corp and PLMDC which previously filed an application.
Subsequently, PLMDC assigned its rights and interests over the
If a corporation has less than 60% Filipino ownership, it will
MPSA application in favour of Narra. Another application of SMMI
automatically not pass the control test. Then, the principle upheld by
was filed and assigned such to Tesoro.
the SEC and DOJ are senseless because it would not even pass the
control test. In order to circumvent our laws, at face value, the
Total of 3 MPSI are granted and transferred/assigned:
corporation would always put 60% Filipino ownership.
1. Sara Marie Mining Inc (SMMI) - Madridejos Mining Corp (MMC) -
MacArthur
SC said that should not be the meaning of doubt.
2. SMMI - Tesoro
3. Patricia Louise Mining & Dev’t Corp (PLMDC) - Narra
The test to use to determine the Filipino Ownership is still the control
test. However, even if the control test is applied, but there is still
Thereafter, Redmont filed before POA 3 separate petitions for denial
doubt as to the true ownership of the shares, then apply the
of applications alleging that at least 60% of the capital stock of
Grandfather Rule.
McArthur, Narra & Tesoro are owned by MBMI- a 100% Canadian
corporation. Thus, they were disqualified from engaging in mining
NOTE: “When in the mind of the court there is doubt based on the attendant
through MPSAs which are reserved only for Filipinos. For the facts and circumstances of the case, in the 60-40 equity ownership of the
petitioners, they averred that they were qualified pursuant to RA 7942 corporation, it may apply the Grandfather rule.”
(Philippine Mining Act of 1995).
Facts and circumstances which gave rise to the doubt:
Respondent Redmont - invoked the grandfather rule  The three corporations owned by the same foreigner had
Petitioners Narra, Tesoro & McArthur – invoked control test similar corporate structure -that in itself is doubtful. But if
the structure was only correct, there will be no problem.
McArthur Shareholdings Total Paid-up Total
 Although the Filipino corporations owned majority of the
Mining Subscribe outstanding
capital stock shares, it did not provide for majority of the funds and
MMC 5,997 shares 5,997,000 825,000 59.97% majority of the funds actually came from the foreign
(Filipino) @ 1k corporations which owned lesser shares.
MDMI 3,998 shares 3,998,000 1,878,174 39.98%  Taking a look into this McArthur corporation, the Filipinos
(Canadian @ 1k had a paid up capital of P825,000, you compare that with
) the foreign paid up. Even if the foreign shareholding is less
than the Filipino shareholdings, it had more paid up capital.
MMC Shareholdings Total Paid-up Total And taking a look further at this 835K, so you take a look at
Subscribe Outsanding
capital stock
the mmc corporate structure, where does this money came
Olympic 6,663 shares 6,663,00 No paid up 66.63% from? the money came from MVMI, foreign-funded which
Mines @1K means the Filipino had no paid up capital

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
 So according to the SC, this structure gave rise to a doubt
as to the 60-40 Filipino ownership. Not to mention that this
corporate structure was applied consistently to the three
corporations. Meaning it was not done inadvertently but for
the purpose of the foreigner funding the mining
corporations. There was an intent.
 And so because there is doubt, apply the grandfather's test
and applying the grandfather's test, this company is not a
Filipino corporation
Based on the structure, what is the status of McArthur?
Under the control test, as long as 60% of the stockholding is owned
by Filipinos, then it is considered as a Filipino national. At first glance,
you have a Filipino corporation (MMI) which is allowed to hold the
MPSA.
But when you dig deeper and look at MMI’s capital structure, MBMI is
the major investor, as the Filipino ownership of MMI only had zero
paid-up capital.
What’s gives rise to the doubt as to the ownership of MMI?
When MMC purchased 60% of MMI’s shares, it was paid for with
foreign cash, as the Filipinos did not contribute. Which means that
MMI is 100% foreign funded. This is where the doubt comes from,
where the foreign stockholders are fully funding the mining company.
The question arises of who controls the mining company. It would be
stupid for the foreign company to pay all the cash but have no
control.
At first pass, it feels like it passes the control test. But this shows
corporate layering.
Is corporate layering allowed?
Yes. There is nothing wrong with corporate layering. In fact, this is
expressly recognized under the FIA. Under FIA , a corporation may
be owned by another corporate layering. It is allowed.
However, in both cases, it must be 60% Filipino-owned, and directors
to be 60% Filipinos.
Applying that test, MMI is 60% owned by MMC. MMC is also 60%
owned by Filipinos. So it passes the control test, hence, it is a Filipino
national.
But, do we stop at the control test? Before the Narra case, the
prevailing rule was the control test, and the grandfather rule was only
used if the Philippine stockholding falls below 60%. This is stupid
because if the Filipino stockholdings fall below 60%, it cannot even
pass control test.
In the Narra case, the SC came out with another rule in testing out
the nationality. First of all, the control test is still applied. If the
corporation does not pass the control test, automatic fail. If it passes
the control test, it is a Filipino national.
However, if there is doubt as to the ownership of Filipinos, based on
attendant facts and circumstances surrounding the structure of the
corporations, then the grandfather rule is applied.
How is the grandfather rule applied?
EH 404 | UNIVERSITY OF SAN CARLOS
You go to the essence of ownership. In this case, out of 10,000
shares of MMI, MBMI owns 2,000 shares indirectly owned by
foreigners (from 6,000 of MMC) and 4,000 shares directly, resulting
to ownership of more than 40 foreign participation.
Questions asked in class:
What if in this case Olympic Mining also invested, so not all of the
paid up capital was done by foreigners?
The result will change. The whole basis of the ruling was you apply
the grandfather rule as there is doubt. And the doubt comes from the
fact that MMI is fully funded by foreigners. If Olympic had paid up
capital, then there would be no doubt, and we would have stopped at
the control test.
What if the corporate layering structure did not exist, but that the
foreign corporation provided the technical staff, machinery, etc.,
would that warrant the use of the grandfather rule?
I don’t think so, although the essence of applying the grandfather rule
is not about really about corporate layering but on who controls the
corporation.
Under the Constitution, the control and beneficial interest should
belong to the Filipinos. If you violate that, then you are giving control
to the foreigners.
But as to whether or not you can use the grandfather rule, I don’t
think so. Because the grandfather rule is specific on indirect shares.
Indirect shares only apply if you have another corporation coming in.
In this case, there is no other corporation, so you cannot apply the
grandfather rule. But as to whether or not they are disqualified, then
yes, because there is still doubt as to control and beneficial
ownership.
What would then be the basis to use, since it is still 60/40 to
disqualify?
The definition of Filipino national (the two-fold test of outstanding
capital stock and BOD) only applies if it is on corporate layering. But
you can also have a Philippine national, domestic corporation with
60% of its capital stock that are owned by Philippine citizens. You
can use this definition to say that although it is 60%, they did not
have control, because the essence of the Constitutional requirement
is that the Filipino should be the one to benefit and control.
If there are circumstances that circumvent that, then you can have
the corporation disqualified. To the extent that you can say that
Filipinos are just dummies of the foreigners. In which case this
becomes a criminal case for violation of Anti-Dummy Law.
You can have the corporation disqualified. In fact you can even say
that the Filipinos are just dummies of the foreigners in which case it
becomes a criminal case for anti - dummy law. Its not black and
white. Just because it’s not corporate layering it doesn’t mean you
can already circumvent. It’s just easier to circumvent it with corporate
layering.
Just to clarify, both MBMI owned the two companies. Lets say
another company owns one of the companies?
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
The law does not distinguish because it merely says foreign
ownership and because the law says 40% foreign ownership,
regardless whoever the stock holder is then it is disqualified. But of
course it's harder to prove doubt if different foreign corporations own
it because it's harder to prove collusion. In this case it is easy to see
that there is only one company. In your case, you’ll have to prove that
the different corporations are working together to prove the
companies are working together.
You said that we do not always use the grandfather rule at first
because if we do then they will always fail the test of the grandfather
rule.
Yes, if you’re 60-40 and you apply the grandfather rule, you will
always fail. This case, 33% foreign but it still failed. So applying the
grandfather rule to 60-40 companies, you will always fail.
That is how we apply the control test and grandfather rule. Control
test first and if there are doubts on the attendant facts and
circumstances as to the beneficial ownership and control of the
Filipinos on the corporation then you apply the grandfather rule.
Now, the next question is, what shares or what capital do we apply
the test? To which capital should be 60% Filipino owned
Gamboa v Tevez (I and II)
Remember that for public utilities, it is at least 60% Filipino-
ownership not 100%.
Ruling: 60% must be applied to the common shares who have the
right to vote the directors.
PLDT had two classes of shares. First, the common shares. Second,
the preferred shares.
The question posed is what does “Capital” mean?
Voting, non - voting or total? In the first Gamboa decision, the SC
said that when you talk about capital under the constitution, you are
talking about beneficial interest and control.
How do you manifest that?
By voting in the election of the directors. This was the first Gamboa
decision. So the lawyers of PLDT filed for MR because PLDT had a
structure of 23% common and 77% preferred. If you base it on
outstanding capital, they would have passed the test. This is because
the 77% was owned by 99% Filipinos and the 20% was owned by
80% foreigners. Such that if you apply the test to the total
outstanding capital stock, the 60% would have still been under the
requirement of the law. But, if you apply the 60% against the 23%
common shares then that would have been below the 60%
requirement of the law because that 23% was around 80% owned by
foreigners.
You must look into the shares entitled to vote the directors. That is
how you manifest the control and beneficial interest. The first
Gamboa said you apply 60% in the common shares entitled to vote
the directors. In the second Gamboa, the Supreme Court said it must
be applied separately.
EH 404 | UNIVERSITY OF SAN CARLOS
This is because under the corporation code, there is no stock that is
completely non - voting. So its 60% of the voting and 60% of the non
- voting or 60% of each class of shares.
Roy v Herbosa
Facts:
Under the memorandum circular, there are only two types of shares
where you apply the 60% rule. In the case of PLDT, it has to be
applied to the 60% of shares entitled to vote the directors and 60% of
the outstanding shares entitled or not to vote the directors of the
corporation or the total outstanding capital whether or not entitled to
vote.
Although the second Gamboa ruling said each class of shares, the
SEC said we apply the 60% of the total outstanding capital stock
entitled to vote meaning if you preferred shares is entitled to vote
then you also apply there. So 60% to the total outstanding capital
stock entitled to vote as well as the ones not entitled to vote.
Roy says that the SEC Memorandum Circular doesn’t comply with
the Gamboa ruling because the Gamboa ruling requires application
with each class of shares and not total. But the Supreme Court said
that the term capital applies to that which has effective control and
must be applied to the outstanding shares of stock entitled to vote the
directors.
According to the Supreme Court, the Gamboa ruling states that it
must be applied to the outstanding capital stock entitled to vote the
directors. Roy says it must be based on each class of shares. The
Supreme Court said that the Gamboa ruling is merely and obiter
dictum such that the first Gamboa ruling prevails. So the ruling really
is that the 60% must be applied to the shares that is entitled to vote
the directors.
Be careful, do not say common shares because there are instances
when the preferred shares are also entitled to vote. Looking at the
SEC Memorandum, it is even stricter than the Gamboa ruling. The
SEC went one step further by including the total outstanding capital
stock. There is no way the SEC memorandum violated the Gamboa
rulings.
We mentioned earlier that corporations are juridical entities but they
are not tangible or real persons. With this, who composes the
corporation?
Sec. 5. Corporators and incorporators, stockholders and
members. – Corporators are those who compose a corporation,
whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of
incorporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or
shareholders. Corporators in a non-stock corporation are called
members.
Components of a Corporation:
1. Corporators – those who compose the corporation, whether
stockholders or members. They are those who subscribe the
shares of the corporation.
2. Incorporators - those corporators mentioned in the articles of
incorporation as originally forming and composing the corporation
and who executed and signed the articles of incorporation as
such.
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A share of stock is an asset of a stockholder. It is intangible because

Remember TWO things: it is merely a representation of a right or interest in those three
 One, you must be an initial subscriber. mentioned above.
 Two, you must be a signatory in the articles of
incorporation. If you have here a capital of P1,000, P1 per share. P1,000/P1 or
1,000 is the capital stocks of the corporation.
Relationship: All incorporators are corporators, but a
corporator is not necessarily an incorporator. TYPES OF CAPITAL:
1. Authorized Capital Stock
3. Stockholders or shareholders – the corporators or owners of
shares of stock in a stock corporation. They may be natural or
It is the amount fixed in the articles of incorporation, to be subscribed
juridical persons.
and paid in by the shareholders of a corporation, either in money or
4. Members – corporators of a corporation which has no capital
property, labor or services, at the organization of the corporation or
stock.
afterwards and upon which it is to conduct its operation. It represents
the equity of the stockholders in the corporate assets.
Are all initial subscribers incorporators?
It is the amount of stocks the corporation is authorized to issue.
Anything beyond that, the corporation can no longer issue. You have
No. Because you can be an initial subscriber and not be an
to go to SEC and apply for the increase of authorized capital stock.
incorporator.
2. Subscribed Capital Stock or Issued Capital Stock
Other components:
5. BODs or trustees
It is the amount of capital subscribed whether fully paid or not. It
6. Officers – president, secretary, treasurer (minimum requirement)
connotes an original subscription contract for the acquisition by a
subscriber of unissued shares and would therefore preclude the
They can have additional officers in the by-laws, but the minimum
acquisition of shares by reason of subsequent transfer from a
required are those three.
stockholder or resale of treasury shares.
Stock or Share of Stocks
Will you be issued a certificate of stock? No. Just because the stock
It represents the interest or right which the owner has
is subscribed, it doesn’t mean that it can have a stock certificate. It
a) In the management of the corporation in which he takes
can only be issued if the subscription is fully paid.
part through his right to vote;
• If voting rights are permitted
It can be paid or unpaid, as long as it is covered by a subscription
agreement.
b) In a portion of the corporate earnings, if and when segregated in
Subscription – the transaction when you buy shares from the
the form of dividends;
unissued capital stock of the corporation. It is a primary offering. You
buy it directly from the issuing corporation. The document is the
• Generally speaking, stockholders have no right to the
subscription agreement.
earnings, unless dividends are declared. A portion of the
share of stock is a representation or a right of the
Secondary offering – If you are buying the shares from another
stockholder to the earnings in the form of dividends, and
stockholder and not from the corporation, it means that you are
not to the earnings per se. Once it is declared, then the
already buying issued shares. The document is the deed of
stockholder has a right. Without such declaration, then the
assignment.
stockholder has no right.
(Remember: If you are buying a tangible thing, the document is a
c) Upon its dissolution and winding up, in the property and assets
deed of sale. If it is an intangible, the document is a deed of
thereof remaining after the payment of corporate debts and
assignment.)
liabilities to creditors.
Does it matter if the subscription is paid or unpaid?
In relation to the capital of the corporation, what is a share? Or how No. Even if the subscription is unpaid, the moment that there is a
is it manifested? subscription agreement, the shares are already subscribed and they
are considered as issued.
It is one of the units into which the capital stock is divided. In other
words, it is a unit of the capital of the corporation.
3. Paid-Up Capital Stock
Residual Assets – Assets leftover after payment to creditors and of
It is the portion of the subscription which has been paid by the
liabilities.
subscriber or stockholder.
Net Assets – Assets minus liabilities.
4. Unissued Capital Stock

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
It is the portion of the capital stock that is not issued or subscribed.
They are those not covered by the subscription agreement.
5. Outstanding Capital Stock
It is the portion of the capitol stock which is issued and held by
persons other than the corporation itself. It is the total shares of stock
issued to subscribers or stockholders, whether fully or partially paid
except treasury shares.
Treasury shares:
Sec. 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 through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of
directors
What’s the difference between Oustanding Capital Stock vs.
Subscribed capital?
Treasury shares still forms part of Authorized Capital Stock and
Subscribed Capital Stock but not Outstanding Capital Stock because
by their definition OCS are shares of stock issued to
subscribers/stockholders, whether or not fully or partially paid and are
held by persons except the issuing corporation.
So subscribed capital stock is broader.
Illustration:
Authorized Capital Stock= 1 million made up at 1 million shares at 1
peso/share
Subscribed Capital Stock=500k
Paid-up Capital Stock=250k (half of the subscribed capital stock)
Unissued shares=500k
Outstanding Capital Stock=500k
You’re subscribed capital stock is also the same as your outstanding
but this is not true in all cases because if there are treasury shares
which are reacquired by the company. So if there are no treasury
shares, outstanding is the same as subscribed but if there are
treasury shares.
Let’s say here there are Treasury Shares=100k
Then how much will be your Outstanding Capital Stock? 400k
Authorized Capital Stock? 1 million
Subscribed Capital Stock? 500k.
Paid up? 250k
EH 404 | UNIVERSITY OF SAN CARLOS
This is regardless of whether you have treasury shares or not
because subscribed refers to those with issued subscription
agreements, just because it is treasury does not negate the original
subscription agreement that was issued for it. Treasury does not
make it unissued but it is no longer outstanding because it is owned
by the corporation.
Atty: Remember the definition of subscribed.
Those which have issued a valid subscription agreement whether
paid or unpaid. Thats your subscribed capital. So in this case its still
500k and your paid-up is still 250k. And your treasury is 100k. And
now because you have treasury shares your outstanding is 400k.
Outstanding shares of stocks are those stock which are subscribed
and issued but are held by persons other than the issuing
corporation.
Treasury shares - those shares repurchased by the corporation itself.
What happens when the shares are repurchased?
They no longer form part of the outstanding capital but they still form
part of the authorised capital stock and the subscribed capital stock.
Will there be an instance will they will no longer form part of the
authorized and subscribed capitals tock?
Yes. When the treasury shares are retired.
How is retirement done?
Retirement is done by decreasing the authorized capital stock by
amending the articles of incorporation.
GR: When the shares are reacquired by the corporation, they are not
automatically retired. They may not form part of the outstanding
capital but they still form part of the authorized and subscribed capital
stock.
When they are retired they will no longer form part of the authorized
and subscribed.
When you retire, that means that the company no longer wants to
issue the treasury shares. When you buy back the shares its not
retired, so the corporation can issue it any time. You can issue it
anytime because its still just there.
But if you chose to retire, then you have the decrease your
authorized capital stock by amending the articles of incorporation. So
in this case, if you retire your 100k treasury shares, you ACS will now
be 900k. But this needs the approval of the SEC. Its not easy to
decrease the ASC. The consent of all the creditors is required.
REMEMBER: When you acquire treasury shares, you do not retire
the shares. They can still be reissued. They still form part of ASC and
the SSC but not the outstanding capital stock. But if you chose not to
reissue it then you can retire the shares. How do you retire? You
decrease your authorized capital stock by amending the articles of
incorporation.
What do you need in order to purchase treasure shares? Can you
just buy it anytime?
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
No. The corporation cannot just buy it anytime. The corporation must
have retained earnings.
Retained earnings - are the net profits you have after distributing your
dividends to your stockholders. It is the portion of your capital which
comes from your profit. So your capital is made up of your
contributions, meaning the subscribed capital and you have your
retained earnings. Any income by the corporation which have not
been distributed to the stockholder will form part of the retained
earning of the corporation.
What is the provision that requires that treasury shares can only be
purchased upon the existence of unrestricted retained earning?
Which provision of the corporation code is it?
SECTION 41. Power to Acquire Own Shares. — A stock
corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes including
but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares sold during said sale;
and
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code.
Atty. Gaviola: So in order to buy treasury shares, the corporation
must have unrestricted retained earnings and it can only buy shares
not just for the sake of buying shares but always for a legitimate
corporate purpose, including but not limited to:
1. To eliminate fractional shares arising out of stock dividends
Example:
You have ten shares in a corporation and the corporation
declared 25% stock dividends. So that will give you an additional
2.5 shares.
What are you going to do with the 0.5? That is your fractional
shares. So the corporation can buy it from you.
2. 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
Example:
If you have subscribed capital stock of 500k, you have
subscriber that subscribed for 100k, of which only 50k is paid.
You will learn later on that a subscription is indivisible and you
cannot even sell your shares until it is fully paid. So what
happens here?
EH 404 | UNIVERSITY OF SAN CARLOS
REMEMBER: If your shares are not fully paid, as long as you
are subscribed, you exercise all the rights of a stock holder.
It stops when your shares become delinquent. The share
become delinquent when the board makes a call for the
payment of the subscription and you do not pay your shares will
be considered as delinquent shares.
In delinquent shares, it will undergo public bidding.
So which shares will be declared delinquent? Is it just the unpaid
portion? No, as I said subscription is indivisible. The whole 100k
will be declared as delinquent.
So later on in the delinquency sale, it will be sold to the highest
bidder, if no one will bid up to the third bidding, the corporation
has the right to purchase the entire thing. They become treasury
shares.
3. To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code - this
is called the appraisal right of a stockholder, if a stockholder
votes against an act of a corporation that it does not agree with
and that act is specifically recognized under the corporation
code as subject to appraisal right, then the stockholder can
demand that the corporation will buy his shares. In this case, the
corporation has a legitimate reason to buy the treasury shares.
AGAIN: Treasury shares cannot just be bought at any time. There
has to be a legitimate corporate purpose. Including but not limited to
three enumerated under section 41.
STUDENT QUESTION: What would be the wisdom of retiring
shares?
Atty: Maybe the corporation does not want to dilute the stockholdings
of its current stockholders. Because here the treasury shares still
forms part of the subscribed so compared to the total subscribed,
gamy ang imong share because dako man ang subscribed, but if you
don’t have any intention to reissue it you just retire it so dako pa ang
shares sa imong stockholders.
DOCTRINE OF EQUALITY OF SHARES OF STOCK - in the
absence of any stipulation in the articles of incorporation and
certificate of stock to the contrary all stocks regardless of their
nomenclature enjoy the same rights and privileges and subject to the
same liabilities.
So if the AOI does not say what the characteristic of each share are,
its the same characteristic for all.
Who has the power to classify?
1. The incorporators at the very beginning because they approve
the AOI.
4. Members of the BOD and the stockholders, subsequently if
there are changes done by amending the AOI. So you have to
go back to the SEC.
CLASSES OF SHARES:
1. Par Value Shares
2. Non-Par Value Shares
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3. Common Shares For par value share on the other hand, it doesn’t mean because
4. Preferred Shares it’s fixed you cannot issue it for a different price. You can. But it
a. Preferred shares as to assets should be more than the par value. It can never be less than the
b. Preferred shares as to dividends par value.
i. Cumulative
ii. Non-cumulative Conditions/Requirements to issue no par value shares:
iii. Participating 1. Cannot be for a price lower than P5/share
iv. Non-participating 2. Deemed fully paid and non-assessable and the holder of
v. Participating cumulative such shares shall not be liable to the corporation or to its
5. Founder’s Shares creditors in respect thereto. (Sec. 6)
6. Convertible Shares 3. Entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be
Status of Shares: available for distribution as dividends
1. Shares in escrow 4. That banks, trust companies, insurance companies, public
2. Treasury shares utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock
5. No par value shares cannot be preferred shares. Preferred
1. Par value v. no par-value shares can only be issued at par value.

Par value – the amount (price per share) is fixed in the articles of
incorporation AND in the certificate of stock
No par value - value is not fixed in the articles of incorporation and
in the certificate of stock
DIFFERENCE:
 If the shares have par value, your authorized capital stock
would be described in money terms.
What does subscription have to do with the payment? So again,
what does this mean? What is the difference in terms of payment
of par value and no par value shares?
So par value shares can be issued based on a subscription
receivables. You still need to pay the price but you don’t have to
pay it the moment of subscription. And in fact, you can also choose
to pay certain percentage of your subscription. If you opt, you can
pay for 10%, 15%, 20% 50%.

P1M ACS divided into 1M shares at P1.00 per share. That is how
your ACS would be if you have a par value stock.
If the stock on the other hand is no par, you don’t put an amount in
the articles, you just state the number of shares and state that it is
no par value.
 In terms of payment: no par value shares, it has to be fully
paid and there can be no partial payment while in par value
shares, there can be partial payment.
Can a par value share be issued at a price different from its par?
It depends. It can be issued for higher but it cannot be issued for
lower than the par value. If it’s higher that would create your
premium or higher paid-in capital. That will not change your
authorized capital.
There’s no requirement as to the extent of payment if the shares
are par value. But if the shares are no par value, the subscription
price must be paid right away because all no par value shares are
deemed fully paid and non-accessible. Meaning for no par value
share you do not recognize a subscription receivable. The moment
of subscription the amount that is paid is the full amount of the
subscription price.
2. Common and preferred
Common - is basically represents the residual right of the
stockholder over the corporation. This is the most common type of
share. You cannot have a corporation without common shares and
you cannot deprive them of voting rights. The only time common
shares are deprived of voting rights is when you have founder’s
shares. But founders shares are only for a limited period. After that
common shares will have voting rights again.

Basically, you are just creating a share premium. It would not
change your authorized but it will only change your paid-in. But
you cannot issue shares lower than the par value because that
would turn in into watered stock and that is not allowed under the
corporation code.
LIMITATION:
A par value share is not as flexible as a no par value share
because a no par share can be issued at any price provided that it
should not be sold at less than P5 pesos per share.
The no par value shares affords the corporation flexibility in the
issue price of its share in any amount provided that it does not go
below P5 per share.
Are shares received by the shareholder pro rata. In the order of the
receiving of the dividends, it comes after anything that is remaining
after the dividends have been given to the preferred share
Common shares are the ultimate ownership of a corporation. It is
the residual interest after all the creditors have been paid and all
the preference have been given.
Preferred shares are those which will have preference either as to
assets or dividends.
If the AOI provides for the common and preferred shares but does
not state anything else. What is the assumption?
For preferred shares it is presumed to be non-cumulative and non-
participating.

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If the articles both provide for the common and preferred but does 1000 shares | P5/share
not provide for anything else. Doctrine of equality of shares 2017 2018 2019
applies. Entitled to
P5000 +
Under the doctrine of equality of shares, all the classifications are P5000 (from
the same regardless of the nomenclature. Even if they are Preferred 2017) +
classified as common share and preferred if there are no other No No P5000 (from
Cumulative
qualifications, they have the same rights voting, dividends, assets. declaration declaration 2018) =
Shareholder
P15000
The moment the law or the AOI provides for a preference then that
is the one that will prevail. Dividends in
Arrears
Can the article provide that the preferred shares are cumulative Preferred
and participating? Non- No No Entitled to
Cumulative declaration declaration P5000 only.
Yes. If preferred shares are cumulative and participating not only Shareholder
do, they get shares in arrears and the dividends of the current Ordinarily once preferred shareholders are given their dividends,
year, but they also participate with the common stockholder on the the common shares will now get their share in the dividends.
residual dividend.
The common stockholders are the ultimate risk takers but at the
It does not mean that preferred shares are cumulative, it can no same time they are also the ultimate beneficiary. Ultimate risk
longer be participating or if it is participating it can no longer be taker because if no dividends are declared they don’t earn
cumulative, because cumulative is the right to receive dividend in anything. If there is a declaration of dividends but it not enough to
arrears while participating it is the right to receive dividends cover the preferred shares, then they don’t get anything. But if
together with the common stockholders. So, they can exist there is a declaration of dividends in such a big amount that only a
together. portion goes to the preferred share holder, they get the rest.

Preferred - if the articles does not specify preferred are always
also voting unless stated in the articles. Only preferred and
redeemable can be deprived of voting rights.
Has a preference over the common as to the order of the either the
assets or the dividends.
Preferred shares can either be:
Preferred as to assets or Preferred as to dividends. Preferred as to
dividends can either be commutative or non-commutative and
participating and non-participating.
So how does it work?
Dividends for preferred shares are either fixed on per unit or a
percentage of par.
Example:
Preferred shares entitled to dividends at 5 pesos per share and
they are commutative.
Example:
The corporation declared 1M worth of dividend.
Preferred Shares – P10 000 @ P1 per share
So at this rate the preferred shareholders at 1 peso will have 10k
share of the dividends.
P1 000 000
(P10 000)
P 990 000 This balance will go to the common shareholders.
This is why the common shareholders are the ultimate beneficiary
because they get the balance. So if only 10k dividends were
declared, the preferred will get it first, so there will be nothing for
the common stockholder.
But if its a big amount such as 1M the common stockholders will
get the balance. That is ordinarily, but if you’re preferred
stockholders are also participating, they not only get there 10 first
they will also participate in the balance of 990k. They participate
with the common stockholders.

What does it mean? It means that, remember again that dividends If in the same example:
are not a matter of right to the stockholders, dividends becomes Preferred Participating Shares – 10 000
only a rights once it is declared. Common Shares – 40 000

No declaration, no right to the earnings of the corporation .
If you are a preferred commutative stockholder, you are entitled to
dividends for every year that you are a stockholder, it does not
mean that you entitled to receive the dividends every year. The
moment it is declared, you are entitled to dividends not just of the
current year but also of the past years.
Supposedly the 990k will only be divided by the 40k common
stockholders, but because the preferred are participating, they also
share, so the 990k will be divided by 50k. So at 990k divided by
40k its 24.75, this is supposed the share of the common share but
because the preferred will be included it 990k divided by 50 which
is 19.81.

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
990 000 = 19.81 instead of 990 000 = 24.75
50 000 40 000
If non-participating it all goes to the common stockholders. But if it
is participating, they get their 1 peso share plus they get their
19.81 per share. They get a total of 20.81 per share.
Definitions:
 Preferred as to Assets – preferred in the distribution of
assets of the corporation in case of liquidation
 Preferred as to Dividends – preferred in the
distribution of dividends
 Cumulative shares – right to dividends in arrears. The
declaration of dividends is always a management
prerogative. If your shares are preferred, it means that
for every year that the company did not declare
dividends, each cumulative preferred will have an
interest in those undeclared dividends.
 Non-cumulative shares - they don’t get dividends in
arrears.
 Participating shares – those which after they get their
share of the dividends, they shall participate in the
sharing of dividends of the common stockholders.
 Non-participating shares — Once you get your
preferred shares, you no longer have a right to what is
left.
5. Voting Shares and Non-Voting Shares
Voting Shares – shares that have a right to vote
Non-voting Shares – shares that do not have the right to vote except
those provided in Sec. 6.
Conditions in the issuance of Non-Voting Shares:
1. Only preferred or redeemable shares may be non-voting;
2. Required to vote under the instances provided in Sec. 6;
3. They cannot issue all non-voting shares – there should
always be a class of shares with FULL voting rights.
8 Instances where non-voting shares may still be entitled to vote :
(Sec. 6) MEMORIZE:
1. Amendment of AOI;
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 this corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this code;
8. Dissolution of the corporation.
Remember:
Bonded indebtedness – borrowings through the issuance of
bonds
When bonds are issued, it usually pertains to long-term
obligations.
6. Founders’ Share
EH 404 | UNIVERSITY OF SAN CARLOS
GR: Common shares cannot be deprived the right to vote.
XPN: In the case of Founder’s Shares – for a limited period of 5
years, owners of founders’ shares shall have an exclusive right to
vote and be voted. (Sec. 7)
Founders’ Shares – shares issued to the organizers and promoters of
a corporation in consideration of some supposed right or property
having special rights and privileges not enjoyed by the owners of
other classes of shares.
There may be other privileges that can be granted without the
limitation of five years, like the privilege of having a higher dividends.
7. Shares in Escrow
Escrow – a deed, bond, money, or a piece of property held in trust by
a third party to be turned over to the grantee only upon fulfillment of a
condition (Merriam-Webster)
There is a company that handles, it does not give the shares unless
the obligation is finished from the other party. So, if the certain
obligation is not done, then the shares are not given.
When can a share be subject to escrow?
Atty: Remember, when you are subscribing you are buying from the
corporation unissued shares.
If you buy shares in a secondary purchase (not a subscription), you
are buying from a stockholder not directly from the corporation. If the
stockholder/seller wants to be assured of payment before he even
gives you the share, what the parties will is that they will deposit the
share with the bank put it under escrow. With the condition that the
bank will only issue the shares the stock certificates upon the full
payment of the price.
Atty: In one of the transactions that we handled before it was a purchase of
all the shares of a bank, but the problem was one of the stockholders died so
the shares were part of his estate. Our client wanted to purchase all the
shares including the properties owned by the estate, but we could not do so
until the estate proceedings were done.
At the same time my client did not want the shares to be out there like being
voted on, receiving dividends and all that. So, what the parties agreed was in
the meantime the shares will be placed in escrow until the proceeding are
done and the shares can be purchased. The share was placed in escrow
and then when the guardian was appointed because the heir was a minor.
When the guardian was appointed, and the shares can now be legally sold
and that was the time it was pulled out in escrow.
Technically, escrow is not a type of share it is a status. It is basically
depositing the share with the 3rd party to be released upon fulfillment
of a certain conditions. It can be any shares; it can either be
preferred, common, convertible. It is a status.
Questions by the students:
In the shares in escrow, what happened to the dividends?
Parties will agree. Escrow is a contract. The parties will agree who
will shoulder the escrow fee, if there are dividends who will have the
right to the dividends. Although technically as long as the transfer has
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not been made in the stock and transfer book, whoever is the right regardless of the existence of retained earnings. But SEC
stockholder in the stock and transfer book is entitled to the dividends. issued a memorandum that you cannot redeem, if after redemption,
your assets are not sufficient to pay your liabilities and your paid-up
Absent any stipulation it will be the estate? capital.

Yes, but if the parties agree if it is the buyer. So, then the stockholder
has the obligation to give the stock dividends to the buyer.
But as far as the corporation is concerned, it will only deal with the
stockholder.
8. Treasury Shares
Treasury shares- it refers to the shares wherein it is fully issued and
paid but is subsequently reacquired by the corporation who issued
such shares through redemption, donation or any other means.
What happens to the treasury? What is the status of the treasury
shares?
The treasury shares will become a property of the corporation
meaning that the corporation can resell it in an amount which is fixed
by the board of directors and it cannot be considered as a retired
share because it does revert into unissued shares.
Retirement is different from an unissued share.
In Sec. 41, you must have unrestricted retained earnings. So if you
have restricted earnings, you cannot redeem. While in Sec 8, you
can redeem even it is restricted retained earnings.
When your retained earnings is at a deficit. That means you don’t
have sufficient assets to cover your liabilities and paid-up capital.
What happens to the redeemable shares that has been redeemed by
the corporation?
Corporation has TWO options:
1. It can retire the shares, if it is provided in the Articles of the
Incorporation that they can be retired; or
How do you retire the shares? It has to amend the articles
to decrease your authorized capital stock.
2. If the AOI allow, they can be reissued. If still not reissued, it
remains treasury shares.
Note: Redeemable shares which are not retired become treasury
shares. But not all treasury shares are redeemable shares.

We said that when we have treasury shares, it become the property
of the corporation, it can reissue the shares, or it can retire the
shares but regardless the shares do not revert to the unissued it will
always be issued but no longer outstanding.
Retirement – a decrease in the authorized capital stock. It has
nothing to do with the unissued shares.
9. Redeemable Shares
Redeemable shares – usually preferred which by their terms are
redeemable at a fixed date or at the option of either the issuing
corporation or the stockholder or both at a certain redemption price.
Student: Should the assets mentioned in the law come from the
sinking fund?
Atty: When the redemption is mandatory, meaning beyond the control
of the corporation, the corporation under the SEC rules is required to
maintain a sinking fund.
The sinking fund is different from your unrestricted retained earnings
because it is part of your cash or assets. The unrestricted retained
earnings is part of your capital. It may be that you have a sinking
fund but you still have a deficit, they are unrelated, in which case you
are not still allowed. Under the SEC rules you are not allowed to
redeem when you have insufficient assets.

Redeemable Share Treasury Share So the redemption is at the option of the corporation, say that it wants
Mode of acquisition Share can be Share can only be to redeem whether the stockholder likes it or not the stockholder has
acquired even reacquired when to sell. In the same way, if the option belongs to the stockholder
without unrestricted there are whether the corporation wants it or not it has to buy if the shares are
retained earnings – unrestricted redeemable.
through surplus retained earnings
Expressly stated in Not stated in the In ordinary shares, there is no way for the corporation to force the
the AOI AOI stockholder to sell. In the same way, the stockholder cannot force the
corporation to buy unless it is in the exercise of its appraisal right.
Treasury shares is not technically a class of share, it is a status like
escrow because it can be any kind of share which has been issued, 10. Convertible Shares
full paid but which was subsequently reacquired by the corporation.
Convertible shares – are shares that allow the holder to convert from
Difference between a redeemable share and other types of shares: one class to another. But the conversion is not automatic, it can be
done thru the amendment of the articles.
GR: A corporation can redeem its own shares whether or not the
shares are redeemable based on Sec. 41. It can only do so when it Ordinarily, if you want to convert but you do not have yet a
has unrestricted retained earnings convertibility feature in your Articles you need to submit two
amendments (dual amendment) simultaneously. The first
XPN: Under Sec 8, corporation can redeem shares even if it does not amendment is the convertibility feature and the secod amendment is
have unrestricted retained earnings. Redemption is now a matter of the actual conversion. You file the two amendments together.

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
INCORPORATION AND ORGANIZATION
How do you incorporate?
1. Not less than 15 incorporators to execute the Articles of
Incorporation;
2. Reservation of corporate name;
3. File with the SEC the AOC, by-laws and the treasurer’s
affidavit together with your approved name reservation
What should be contained in the articles of incorporation? (Sec. 14)
AMENDED
1. Name of the corporation;
2. Purpose
3. Principal Address
4. Term of Existence
5. Names, nationalities, residence of incorporators
6. The number of directors or trustees, which shall not be less
than 5 nor more than 15
7. The names, nationalities and residences of the persons
who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in
accordance with the Code
8. If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the number
of shares into which it is divided, and in case the shares
are par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and
the amount subscribed and paid by each on his
subscription, and if some or all of the shares are without
par value, such fact must be stated.
9. If non-stock, the amount of the capital, the names
nationalities and residences of the contributors and the
amount contributed by each; and
10. Such other matters as are not inconsistent with law and
which the incorporators may deem necessary.
1. Name of the Corporation
Requirements:
It must not be misleading or confusingly similar with the existing
name of a corporation.
Industrial Refractories
Facts:
This case involves two corporations engaged in the sale of similar
products and in the same locality. One is Refractories Corporation of
the Philippines (RCP) and the other is Industrial Refractories
Corporation of the Philippines (IRCP). RCP first registered in 1976
and IRCP was incorporated in 1979 and changed its name in 1985.
Based on this decision, what are the grounds that would entitle RCP
to question the name of IRCP?
Either identical, deceptively or confusingly similar or patently
deceptive or contrary to existing law.
EH 404 | UNIVERSITY OF SAN CARLOS
So any corporation who finds out that there is another corporation
has a name which is similar or confusing can bring a case to change
the name of the second corporation?
In the case, another requirement is that the complainant has a prior
right to the name by prior registration with the SEC.
IRCP also registered its name, does that mean they can file a case
against RCP?
No, prior right means that who registered its name first with the SEC.
It’s a matter of who registered first.
RCP registered first in 1976, while IRCP applied for the change of
name in 1985.
Going back to similarity how is that determined?
Confusion is determined if it can mislead a person using ordinary
care and discrimination.
NB: Distinguish between trade name and corporate name. If it is a
trade name it falls under IPL. If it is a corporate name it falls under
Corporation Code.
Trade names do not need to be registered under IPL. Corporate
names need to be registered under SEC to be protected.
Iglesia Case
Facts:
Respondent was established in 1936, while petitioner was
established by separatist members and was registered in 1980. An
action to change the corporate name ensued. The defense of the
petitioner was that they added 8 more words such as “mga kaanib”
and “sa bansang Pilipinas” while the law required only 2 more words.
Also, they raised the defense that they changed the name from
“suhay” to “saligan”.
The Supreme Court ruled that the addition of other words were
merely descriptive and that they cannot hide behind the generic word
rule. Further, the court held that the words “suhay” and “saligan” are
synonymous.
What is the generic word rule and when does it apply?
The generic word rule is when a generic word like “BAG” cannot be
protected under Intellectual Property Law. It applies only in IPL and
does not find any ground in the corporation code.
Does the protection under the generic word rule apply to corporate
names?
No, under the corporation code, the SEC will not register any name
that is similar, or identical or confusing even if the name is generic.
In intellectual property, generic names are not protected unless you
can apply the doctrine of secondary meaning, where you associate it
specifically with a product. Like apple, although it is generic, you
already associate it with a cellphone so it’s protected. Unlike in a
corporate name, although it is generic, it is already protected. SEC
only looks at whether the names are confusingly similar.
SEC came out with a rule that if a corporation’s name is similar but
there are a number of words that are different, they can overlook the
similarity and look at the additional words and how different the
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
names are. In the Iglesia ni Cristo case, there was a contention that
there were 8 different words. But the Supreme Court said it does not
even matter that there are eight different words, when the rules only
require two, because those words were merely descriptive words.
And even if those words were generic, that generic word rule does
not apply to corporate names. This rule was also reiterated in the
Refractories case.
Zuellig v. NLRC
“Change of name is not a change of being.”
This case involves the illegal dismissal of San Miguel by petitioner
Zuelig which was formerly known as Zeta Brokerage Corporation.
Here, private respondent was informed he would be dismissed after
Zeta had decided to cease its operations.
However, San Miguel decided to file a case for illegal dismissal
before the Labor Arbiter, which sided with the respondent. On
appeal, the NLRC also sided with the private respondent as well as
the CA.
Hence this petition, where petitioner Zuelig alleges it is not the proper
party to the case as it should have been Zeta, and it already ceased
its operations and the corporation was already dissolved.
What was the ground for the dismissal of the employment of San
Miguel?
Zeta informed him that they would be closing and ceasing its
operations.
What did Zeta actually do?
Zeta actually changed the name of its corporation to petitioner Zuelig
and now they allege that the Zeta Corporation was already dissolved.
So by amending its articles, there was a claim that the Zeta
Corporation no longer existed. Was the amendment only for the
change of name?
No. They also expanded its primary purpose, changed its name, and
increased its capital stock.
So they said that because of this amendment, the Corporation no
longer exists. So it’s dissolved therefore, closure of operations,
therefore San Miguel was legally dismissed. So what happened?
The SC sided with San Miguel. It held that the amendment of the
articles of incorporation of Zeta Brokerage Corporation did not
dissolve its corporate existence. They also cited a case where a
change of name is analogous to a person changing his name. It
would not mean that another person is born. In this case, the petition
of Zuelig was denied as there was no change of existence of Zuelig.
This case is an offshoot of what attribute of a corporation? Right of
succession
Remember: Under the right of succession, the rule is that the
corporation’s is not affected by the change of its stockholders, or its
Board of Directors. It continues as one separate entity. In the same
manner, if you amend the articles of incorporation, it does not mean
that the corporation is dissolved and a new one is created.
EH 404 | UNIVERSITY OF SAN CARLOS
Unlike in a partnership, when you amend the articles of partnership,
the old partnership dies and another partnership exists. For
corporations, as an offshoot of its being an artificial being and with
the right of succession, even if you amend its articles of corporation,
the corporation continues its existence.
The SC said it is similar to a person changing his name. If you
change your name, it does not mean that a new person is born. Just
like corporations, it doesn’t mean that if you change your name, there
is a change in entity. The entity continues its existence even with the
amendment. Change of name does not mean change of corporation.
Atty:
By the way class if you have a client that wants you to incorporate a
corporation for him, the first thing you need to do is to get a name. Because
you need to have it reserved. Don’t get one name. Get three because you
aren’t sure that your first choice will be approved. By the way, just because
there is a similar name, you can’t reserve the name anymore. You cannot do
an online reservation, but you can actually write a letter to the SEC
contesting the nonreservation, basically justifying why you should be allowed
to register the same name. If the same name is because you’re affiliates,
parent, or subsidiary, you just have to get the written consent of the other
corporation, you send it to the SEC, and the SEC will approve manually your
reservation. But that takes time because the approval is done in the Head
Office in Manila. So just to be sure, just get three choices for the name. If
one does not pass, you have other choices.
2. Purpose/Purposes of the Corporation
Other than the name, the purpose must be indicated in the articles of
incorporation such that if there’s more than one purpose for the
corporation, the primary and secondary purposes must be cited in the
articles.
Why is it necessary to place the corporate purpose in the articles?
 As a corporation, it is important so you will know if the
business transaction or contract you’re entering into is in
line with the purpose of the corporation.
 As a stockholder, it is important so you will know what risks
you are taking in investing in that company
 As a member, it is important so that you know what you’re
getting yourself into.
So if you transact with a corporation, is it important to look at the
purpose of the corporation? Why?
Because the corporations may not be authorized to transact with the
corporation in the first place.
Remember the last attribute of a corporation that it has the powers,
attributes, and properties expressly provided by law and incident to
its existence.
What shapes the power of the corporation?
It’s the purpose of the corporation. The powers of a corporation are
determined by its purpose. If the purpose of the corporation is to sell
real estate, it cannot engage in retail trade. So if you enter into a
contract with a corporation for retail trade, that contract is ultra vires.
The corporation does not have the power to enter into the contract.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Because you judge the powers, rights and authorities of the
corporation by its purpose.
It is important to know the purpose of the corporation, even if you’re
not investing but just transacting with the corporation because maybe
what the corporation is doing is beyond its purpose, in which case it
becomes ultra vires.
Classifications of Purpose:
1. Primary
2. Secondary
Primary purpose - determines why the corporation was created in the
first place and the secondary purpose states the other incidental
purpose of the corporation.
Example:
You have a client, you have to be careful in crafting the purpose of
the corporation because a few years ago the BIR came a rule that if
you buy shares of a real estate company, the value of the shares will
not be the book value but the appraised value of the real estate.
There was also a rule that if the real estate asset is considered an
ordinary asset of a corporation, then you subject it to income tax
which is at 30% and it’s subject to VAT.
The problem was, if you put in your purpose that if you own or
purchase real estate, the BIR considers that corporation as a real
estate corporation. Which means that if you sell real estate, it’s
subject to VAT and income tax. That was the problem before
because you expect lawyers to put in the secondary purpose that the
corporation is capable of owning real property and transacting real
property. But the BIR turned it around and said that if you put that in
the articles, that entity is a real estate entity.
So, any real property you sell will not be subject to the 6% capital
gains tax but the 30% income tax plus VAT. That was a problem a
few years ago. So corporate purpose is not something that has no
implications. It’s important to think about what you want in your
corporate purpose.
3. Principal Address of the Corporation
How should the address be stated? The requirement is it should be in
the Philippines. Can I just say Cebu City, Philippines?
No. It must be sufficient for the place of business to be identified.
Cebu City does not exactly point out the specific address, so you
include the floor number, the building name and number, the
Barangay, the City, the province, and the country.
A few years ago, the SEC allowed when corporations just said “Cebu City”,
“Metro Manila”, “Mandaue City”. Why? Because if you change your principal
office, if you move from one office to another, it means you have to amend
your articles. For example, if you have your principal address is at A
Building, No. 7 street, Cebu City. If you’re going to move to B Building, no. 7
street, Cebu City, you have to amend your articles.
Remember the requirement for amendment, it requires Board Approval, the
approval of the stockholders, whether voting or nonvoting, and you go back
to the SEC to have your amendment approved. It’s tedious. So to circumvent
that, a lot of corporations just place “Cebu City” so that if they move within
Cebu City, they need not amend.
EH 404 | UNIVERSITY OF SAN CARLOS
But there was a problem. The principal place of business is where you’re
supposed to receive summons, keep your stock and transfer book, where
the business is supposed to conduct its business. There was now an issue
that the address needed to be more specific.
So around 2006, the SEC came out with the rule that no corporation will now
be incorporated unless their address is specified in the Articles. All
corporations with addresses that are not specific were required to amend
their Articles to make it more specific. It was a big headache because if you
do not change, you will be penalized. But the problem is still the same.
Example:
If you are in Unit 1 and then you transfer to Unit 2, that is a change in
principal office that needs a change in the Articles. So the SEC needed to
compromise. It said that as long as you are in the same municipality or city,
you need not amend your Articles. Just provide with a General Information
Sheet with the new address. It found that it was impractical that you need to
amend the Articles every time you move.
4. Term of Existence (AMENDED) – Corporate Term is NOW
perpetual
Sec. 11. Corporate term. – A corporation shall exist for a period
not exceeding fifty (50) years from the date of incorporation
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 .
Maximum – 50 years
It can be shortened or extended. Extension should not exceed 50
years.
How? The shortening or extension shall be made within 5 years prior
to expiration by amending the Articles of Incorporation.
5. Names, Nationalities and Residences of the Incorporators
(AMENDED)
Requirements to become an incorporator: (AMENDED)
1. 5-15 natural persons
2. Of legal age
3. Majority must be residents
4. Certain percentage of citizenship required
5. Owns at least 1 share
Difference between incorporator and corporator:
Corporators – those who compose the corporation, whether
stockholders or members. They are those who subscribe the shares
of the corporation.
Incorporators - those corporators mentioned in the articles of
incorporation as originally forming and composing the corporation
and who executed and signed the articles of incorporation as such.
Can a juridical entity become an initial stockholder? Yes.
A juridical entity cannot be an incorporator, but it does not mean that
it cannot be a stockholder or an initial subscriber.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

If a juridical entity is an initial subscriber, its name will still appear in
the Articles but it will not be considered as an incorporator because it
does not sign the Articles. Only natural persons can sign the Articles
and there must be at least 5 natural persons.
No longer required to be natural persons. Incorporators may now be
juridical persons.
Example: Corporation A puts up a subsidiary, Corporation B.
retail and trade (if you have a foreign stockholder), domestic market
enterprise (if you have a foreign stockholder), etc.
(AMENDED)
In order to incorporate, the authorized capital stock must be
subscribed. How much must be subscribed?
At least 25% of the authorized capital stock must be subscribed.
At least 25% of the subscribed capital stock must be paid up.

Can a juridical entity own ALL shares in a corporation? Example, in a corporation:

Authorized capital stock – 100,000
Subscribed capital stock – 25,000 (at least)
Yes. One person, whether natural or juridical, can own ALL the
shares of a corporation. The law only requires at least 5 names to Scenario 1:
whom the shares are registered. It does not mean that those 5 Shareholder Subscription
shareholders actually own the shares. They are the legal owners, but A 1
not the beneficial owners. So in the stocks and transfers book, there B 1
must ALWAYS be at least 5 natural persons named therein. All the C 1
time. It does not mean that those 5 are the owners forever. D 1
E 24, 996
What you actually do there is to have those 5 persons execute a
Deed of Trust. In that deed, they will acknowledge that they are just Is this allowed? Yes. There is no requirement as to the distribution of the
holding the shares in trust for the principal. This is allowed by law. subscription. The law requires that incorporators shall own at least one
share.
Shareholder Paid-up
A 5,000 HOWEVER, this is not allowed when it is Paid-up capital – 6, 250 (at least)
B - nationalized. If you are a foreigner, you
C - might be held liable for violation of the Scenario 2:
D - Anti- Dummy Law (CA No. 108). Even
E 1,250 beneficial ownership is not allowed. Is this allowed? Yes. The law requires that at least 25% of the TOTAL
Filipinos must control both the legal and subscribed capital stock must be paid up. It does not say EACH subscription.
beneficial ownership.

6. Number of Directors or Trustees (NOT less than five (5) nor more
than fifteen (15))
That is why you need to have at least 5 incorporators. The
corporation cannot function without the directors. Each director is
required to own at least 1 share.
7. The names, nationalities and residences of the persons who shall
act as directors or trustees until the first regular directors or
trustees are duly elected and qualified in accordance with the
Code
8. If it be a stock corporation, the amount of its authorized capital
stock in lawful money of the Philippines, the number of shares into
which it is divided, and in case the shares 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.
Is there a minimum authorized capital stock that needs to be
complied with?
No, there is no minimum authorized capital stock required under the
Corporation Code, unless a special law requires such minimum
authorized capital.
If their Par value share, when you subscribe it does not even have to be paid
up, this is a valid subscription. The important thing is you can only
incorporate so long as 25% is paid up, it doesn’t have to be each
subscription. It is based on total.
Remember the case of Narra, remember that MMC 60% was subscribed by
Olympic but 0% was paid up, it was valid in so far as the 25% rule is
concerned.
So the corporation already fully paid up the 25% then the
incorporators/stockholders said that we have too much money, lets reduce
our capital. So out of 100k ACS they retired 15k shares so their ACS is 85k
and their subscribed is 10k. Is this allowed?
Allowed. You only need to meet the 25-25 rule at the time of incorporation
and in cases of increase in ACS. In these 2 instances the 25-25 rule must be
followed an outside of these 2 situations the rule does not apply. So this is a
valid decrease in capital.
So when does the corporate existence start?
Upon the issuance of certificate of incorporation from the SEC.
How many relationships are created from such issuance?
Three Relationships created from the Issuance of a COI:
1. Between the State and the Corporation;
2. Corporation and its stockholders;
3. State and the stockholders

But there are certain industries that require a required minimum The Articles of Incorporation is a tripartite agreement and creates
authorized capital stocks, such as banks, insurance, construction, three relationships between these three parties.

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
So what is the requirement for there to be a valid corporation?
There must be substantial compliance with the formal requirements
of the law. The law does not require strict compliance. Substantial
compliance will actually create a valid foreign entity. If you fall short
of substantial compliance, what is created is a de facto corporation.
The minimum requirements for a de fact corporation are:
Section 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.
Seventh Day Adventist Case
Facts:
Spouses Felix Cosio and Felisa Cuysona donate a parcel of land to
South Philippine [Union] Mission (SPUM-SDA)of Seventh Day
Adventist Church, and was received by Liberato Rayos, an elder of
the Seventh Day Adventist Church, on behalf of the donee.
However, 21 years later, the spouses sold the same land to the
Seventh Day Adventist Church of Northeastern Mindanao Mission.
Claiming to be the alleged donee’s successors-in-interest, petitioners
asserted ownership over the property thru filing a case for revocation
of the donation with the RTC. This was opposed by respondents who
argued that at the time of the donation, SPUM-SDA Bayugan could
not legally be a donee because, not having been incorporated yet, it
had no juridical personality. Neither were petitioners members of the
local church then, hence, the donation could not have been made
particularly to them.
The SC ruled that the donation was void bec The deed of donation
was not in favor of any informal group of SDA members but a
supposed SPUM-SDA Bayugan (the local church) which, at the time,
had neither juridical personality nor capacity to accept such gift.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de
facto corporation. We have held that an organization not registered
with the Securities and Exchange Commission (SEC) cannot be
considered a corporation in any concept, not even as a corporation
de facto. Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they even
attempt to organize to comply with legal requirements.
Corporate existence begins only from the moment a certificate of
incorporation is issued. No such certificate was ever issued to
petitioners or their supposed predecessor-in-interest at the time of
the donation. Petitioners obviously could not have claimed
succession to an entity that never came to exist. Neither could the
principle of separate juridical personality apply since there was never
any corporation to speak of. And, as already stated, some of the
representatives of petitioner Seventh Day Adventist Conference
Church of Southern Philippines, Inc. were not even members of the
local church then, thus, they could not even claim that the donation
was particularly for them.
EH 404 | UNIVERSITY OF SAN CARLOS
Atty: SPUM-SDA used the defense of de facto corpo and making the
donation is valid so that they will benefit from the donation because a
de facto corporation has a standing as a corporate entity.
The donation to the 1st donee was revoked on the ground that it had
no juridical personality which in this case was a collateral attack on
its existence because the issue in the case was revocation of the
donation and the issue on juridical personality was brought up here.
This cannot be done because you cannot attack the existence of a
de facto corporation collaterally.
A de facto corporation although has a standing, its status can be
attacked but only in an action thru a quo warranto proceeding and not
collaterally. A de jure corporation’s existence cannot be assailed
whether in a direct/indirect attack, a de jure corporation can hold its
existence even against the state. A quo warranto proceeding initiated
by the government through the OSG against a de jure corpo will not
prosper.
This is related in this case because SPUM-SDA was not a de facto
corporation because the three requisites for a being a de facto
corporation were not met, namely:
(a) The existence of a valid law under which it may be
incorporated;
As long as you have the corporation code, or whatever law
was present at this time, which allows the existence of
corporations, then it is allowed.
(b) An attempt in good faith to incorporate; and
This entails registration with the SEC thru filing of articles
of incorporation and then the SEC must have issued the
certificate of incorporation meaning you have actually
registered as a corporation. The attempt in good faith to
incorporate in other words is not a mere trying to
incorporate, you must have actually been incorporated, the
certificate of incorporation must have been issued by the
SEC.
(c) Assumption of corporate powers
In this case the 1st donee was not a de facto corporation because
they did not register and file the AOI so they are not de facto
corporations so their existence may be attacked indirectly, so valid
and revocation of the donation.
Even if a de facto corpo has a SEC certificate it is not de jure bec
there is an issue with the compliance on the requirements of the law.
For de jure there must be substantial compliance, with de jure there
must be colorable compliance.
Meaning it looks like you complied but in reality you have not, so
even if you were issued the certificate but there was a problem with
your compliance then de facto siya (examples from the book of
Aquino: (1) corporate name resembles that of an existing corporation
(2) ineligibility of one or more incorporators (3) one of the purposes is
not authorized by law)
If a corporation was issued a certificate, it can raise the defense that
it is a de jure corporation, now it’s up to the state to prove that you
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
did not substantially comply then it can actually terminate your
existence, but if the state will not be able to prove that you did not
comply with the requirements then you will be a de jure corporation.
Once the state finds that there was substantial noncompliance with
the requirements and it declares that you are non-existent then that
means that you were never a de jure corporation to begin with, so it
does not change your status, from the very beginning you are either
de jure or de facto.
If you were issued a certificate of incorporation, the assumption is
you are a valid corporation, does that mean that the state cannot file
a quo warranto case against your corporation?
Of course not, they can always file a case, you can even file against
a person who did not actually borrow money from you.
But if during the case, it was proven that you substantially complied
them the quo warranto proceeding will not prosper so your
existence/status is affirmed.
If the state will now bring a quo warranto case and it was proven that
you did not substantially comply then it proves that you were never
de jure to begin with, you were just de facto.
So the bringing of the case does not change who you are in the 1 st
place that is your status from the beginning. The de jure or de facto is
really just a matter of defending an attack against your corporate
existence, so a de jure corporation can defend against the state in a
quo warranto proceeding, a de facto cannot.
Amendment of Articles of Incorporation
Section 16. Amendment of Articles of Incorporation. - Unless
otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles
of incorporation may be amended by a majority vote of the board
of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (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.
In the amendment of the AOI you need two approvals:
1. The approval of the majority of the board and
2. Approval of owners representing 2/3 of the outstanding
capital stock.
EH 404 | UNIVERSITY OF SAN CARLOS
Take note the law says outstanding capital stock not
stockholders. So if A B C D E (example on the board), 2/3 must
not be based on the 5 but based on 25k such that if A B C D
owns 1 and E owns 24,996 then E voting alone can get the
amendment passed. Count by shares and not by stockholders
When you amend your articles, all you need to do is underscore your
changes.
For example, you amended the number of directors so all you have
to do is underline it.
e.g. 7 directors
(as amended on *date approved by the stockholders)
So you underline the change and place the date of amendment at the
end of the paragraph). If this is not present that means that it was the
original provision. The amendment takes effect upon approval of the
SEC, if they do not act on it within 6 months then the amendment will
be valid from the date of filing.
Section 17. Grounds when articles of incorporation or amendment
may be rejected or disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation or disapprove
any amendment thereto if the same is not in compliance with the
requirements of this Code: Provided, That the Commission shall
give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles or amendment.
The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto
is not substantially in accordance with the form prescribed
herein;
2. That the purpose or purposes of the corporation are
patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of
capital stock subscribed and/or paid is false;
Note: Before, together with your Treasurer’s affidavit, the
SEC will also require you to bring a bank certificate
showing the cash but now it is not required, except if the
money came from abroad which in that case the bank
certificate is still required.
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.
Atty: If you remember under the General Banking Law, you first apply
with the BSP for the Authority to Establish then you need to apply for
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
an Authority to Register and once you have this you go to the SEC
and apply for the certificate of incorporation. The SEC will not even
accept your application without the certificate or permit to register
from the BSP. So you need to have certification from the appropriate
govt agency. (e.g. DepEd, DENR, NPR etc.)
If the corporation’s activities are governed by other government
agencies, then the SEC will not even entertain your application
unless endorsed by that agency. Even PEZA, there was a dilemma a
few years back because the PEZA will not endorse unless you are
incorporated but SEC will not endorse without PEZA endorsement so
what happened was you file your draft articles with the PEZA and the
PEZA will just make an endorsement that you have a pending
application which allows SEC to entertain your application.
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.
Atty: This is not automatic, it still subject to notice and hearing
because it is just a ground for revocation, it doesn’t mean that
automatically your corporate franchise is revoked.
Adoption of By-Laws
What happens upon the issuance of certificate of incorporation from
the SEC?
The corporation commences to have corporate existence and within
2 years the corporation must formally organize and commence its
business, otherwise the corporation will be deemed dissolved.
What is covered by formal organization and commencement of
business? [Post-incorporation requirements]
1. Adoption of by-laws and filing of by-laws with the SEC if
there is still no by-laws,
2. Election of officers by the board,
3. Apply for business permits with the LGU,
4. Register with BIR,
5. Pay documentary stamp tax for the subscription,
6. Open office in the place stated in the AOI,
7. Hire employees,
8. Start transacting business.
 Pre-incorporation - Must be substantially complied with in order for
the SEC to approve the incorporation. If not complied with, then
there can be no valid incorporation.
 Post-incorporation - Does not go into the validity of the
incorporation. Regardless of non-compliance with the post-
EH 404 | UNIVERSITY OF SAN CARLOS
incorporation requirements it will not affect the certificate of
incorporation. But non-compliance to certain post-incorporation
requirements may subject the corporation to penalties and even
the revocation or suspension of their license or certification of
incorporation.
BY-LAWS - By-laws are a set of internal set of rules for the
governance of a corporation
Not being a legal requirement, It is more of a practical requirement. It
is necessary as it is set of rules and guidelines for the corporation
and its stockholders.
What should be in the by-laws?
1. Time and place and manner of conduct of regular and
special meeting of the board.
2. Quorum requirements provided it does not go below the
statutory requirement.
3. Stockholders meeting
4. Penalties for violation of by-laws
5. Manner of election of corporate officers
6. Qualification and duties and compensations of directors,
officers, and employees
7. Other matters which are necessary
What are the requisites for a valid by-law?
It must be consistent with the corporation code and other issuances,
and it must be approved by the board of directors and stockholders. It
should also be consistent with the articles of incorporation.
Two Ways of Adopting By-laws
1. Pre-incorporation
Corporation can adopt and file its by-laws with the SEC together with
the articles of incorporation. It requires the approval of all the
incorporators.
2. Post-incorporation
Corporation must adopt its by-laws and file it with the SEC within 1
month after receipt of official notice of the issuance of its certificate of
incorporation by the SEC.
There must be an 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 the case of non-stock corporations.
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; and a copy thereof, duly certified to by a majority of the
directors or trustees and countersigned by the secretary of the
corporation.
It shall be filed with the SEC which shall be attached to the original
AOI.
By-laws become effective upon the issuance of a certificate of filing
by-laws or certificate of amendment of by-laws by the SEC.
What happens if the corporation fails to adopt by-laws?
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
Failure to adopt by-laws does not automatically cause the revocation
of the certificate of incorporation or dissolution of the corporation.
Loyola Grand Villa Homeowners v. CA
Facts:
LGVHA was established in 1983, however, they were not able to
file their by-laws.
In 1987, LGVHA tried to register its by-laws and they discovered
that there were two other associations, the North and South
Associations.
When Soliven (head of the South Assoc) inquired about the
status of LVHAI he found out that it had been dissolved for non-
submission of by-laws and non-user. This prompted him to
cause the registration of the South Association.
LGVHAI filed a complaint with Home Insurance and Guaranty
Corp questioning the revocation and prayed for cancellation of
the certificates of incorporations of the two other corporations.
Issue: WON LGVHAI’s COI was automatically revoked on the
ground of non-submission of its by-laws.
Held:
NO. The automatic corporate dissolution is not the intention of
the law.
Under Sec. 46, the non-filing of the by-laws is merely a ground
for revocation – it does not result in automatic dissolution.
Why did the SC say that even if they said “must” in the
provisions, regarding the adoption of by-laws, it is not
mandatory?
It was not considered mandatory because the SC because the
provision allows for post incorporation adoption. Meaning, that it
is not the only way to adopt by-laws.
Not should be taken of the second paragraph which allows for
filing of by-laws after the incorporation.
What was the basis of the SC in saying that the failure to adopt
by laws is not a ground for the automatic dissolution of a
corporation?
PD 902-A, which was issued with the corporation code, said that
among the powers of the SEC is the power to suspend and
revoke the certificate of incorporation, with notice and hearing,
on the grounds of failure to adopt bylaws among others.
It does not even provide for automatic dissolution but may even
be suspension.
Why is the by-law not a necessary document for the validity of a
corporation?
Adoption of the by-laws is a post incorporation requirement. It is
not a pre condition to the existence of the corporation.
What is the basis for the requirement that the by laws must be
consistent with the corporation code?
EH 404 | UNIVERSITY OF SAN CARLOS
Sec 47. Subject to the provision of the constitution, and this
code, and special laws...
Sec 46 provides for the approval of the board of directors and
stockholders.
Section 46. Adoption of by-laws. - Every corporation formed
under this Code must, within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws
for its government not inconsistent with this Code. For the
adoption of by-laws by the corporation the affirmative vote of the
stockholders representing at least a majority of the outstanding
capital stock, or of at least a majority of the members in case of
non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall
be kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. A
copy thereof, duly certified to by a majority of the directors or
trustees countersigned by the secretary of the corporation, shall
be filed with the Securities and Exchange Commission which
shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
the Securities and Exchange Commission of a certification that
the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for
filing the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company,
insurance company, public utility, educational institution or other
special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in
accordance with law. (20a)
Section 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting
regular or special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or
special meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or
members and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing
stock certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
For by-laws, under the law, you are given one (1) month to file the
by-laws after incorporation but the practice by the SEC is that they
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
will not even entertain your application if you do not file your by-laws
together with your articles so it has to be submitted together. The By-
laws contains basically the rules concerning the management of the
corporation. So it governs the relationship between the corporations
and the BOD and its stockholders and the stockholders and the
corporation. All the rules for the internal management of the
corporation is there. If the by-laws are silent then the matters stated
in sec 47 will be that which is provided for by the law e.g. quorum-
requires presence of the majority of the outstanding capital stock but
the by-laws can provide for higher and that is what we call
supermajority. The By-laws can also provide for more officers than
that in the law.
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.
Note: The vote that is required here is majority of the directors and
majority of the outstanding capital stock but the power to amend may
also be given solely to the directors by the vote of 2/3 of the
outstanding capital stock but this authority can be revoked by the
majority of the outstanding capital stock.
Grace Christian High School v CA
Facts:
From 1975 to 1989, Petitioner was recognized as a “PERMANENT
DIRECTOR” pursuant to a draft of an amendment of the by-laws
which provided “Grace Christian School is a permanent
representative in the board”.
The ASSOCIATION informed petitioner that they were re-examining
the right of the petitioner to continue as an unelected member of the
Board.
Issue: WON petitioner can continue as a permanent representative of
the board.
Held:
The petitioner cannot continue as a permanent unelected director.
The corporation code requires election. The draft was never
presented for approval.
EH 404 | UNIVERSITY OF SAN CARLOS
Moreover, practice, no matter how long continued, cannot give rise to
any vested right if it is contrary to law.
THE PROBLEM IN THIS CASE (As discussed)
First, the by-laws does not require that the representative of the
Petitioner (Grace Christian High School) be a homeowner.
The Grace Village Association, Inc. is an association consisting of
HOMEOWNERS as its members. In order to elect a trustee, he/she
must be a member. To be a member in this particular case, he/she
must be a homeowner.
In the case of the petitioner, since the by-laws do not provide for such
requirement, any person designated by the school can become
director of the Village Association.
This situation presents a problem where the Association will have a
director who is not a homeowner. THIS SHOULD NOT BE
ALLOWED.
Second, there is no vested right in holding office of the director. The
law does not allow this.
In the first place, the by-law is not even valid because it was not
approved by the SEC. But even if it was approved by the SEC, it
would still not be valid because it is contrary to the provision of the
Corporation Code.
Between the provision of the Corporation Code and the provision of
the by-law, the Corporation Code will prevail.
Between the Articles of Incorporation versus the Corporation Code,
the latter shall still prevail.
China Banking Corporation v. CA, Valley Golf and Country
Club
Facts:
Calapatia, a stockholder of Valley Golf & County Club, Inc. (VGCCI)
entered into a pledge agreement with Chinabank and used his stock
certificate as security. Chinabank notified VGCCI regarding the
pledge agreement, in which VGCCI confirmed it in its books.
Calapatia failed in his obligation hence Chinabank informed VGCCI
that it was executing the foreclosure on the stock certificates. VGCCI
then said that it should not be done since Calapatia has
delinquencies against VGCCI, since under its by-laws, if their
stockholders have delinquent payments, VGCCI has the right to sell
the stocks.
Chinabank still proceeded with the foreclosure, with it being the
highest bidder. On the other hand, VGCCI also sold Calapatia’s stock
certificate with other delinquent stock holders.
Being the owner of the stock certificate, Chinabank informed VGCCI
that it is the new owner, but VGCCI responded that it has sold the
stock certificated. SEC’s hearing officer said that VGCCI has the right
to sell, but SEC En Banc reversed the decision and said that the
pledge must be respected. CA reversed it, not being an intra-
corporate dispute.
ISSUE: (1) WON petitioner is a stockholder of VGCCI.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
(2) WON petitioner is bound by the provisions of the by-laws.
Held:
(1) Yes. The petitioner is a stockholder of VGCCI.
The by-laws of respondent provided that the corporation may be
allowed to sell stocks of a stockholder by reason of their delinquency.
However, petitioner is not bound. The by-laws do not bind a third
person if he had no knowledge when the shares were pledged.
SC stated that knowledge contemplated under the law that by the
time Chinabank informed VGCCI of the pledge agreement, it should
have been the best time VGCCI could have informed Citibank of its
by-laws regarding delinquent stockholders. However, VGCCI did not
do so, and only informed Chinabank after the pledge agreement has
been perfected, and that it had plans to foreclose the property. This is
not sufficient knowledge.
On VGCCI’s contention that the transfer is not valid under Sec. 63
It’s not the correct argument, as Calapatia’s delinquency is not on the
subscription but on the membership dues. Sec. 63 only applies to
unpaid subscriptions.
If it was Sec. 63 applicable, would Chinabank’s contention that it had
no knowledge be upheld?
No. VGCCI would have won because Chinabank does not need to
know the law as everyone is presumed to know the law. The by-law
provision is not a law, only an internal provision between VGCCI and
its members
Cebu Mactan Members v. Tsukahara
Facts:
Cebu Mactan through its president contracted a loan with Masahiro
Tsukahara. There were post-dated checks as security for the loan.
These bounced when encashed by Tsukahara, and despite repeated
demands, the corporation and its president did not pay. Tsukahara
filed a case against the corporation and president.
Cebu Mactan contended that it is not liable as it was contracted in the
personal capacity of the president, and if it was contracted by the
corporation, it should have been accompanied by a resolution by the
board of directors, as the corporation acts through its board of
directors.
Ruling:
As a general rule, in order to bind third persons to a contract, a board
resolution is necessary. However, as an exception, when the by-laws
provide authority for the president or other officers to contract loan,
then it is valid.
In this case, the by-laws provide for the authority of the president to
borrow money. Hence, the corporation is bound by the contract.
The difference between Cebu Mactan case and Chinabank case is
that in Chinabank, third persons are not bound of the by-laws unless
they have knowledge by the corporation. In Cebu Mactan, the
corporation is bound by its own by-laws. The limitation being that the
by-laws must not be contrary to the constitution, Corporation Code,
other laws, and its own articles of incorporation.
EH 404 | UNIVERSITY OF SAN CARLOS
Gokongwei, Jr. v SEC
Facts:
Gokongwei as stockholder of San Miguel, Inc., and a substantial
stockholder of Robina Corp. and CFC Corp. Gokongwei wanted to be
a director of SMI, but SMI amended its by-laws, it disqualified
stockholders who own conflicting interests with other corporations. It
was shown that Robina Corp. and CFC Corp., where Gokongwei was
a substantial stockholder, were corporations in competition with SMI,
so Gokongwei was not allowed to run, so Gokongwei filed for the
cancellation of amendment.
Issue
Whether the amended by-laws of SMI was valid.
Ruling
Corporations through its board of directors may amend its by-laws.
The amendment of its by-laws was consonant to its self-preservation
rights. To let Gokongwei be the director of SMI is an invitation for him
to know significant matters involving SMI, and would be
disadvantageous for SMI.
On the power of corporation to provide for qualifications/
disqualifications of board of directors in its by-laws.
It is allowed, as long as the by-laws are reasonable and not arbitrary.
One of the requirements of a valid by law is that the provisions
thereof must be reasonable and not arbitrary. In this case the SC
said that as long as the qualifications and disqualifications are
reasonable, then it is a valid provision in the by law.
How do you determine reasonableness?
SC said that, as long as it applies equally to all, it is reasonable. For
as long as it is not specifically targeted to exclude one person. Which
is the case here. It was not specific. It was any person who has major
interest in a business that directly competes with that of San Miguel.
Those are the disqualified director.
The equal protection clause only requires that the by law apply
equally upon all persons of a class. SC also said that the application
should not be automatic but there should be due process. There
must be hearing and presentation of evidence on whether or not
there is actual competition.
Amendment of By-Laws
Two ways:
1. BY DELEGATION: Majority of the board of directors. (The
2/3 refers to the delegation of this power to the board)
2. Majority vote of the BOD and the owners of at least a
majority of the outstanding capital stock.
By Delegation
What needs to happen first?
There must first be a delegation of power to amend the by-laws to the
board by 2/3 of the outstanding capital stock. Once there is
delegation, a meeting will be called for that purpose. Wherein the
BOB/BOT will vote by a majority vote.
What if you do not reach the 2/3 to delegate the power, you cannot
amend the by-laws?
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You can still amend.

Which means that all that is required is that the share must
How? be registered in the director’s name; so it doesn’t matter
By Majority Vote whether the director has the right to the financial benefits or
Majority Vote of the Board of Directors AND majority vote of the dividends, etc.
stockholders representing the outstanding capital stock (subscribed
capital stock less treasury shares) is required. Take note: you can have legal ownership without beneficial
ownership
ILLUSTRATION:
For the BOD: Example:
If there are 15 BOD, then 8, which is the majority of the 15 members,
must vote for the amendment. The vote of the BOD is regardless of I want to incorporate, but I cannot do it alone so I will
the number of shares owned by each of the members of the BOD. gather the minimum required number of directors then
assign to them the minimum number of shares required.
For the Stockholders: Then I can make them sign a Declaration of Trust. In that
You consider the number of shares owned and not the number of Declaration of Trust, I will say that the shares are in their
persons. name only for the purpose of being elected as directors and
the right to vote the shares and to the dividends belong to
How do we determine the majority? me. That is legal.
50 plus 1, not 51%. 50 plus 1 is different from 51%.
- The “books” referred to is the stock and transfer book
Do we consider the number of stockholders?
No. It is the number of shares. 2. Majority of the directors should be resident of the Philippines.

What particular type of shares? - Note: Majority, not all

The Outstanding Capital Stock. - There is NO citizenship requirement
 Except: Nationalized industries
EXAMPLE:
Authorized Capital Stock (ACS) 100k Even foreigners can be voted as directors
Subscribed Capital Stock (SCS) 70k (50k voting
20k non- DISQUALIFICATIONS (Section 27)
voting) 1. A person convicted by final judgment of an offense punishable by
Paid-up Capital Stock (PCS) 60k imprisonment for a period exceeding 6 years
Treasury shares 5k 2. A person who has committed a violation of the Corporation Code,
committed within 5 years prior to the date of his election or
The required vote is the Outstanding Capital Stock which is the appointment as director or trustee.
Subscribed Capital Stock less the treasury shares which is equal to
65k. The required vote is majority of the 65k or 32,500 shares plus 1 ELECTION OF DIRECTORS (Section 24)
(32,501). 1. There must be a meeting where there is a quorum
- This means that there must be present the owners of the
majority of the outstanding capital stock of the corporation
Does it matter if it is voting or non-voting? - Majority is 50% plus 1
No., because under Section 6 of the Corporation Code, even non-
- Note: there is no quorum, the meeting is NOT valid
voting shares are required to vote in the amendment of the by-laws.
2. There will now be voting
If the number of shares are held by one person, the vote of that one
person is sufficient to adopt or amend the by-laws. If the other 32,
How voting is made:
499 shares are held by 32,499 persons, they still could not get the
- The manner of voting is CUMULATIVE VOTING
required approval. Because for stockholders voting, you don’t count
by person, you count by shares of stock. As a rule, it is one stock one
Example:
vote.
I own 100 shares. There are 5 seats needed to be filled. There are 7
nominees (A, B, C ,D, E, F, G).
Board of Directors
QUALIFICATIONS TO BE ELECTED AS DIRECTOR OR TRUSTEE I am allowed 500 votes. Cumulative. In this case, it is not 1 share = 1
OF A CORPORATION (Section 23) vote. 1 share is allowed more than 1 vote.
1. Every director must own at least one share of the capital stock;
said share must be registered in his name on the books of the Point: You can allocate your vote anyway you want. You can give
corporation each nominee equal share, or give some nominee more shares than
the other, you can give one nominee all your votes, whichever way
- The ownership required is legal title/ownership, not you want!
necessarily beneficial ownership

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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
The only LIMITATION is it should not exceed the number of seats
multiplied by the number of shares.
- Those who can vote are those with voting shares.
3. You then report what transpired in the elections through the
filing of the GENERAL INFORMATION SHEET.
Question:
Can the company not opt to use cumulative in its by-laws?
If you remember the contents of the by-laws, there are two items
mentioned there:
SECTION 47. Contents of By-Laws. —
[…]
6. The time for holding the annual election of directors or
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
[…]
The manner of election is not subject to the discretion of the
corporation. The manner of voting for the directors cannot be
something that is subject to the provisions of the by-laws.
It is always subject under the requirement of the Corporation Code
that it should be the number of seats to be elected multiplied by the
number of shares you hold. You cannot provide in your by-laws a
different manner of voting.
Once we have the directors elected, what roles will the directors play
in the corporation? What are the authorities granted to the board
under the Corporation Code?
Under the Corporation Code, the board of directors exercises the
corporate powers. This includes conducting all the business and
control and hold the corporate properties. Basically they take care of
the management of the corporation.
The board acts or enters into transactions through the issuance of a
resolution.
For directors to approve the transactions that the corporation enters
into, they need to have a meeting as a board. The directors need to
act as a board. They cannot act individually. There has to be a
quorum.
What is a quorum?
Sec. 25 .. x x x 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 . x x x
How do you determine the correct quorum if the Articles of
Incorporation and By-laws are silent?
The quorum is based on the number of directors indicated in the
articles, not the actual number of directors.
Example:
EH 404 | UNIVERSITY OF SAN CARLOS
If your articles provide for 15 directors but you have 9 directors
present. The quorum is still based on the 15, not on the 9 present. So
in this case, the quorum is 8 directors. Once you have at least 8
directors you can now validly transact business.
What is the required approval for transacting business?
If there are 15 directors, 8 directors are needed in order to hold a
valid meeting. If 12 directors show up, there is a quorum and the
board can now validly transact business and make approvals. If 5
resolutions are presented, how many votes are needed for each
resolution to pass?
In order to approve of resolutions, a majority vote based on the
directors present in the board meeting is needed.
Sec. 25 … x x x 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.. x x x
For the actual voting for the approval of a transaction, it is based on
the number of directors present.
Summary of Voting and Approval of the Board of Resolutions:
First, you have to take a look at is whether there is a valid meeting.
A quorum is what makes a valid meeting. A quorum is majority of the
directors fixed in the Articles of Incorporation. For the actual voting
for the approval of certain transactions to be a valid approval, it must
be based on majority of the directors present during the meeting.
What if the actual number of directors cannot constitute a quorum, is
there a need to hold an election in order to fill the vacancy? Yes.
The transaction has been voted on by the majority of the directors
present and approved. However, it turns out to be a bad decision.
The company lost money. What is the liability of the directors?
The directors do not have any liability for as long as they have acted
in good faith. Under the Business Judgment Rule, whatever the
board of directors decide as long as it is done in good faith, they
cannot be held liable.
Can’t the stockholders question the validity of the transactions and
say that the directors made a bad decision? Or can the stockholders
compel the courts to revise the terms entered into by the directors?
Business Judgment Rule - the directors in the performance of their
duties cannot be held liable. The Courts cannot suspend or substitute
their judgment to the judgment of the directors.
Even the stockholders cannot say that “This contract is wrong and
should be invalid” just because the directors chose wrongly, the
stockholders do not have that kind of authority. For as long as the
directors act in good faith, all transactions entered into by the
directors are binding and they cannot be held liable for it.
EXCEPTION TO THE BUSINESS JUDGMENT RULE (1st par. of
Sec. 31)
1. Willfully and knowingly assent to patently unlawful acts
2. Guilty of gross negligence or bad faith in directing the affairs of
the corporation
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3. Acquires any personal or pecuniary interest in conflict with their
duty (conflict of interest)
SECTION 31. Liability of Directors, Trustees or Officers . —
Directors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who
are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty .. x x x
If a director goes for a patently unlawful act, or when he is guilty of
bad faith or negligence, or when he is guilty of conflict of interest, is it
the same obligation that he would have if he acquires an interest
adverse to that of the corporation?
For patently unlawful acts or guilt of bad faith or negligence or conflict
of interest, the liability of the director is joint and several or solidary to
the corporation, its stockholders or members or other persons.
SEC. 31 x x x .. 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… x x x
In which case, the director is solidarily liable for any damage caused
not just to the corporation but as well as to stockholders and third
persons.
DOCTRINE OF CORPORATE OPPORTUNITY
`Section 31. Liability of directors, trustees or officers.
[…]
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest averse 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.
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.
The things that you need to look at when there is a violation of the
doctrine:
(1) WON the transaction in line with the business of the corporation;
(2) WON the corporation has the capacity to enter into that
transaction but the director takes the opportunity for himself.
That violates the doctrine it doesn’t matter if it’s a competing
corporation, if there is a transaction supposed to be for the
corporation but taking it for yourself violates this.
EH 404 | UNIVERSITY OF SAN CARLOS
Example:
(1) The corporation owns land somewhere in the province, a person
goes to the corporation through the director and says we wants
to buy land in the province and he is willing to buy, but instead
the director says that he has his own land and sells it to the
person for 100k.
If the corporation is engaged in buying and selling land then this
is in line with its business, and the corporation has the capacity
because it has land in the area, but instead of selling the
corporation’s land the director sells his own land and so he took
the opportunity for himself and profited from it.
So you have a potential contract that a corporation can validly
enter into where it is in line with its purpose and has the capacity
to enter into it but rather than giving the opportunity to the
corporation, you take it for yourself.
If the director does this then he is liable under sec 34 so 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.
(2) The corporation is looking for land, and the director knows
somebody who is selling land in the area, so the director goes
there, the director knows that the corporation is willing to buy
land in that area for Php15k/sqm but then the director says to
the seller that ‘hey I’ll buy your land for Php10k/sqm.
Again, this violates the doctrine. Instead of saving the
corporation Php5k/sq.m, the corpo now has lower profits. Again
you have to account for the profits back to the corpo. So it’s
really not a matter of investing funds.
What’s the difference between Sec. 34 and Sec. 31 p.2?
Section 31 p.2 is another mode of doctrine of corporate opportunity.
Sec 34 is more general, under sec 31 p2, you have been reposed
with the duty to undertake the transaction but rather than giving that
transaction to the corporation you acquired interest averse to the
corporation. It is more specific.
Example:
In the second example, if you have been tasked to look for the land,
but instead of having the corporation buy directly, you buy it first and
you sell it for a higher price, then that falls under sec 31 p2.
But if in general you were not assigned but you know the corporation
is looking for land and you were the one who bought, Sec. 34
applies.
SALIENT AMENDMENTS IN THE
CORPORATION CODE
The following are few points emphasized and compared with the
revised corporation code as opposed to old corporation code.
Caveat: Better read the full codal provisions.
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
SEC. 10. Number and Qualifications of Incorporators -
Incorporators are not limited to natural person only, partnership,
association or corporation, singly or jointly with others and other
juridical entities may now form a corporation are now allowed to
be incorporators
Juridical entities are now allowed as incorporators, no minimum
number required to be incorporators, requirement of ownership of 1
stock is still there.
SEC. 7. Founders’ Shares. – Founders’ shares may be given
certain rights and privileges not enjoyed by the owners of other
stocks. 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 from the date of incorporation: Provided, That
such exclusive right shall not be allowed if its exercise will violate
Commonwealth Act No. 108, otherwise known as the “Anti-Dummy
Law”; Republic Act No. 7042, otherwise known as the “Foreign
Investments Act of 1991”; and other pertinent laws.
Changes in founder’s share expressly provided that exclusive right to
vote and be voted on founders share in the election of directors
should not violate the Anti-Dummy Law and FIA.
Anti dummy law – persons not allowed to have interest in
nationalized corporation, they just nominate Filipino citizen to be legal
stockholders but in reality they are the one controlling, a violation of
Anti-Dummy Law, a criminal offense.
Foreign Investment Act, including FINL- Foreign Investment Negative
List – restrictions, as between Founder’s share or Anti-Dummy Law
or FIA, FIA and Anti-Dummy Law will prevail
SEC. 11 Corporate Term - A corporation shall have perpetual
existence unless its articles of incorporation provides otherwise.
Perpetual existence and automatic for existing corp unless elect
otherwise
Applies even to existing corporation.
For those corporation elect a definite term and have expired, old law
automatically dissolve and cannot revive and must incorporate
another corporation, but revised corporation code, expiration of
corporate term does not result in automatic dissolution of the
corporation because corporation can still be revive. Just apply for
revival and the personality of corporation as if it was never dissolve,
same rights and obligation, properties, asset and liabilities
SEC. 12. Minimum Capital Stock Not Required of Stock
Corporations - No more minimum subscribe or paid up capital
stock as opposed to old corporation code which has a minimum
authorized capital stock.
There is no longer a minimum capital at all, whether authorized,
subscribed or paid up.
Deletion of Section 13 in the Old code
Section 13. Amount of capital stock to be subscribed and paid for
the purposes of incorporation.
Requirement of 25-25% was deleted
This is now the new section 13 of the revised corporation code.
Section 13. Contents of the Articles of Incorporation
EH 404 | UNIVERSITY OF SAN CARLOS
 It is the same except that the number of incorporators are not
subject to minimum number requirement anymore.
 Provision that if stockholderrs want, there can be arbitration
agreement in articles of incorporation.
 Deleted the treasurers affidavit because supposed affidavit of 25-
25%, now its incorporated in the body that the total paid
subscriptions and have the treasure signed on the articles,
 Not only incorporators are signing the articles, treasurer is also
required
SEC. 17. Corporate Name - No corporate name shall be allowed
by the Commission if it is not distinguishable from that already
reserved or registered for the use of another corporation, or if
such name is already protected by law, or when its use is
contrary to existing law, rules and regulations.
A name is not distinguishable even if it contains one or more of
the following:
(a) The word “corporation”, “company”, “incorporated”, “limited”,
“limited liability”, or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses, spacing, or number
of the same word or phrase.
[…]
If the corporation fails to comply with the Commission’s order, the
Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or
criminally liable under this Code and other applicable laws and/or
revoke the registration of the corporation.
Example:
You copy existing or protected and just add corporation in the end of
the name, still not distinguishable, still not allowed to be registered.
SEC now has the power to hold corporations or its directors in
contempt for failure to comply with an order not to use the name,
when it does not comply with an order to change the name.
SEC. 18. Registration, Incorporation and Commencement of
Corporate Existence
This includes the outline for the process of incorporating. It is not in
the old law but is already in practice.
SEC. 21. Effects of Non-Use of Corporate Charter and
Continuous Inoperation
From non-use of two (2) years as provided in the old code, it is now
five (5) years.
In this case certificate of incorporation deemed revoked as the end of
the following 5 year period, but if corporation has already started
operation and then it stop for a period of at least 5 years, is not
anymore a ground for revocation, now just a ground for placing
corporation in delinquent status. And such delinquent corporation has
a period of 2 year to resume operation, if it fails to resume in 2 years,
SEC may now revoked the certificate of incorporation.
SEC. 22. The Board of Directors or Trustees of a Corporation;
Qualification and Term.
[…]
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The board of the following corporations vested with public interest
shall have independent directors constituting at least twenty
percent (20%) of such board:
(a) Corporations covered by Section 17.2 of Republic Act No.
8799, otherwise known as “The Securities Regulation Code”,
[…]
Strengthening corporate governance usual requirement is existence
of independent directors, not really new in the revised corporation
code these are already required under other special laws, 20% of
their board as independent directors.
SEC. 45. Adoption of Bylaws
Filing of Bylaws within 1 month period was deleted, now consistent
with the jurisprudence, that bylaws is not necessary for the existence
of corporation.
SEC. 49. Regular and Special Meetings of Stockholders or
Members
[…]
The right to vote of stockholders or members may be exercised in
person, through a proxy, or when so authorized in the bylaws,
through remote communication or in absentia.
[…]
Under the revised code, attendance in a meeting by remote
communication are now allowed for stockholders, before
stockholders are required to attend in person or by proxy not by video
or telephone conference. Under the old code BOD were already
allowed by SEC rules.
Election of Directors
SEC. 23. Election of Directors or Trustees - At all elections of
directors or trustees, there must be present, either in person or
through a representative authorized to act by written proxy, the
owners of majority of the outstanding capital stock, or if there be
no capital stock, a majority of the members entitled to vote.
When so authorized in the bylaws or by a majority of the board of
directors, the stockholders or members may also vote through
remote communication or in absentia: Provided, That the right to
vote through such modes may be exercised in corporations
vested with public interest, notwithstanding the absence of a
provision in the bylaws of such corporations.
Who nominates?
Each stockholder or member shall have the right to nominate any
director or trustee who possesses all of the qualifications and none of
the disqualifications set forth in this Code, except when the exclusive
right is reserved for holders of founders’ shares under Section 7 of
this Code
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for purposes
of quorum.
What are the disqualifications?
SEC. 26. Disqualification of Directors, Trustees or Officers. – A
person shall be disqualified from being a director, trustee or
EH 404 | UNIVERSITY OF SAN CARLOS
officer of any corporation if, within five (5) years prior to the
election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known as
“The Securities Regulation Code”;
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority for
acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory
agency, or the Philippine Competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings.
Atty Gaviola: The Revised Corporation Code now expressly provides
that stockholders have the nominate persons holding at least one
share of stock to be elected as a member of the Board of Directors,
provided that the person nominated has the qualification which is the
“stockholdership”, and none of the disqualifications.
How is the voting done?
By ballot, if expressly requested by one of the stockholders.
How many shares or how many votes can a stockholder cast?
Under the Revised Corporation Code, a shareholder is entitled to an
amount of votes equal to his number of shares multiplied by the
number of seats to be elected.
How does a stockholder distribute his/her votes?
There are three manners:
1. Cumulatively or giving all of his votes to one nominee
2. Proportionately divide his votes to the number of vacant seats
3. Give his vote to 2 or more directors, depending on his choice or
as to who he sees fit
Atty Gaviola: So, he can allocate to as many persons as he sees fit.
But, of course, it’s not logical to allocate it to more than the number
of the vacancies or seats to be filled. You cannot get a director
elected that way.
What happens after the election?
After the election of the directors, the corporate secretary is required
to submit a General Information Sheet to the Securities and
Exchange Commission (SEC).
What would be contained in the General Information Sheet?
Names, nationalities, shareholdings, and residence addresses of the
elected directors
Atty Gaviola: The Corporate Secretary would have to file a report to
the SEC on the election of the directors. It has to be filed within 30
days from the time of the conduct of the election.
What happens if no election is held?
Report to the SEC the reason behind the failure of the election within
30 days. State the schedule of the date of the next election which
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should not be more than 60 days from the date of the election that
was not held.
Atty Gaviola: This is new, not found in the old Corporation Code. You
are now required to submit a report on non-holding of election. A few
years ago, the SEC was requiring this report through its rule-making
power, but so many people complained about it, they stopped. So,
there was a time (around 2008 onwards), it was no longer required to
submit the report on non-holding of election. Now that it’s back and
it’s under the law, the SEC id now again requiring the report on the
non-holding of elections.
What happens if the corporation continues to not hold the election?
Upon application of a stockholder, member, director, or trustee, and
after verification of the unjustified non-holding of the election, the
SEC can summarily order that an election be held. The SEC has the
power to issue such orders as may be appropriate, including directing
the issuance of a notice stating the time and place of the election,
designating a presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote.
What is the Business Judgment Rule?
It presupposes the existence of a Board of Directors or Trustees such
that when the stockholders elected the Board of Directors or
Trustees, it is the law that grants them the authority to act. Any
decision made by the Board of Directors or Trustees, the
stockholders cannot review it except for the exceptions provided by
law. The law accords the Board of Directors or Trustees the specific
power to act on behalf of the corporation.
Atty Gaviola: The Board of Directors has been granted the power to
exercise all the corporate powers of the corporation, to conduct all
the business, and to control the corporate properties. So, whatever
the decision or judgment of the BOD no person, not even the
stockholders, not even the courts, can question and substitute their
judgment for that of the BOD. The BOD is insulated from any liability
or damages that may arise out of their decision. This is the general
rule of the business judgment rule.
In those three instances, what’s the liability of the director?
Civil liability. Solidarily liable with the corporation for damages caused
to the corporation, the stockholders, or any other person.
General Rule: Directors are not liable for any losses or damages their
decisions may cause the corporation or any third persons.
Exceptions (Sec. 30, Revised Corporation Code):
1. If they vote for or assent to patently unlawful acts
2. They are guilty of bad faith or gross negligence in managing the
operations of the corporation
3. They acquire personal or pecuniary interest in conflict with their
duty as such director or trustee
Magaling vs. Ong
This is with respect to a Termo Lending corporation. Ong was
allegedly persuaded by Spouses Magaling with respect to investing
in the thermo-lending corporation by virtue of the represented by
Spouses Magaling. Ong invested in the corporation only to know that
there were no return of investments with respect to the investments
made by Ong.
EH 404 | UNIVERSITY OF SAN CARLOS
Ong had a cause of action with respect to demanding the amount he
invested to the thermo-lending corporation and imputing liability to
Spouses Magaling. The only question in this case is whether there
was gross negligence on the part of Spouses Magaling.
During the cross-examination, it was found out by the court that
despite being the president of various lending corporations,
Magaling:
(1) when asked if he knows personal names of the directors of these
corporations, he answered in the negative
(2) when asked if he knew of the outstanding balances of the
corporatons, he answered in the negative and said he did not
know
(3) when asked whether he had any financial statements of thermo-
lending corporation, he answered in the negative
When asked what is his role as the president of the Termo Lending
corporation, Magaling said that it is the manager who is acting on
behalf of the actions committed by the thermo-lending corporation.
The SC said that Magaling in this case is liable because he acted in
gross negligence which is characterized by the want of even the
slightest care, acting or omitting to act in a situation where there is a
duty to act, not inadvertently but willfully with a conscious disregard
to the consequences insofar as other persons are concerned.
The SC said we cannot simply hold the Termo Lending corporation
liable because the case falls under the second exception to the
Business Judgment Rule which is acting in bad faith or gross
negligence amounting to bad faith. Magaling is solidarily liable with
Termo Lending corporation in paying Ong for the investment made.
Atty Gaviola: So Magaling was made responsible for the loan paid by
Ong — solidarily liable with the corporation — on the ground of
negligence in directing the affairs of the corporation. So, this is an
instance of one of the grounds under Section 30 where a director
may be held liable.
The SC said that when it reviewed the trial transcripts, his answers
appeared to be “I don’t know” or “I don’t remember,” so it connotes
an attitude of nonchalance or indifference. So, he simply did not care
about the operations of the corporation. That is considered as being
grossly negligent, and Magaling was held solidarily liable with the
corporation.
James Ient and Maharlika Schulze vs Tullet Prebon
Philippines G.R. No.189158 Jan. 11, 2017
Facts:
Tullet Prebon and the company of Ient and Schulze Tradition
Philippines are competitors in the deal breaking business. At some
point in time several Tullet deal brokers resigned and went to work
with Tradition Philippines. Tullet filed a complaint against Tradition for
sabotaging their business by taking their deal breakers. Tullet wanted
Tradition to be criminally liable under Sections 31, 34 and 144 of the
Corporation Code
Issue:
Whether or not Ient and Schulze could be criminally liable. (The
aggrieved corporation wasn’t satisfied with civil liability—hence, it’s
insistence for criminal liability.)
Ruling:
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No, Ient and Schulze could not be criminally liable because the
Corporation Code is not a penal statute. The penalties suggested in
the code are only administrative, which is
How does the revised corporation code affect the ruling of this case?
Section 144 is now under Section 170.(The catch-all provision for all
violations of the Code)
No criminal liability anymore, only civil penalty of an increased fine—
apply said section only if the violation is not penalized anywhere else
in the Code.
Section 31 and 34 penalizes the violations in said provisions to which
Section 170 is inapplicable.
Can directors delegate their powers:
Yes. Through the Board of Directors of Executive Committees or
Board of Directors of Special Committees.
Filipinas Port v. Go (2007)
Lessons Applicable: Rationale for "Centralized Management"
Doctrine
FACTS:
Sept 4 1992: Eliodoro C. Cruz, Filport’s president from 1968-1991,
wrote a letter to the corporation’s BOD questioning the creation and
election of the following positions with a monthly remuneration of
P13,050.00 each. Cruz requested the board to take necessary
action/actions to recover from those elected to the aforementioned
positions the salaries they have received.
Jun 4 1993: Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal
and Brokerage Services, Inc. (Minterbro), filed with the SEC a
derivative suit against Filport's BOD for acts of mismanagement
detrimental to the interest of the corporation and its shareholders at
large.
Cruz prayed that the BOD be made to pay Filport, jointly and
severally, the sums of money variedly representing the damages
incurred as a result of the creation of the offices/positions complained
of and the aggregate amount of the questioned increased salaries.
RTC: BOD have the power to create positions not in the by-laws and
can increase salaries. But Edgar C. Trinidad under the third and
fourth causes of action to restore to the corporation the total amount
of salaries he received as assistant vice president for corporate
planning; and likewise ordering Fortunato V. de Castro and Arsenio
Lopez Chua under the fourth cause of action to restore to the
corporation the salaries they each received as special assistants
respectively to the president and board chairman. In case of
insolvency of any or all of them, the members of the board who
created their positions are subsidiarily liable.
Appealed: creation of the positions merely for accommodation
purposes - GRANTED
ISSUES:
(1) W/N there was mismanagement – NO
(2) W/N there is a proper derivative suit - YES
EH 404 | UNIVERSITY OF SAN CARLOS
HELD: CA Affirmed
(1) NO
Section 35 of the Corporation Code, the creation of an executive
committee (as powerful as the BOD) must be provided for in the
bylaws of the corporation.
Notwithstanding the silence of Filport’s bylaws on the matter, we
cannot rule that the creation of the executive committee by the board
of directors is illegal or unlawful. One reason is the absence of a
showing as to the true nature and functions of executive committee.
But even assuming there was mismanagement resulting to corporate
damages and/or business losses, respondents may not be held liable
in the absence of a showing of bad faith in doing the acts complained
of. ("dishonest purpose","some moral obliquity","conscious doing of a
wrong", "partakes of the nature of fraud") determination of the
necessity for additional offices and/or positions in a corporation is a
management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith
or with malice.
(2) YES
Besides, the requisites before a derivative suit can be filed by a
stockholder: - present
The party bringing suit should be a shareholder as of the time of the
act or transaction complained of, the number of his shares not being
material - a stockholder of Filport.
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 he wrote a letter.
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. - wrong against
the stockholders of the corporation generally
Filport Inc vs Go: Executive committees can only be created through
by laws; however, the board of directors may create it. The court did
not rule that the creation of the executive committee by the board of
directors is illegal or unlawful because: In relation to Section 34 of the
Amended Code:
1. One reason is the absence of a showing as to the true
nature and functions of said executive committee.
2. The Board of Directors has the power to create positions
not provided for in the bylaws since the board is the
corporations governing body, clearly upholding the power
of its board to exercise its prerogatives in managing the
business affairs of the corporation.
Executive Committee: must be provided for in the bylaws if it is as
powerful as the board of directors and in effect acting for the board
itself. Otherwise, no need to be included in the bylaws.
Relevant Section:
Section. 34. Executive, Management, and Other Special
Committees. – by-laws so provide, the board may create an
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executive committee composed of at least three (3) directors.
Said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may
be delegated to it in the bylaws or by majority vote of the board,
except with respect to the: (a) approval of any action for which
shareholders’ approval is also required; (b) filling of vacancies in
the board; (c) amendment or repeal ofbylaws or the adoption of
new bylaws; (d) amendment or repeal of any resolution of the
board which by its express terms is not amendable or repealable;
and (e) distribution of cash dividends to the shareholders. The
board of directors may create special committees of temporary or
permanent nature and determine the members’ term,
composition, compensation, powers, and responsibilities (as long
as the committee does not exercise the powers on the first
paragraph
GR: The Board of Directors has the power to create temporary or
permanent special committees, provided that such committees do
NOT have the powers and functions of the board of directors.
Otherwise, it must be provided for in the by laws. This was the
doctrine held in Filipinas Port Services v Go and is now in Sec. 34
( Sec. 35).
How do you reconcile the requisite in the law to have an executive
committee, first paragraph (sec. 35, now 34), and the Fil Port Case
where the court said that the “executive committee” is valid even if it
wasn’t stipulated in the by laws?
In the FilPort case, although the committee was named “executive
committee”, it did NOT exercise the powers and functions of the
Board of Directors. It did not exercise the competencies of the board.
Thus, it is not the “executive committee” which is contemplated in
Sec. 35 (Now 34) of the Corporation Code.
In FilPort, it was not shown that the executive committee had the
functions of the board nor did it show that the board delegated
functions to it. Regardless of the name it possessed, what is
important is the functions that the committee has.
The board has the right to establish special committees even if it is
not in the by laws.
Self-Dealing Directors
SECTION 31. Dealings of Directors, Trustees or Officers with the
Corporation. — A contract of the corporation with one (1) or more
of its directors, trustees, officers or their spouses and relatives
within the fourth civil degree of consanguinity or affinity is
voidable, at the option of such corporation, unless all the following
conditions are present:
a. The presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
b. The vote of such director or trustee was not
necessary for the approval of the contract;
c. The contract is fair and reasonable under the
circumstances;
d. In case of corporations vested with public interest,
material contracts are approved by at least two-thirds
(2/3) of the entire membership of the board, with at
least a majority of the independent directors voting to
approve the material contract; and
e. In case of an officer, the contract has been
previously authorized by the board of directors.
EH 404 | UNIVERSITY OF SAN CARLOS
Where any of the first three (3) conditions set forth in the
preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two- thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees
involved is made at such meeting and the contract is fair and
reasonable under the circumstances.
The requirement for self-dealing directors ONLY applies to directors,
trustees or officers, meaning only those that manage the corporation.
Because the assumption is, the stockholder has nothing to do with
the management of the corporation unless he or she is a director,
trustee. The law seeks to prevent a conflict of interest where a
director will put his own interest above that of the corporation where
he is a director.
“Or their spouses and relatives within the fourth civil degree of
consanguinity or affinity” – this is a new addition to the law. Relatives
are now covered as well.
Quorum of BOD in a meeting
Quorum for the directors is based on the directors that are stated in
the Articles of Incorporation.
Atty Gaviola: It is not typical to find BOD that are in even numbers
because that will result in a deadlock.
Example:
If there are five board of Directors, then the quorum that is needed is
3.
If there are four then the majority needed is three since what is
necessary is the majority of those that are present in order for a
transaction to be valid.
What happens if there are three present including the self-dealing
director then out of the 3, 2 voted to approve including the self-
dealing director?
It could be voidable but is subject to ratification. However, if the
requirement under Sec 31 is met then it is valid.
What’s the third requirement?
The contract must be fair and reasonable.
What happens if the contract is voidable because the requirements
are not met are there any remedy?
It could be ratified by a vote of 2/3 of the stockholders representing
2/3 of the outstanding capital stock or 2/3 of the members of the non-
stock corporation and there must be a meeting wherein the director
or trustee shall fully disclose the adverse interest that he has and
such contract must be fair and reasonable under the circumstances.
What happens if the corporation is vested with public interest?
In case of corporations vested with public interest, material contracts
are approved by at least two-thirds (2/3) of the entire membership of
the board, with at least a majority of the independent directors voting
to approve the material contract.
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Independent Directors
They are free from any relation which could reasonably interfere with
their independent exercise with their judgement
When are they required?
a) Corporations covered by Section 17.2 of Republic Act No.
8799, otherwise known as “The Securities Regulation Code”,
namely those whose securities are registered with the
Commission, corporations listed with an exchange or with assets
of at least Fifty million pesos (P50,000,000.00) and having two
hundred (200) or more holders of shares, each holding at least
one hundred (100) shares of a class of its equity shares;
(b) Banks and quasi-banks, non-stock savings and loan
associations, pawnshops, corporations engaged in money service
business, preneed, trust and insurance companies, and other
financial intermediaries; and
TN: these are not new but they are just incorporated in the New
Corporation code since this is provided in their own laws already
since they already require independent directors already.
(c) Other corporations engaged in businesses vested with public
interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of
an independent director, such as the extent of minority ownership,
type of financial products or securities issued or offered to
investors, public interest involved in the nature of business
operations, and other analogous factors.
There must be 20% of the membership in the above-mentioned
corporations.
Interlocking Director
When one is a board of two corporations and those two corporations
are contracting with one another.
General rule: the contract is valid, since it is not a ground to
invalidate a contract unless there are other grounds such as fraud.
Exception: If one corporation is a substantial shareholder and the
other is nominal shareholder
Nominal Shareholder – owns less than 20%
Substantial: exceeds 20%
How may a director be removed from office?
They can be removed by a vote of a stockholder holding 2/3 of the
outstanding capital stock or 2/3 members in case of a non-stock
corporation.
Removal of Directors or Trustees
Provision:
SEC. 27. 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 in 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
EH 404 | UNIVERSITY OF SAN CARLOS
or members of the corporation of the intention to propose such
removal at the meeting. A special meeting of the stockholders or
members for the purpose of removing any director or trustee must
be called by the secretary on order of the president, or upon
written demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or a majority of
the members entitled to vote.
If there is no secretary, or if the secretary, despite demand, fails
or refuses to call the special meeting or to give notice thereof, the
stockholder or member of the corporation signing the demand
may call for the meeting by directly addressing the stockholders
or members. Notice of the time and place of such meeting, as well
as of the intention to propose such removal, must be given by
publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without
cause may not be used to deprive minority stockholders or
members of the right of representation to which they may be
entitled under Section 23 of this Code.
The Commission shall, motu proprio or upon verified complaint,
and after due notice and hearing, order the removal of a director
or trustee elected despite the disqualification, or whose
disqualification arose or is discovered subsequent to an election.
The removal of a disqualified director shall be without prejudice to
other sanctions that the Commission may impose on the board of
directors or trustees who, with knowledge of the disqualification,
failed to remove such director or trustee.
How may directors be removed from office?
(Sec. 27, Par. 1)
(a) May be removed from office by a vote of the stockholders
holding or representing at least (2/3) of the outstanding
capital stock.
(b) Directors may be removed through a regular meeting OR a
special meeting called for that purpose
(c) In either case, there should notice given to all stockholders
or members of such corporation of the intention to propose
such removal.
If held in a SPECIAL MEETING – it should be called by ;
(a) The secretary on the order of the president OR;
(b) Upon written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock,
or majority of the members entitled to vote.
What if the secretary refuses to call?
(Section 27, Par. 2)
If there is no secretary, or if the secretary, despite demand, fails or
refuses to call the special meeting or to give notice thereof;
REMEDY: The stockholder or member of the corporation signing the
demand may call for the meeting by directly addressing the
stockholders or members.
Note: (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)
Should removal of a director be with cause?
(Section 27, Par. 2)
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It can be with or without just cause due to the fiduciary nature
between the stockholders and the directors.
If the stockholders no longer see a director fit, they have the right to
remove such director.
Limitation:
If removal is WITHOUT CAUSE; It may not be used to deprive
minority stockholders or members of the right of representation to
which they may be entitled.
How about the removal of the SEC, can it also be with or without
case, and how is it done? (Section 27, Par. 3)
It is done either through a (a) verified complaint or (b) motu pro prio
and (c) after due notice and hearing.
On grounds of; (a) elected despite the disqualification , or (b)whose
disqualification arose or is discovered subsequent to an election.
Summary: The grounds for the stockholders to remove directors can
only be done with or without cause; Provided that if the removal
should be without cause it should not violate the rights of the minority
stockholders; while for the Securities and Exchange Commission,
they can only remove a director for disqualification.
Bernas, et al vs. Cinco, et al. G.R. Nos. 163356-57. July 1,
2015.
Where there is an officer authorized to call a meeting and that officer
refuses, fails, or neglects to call a meeting, the SEC can assume
jurisdiction and issue an order to the petitioning stockholder to call a
meeting pursuant to its regulatory and administrative powers to
implement the Corporation Code.
Facts:
BERNAS GROUP were among the Members of the Board of
Directors and Ofaicers of the Makati Sports Club corporation whose
terms were to expire either in 1998 or 1999.
CINCO GROUP are the members and stockholders of the
corporation who were elected Members of the Board of Directors and
Ofaicers of the club during the 17 December 1997 Special
Stockholders Meeting.
Alarmed with the rumored anomalies in handling the corporate funds,
the MSC Oversight Committee (MSCOC), composed of the past
presidents of the club, demanded from the Bernas Group to resign
from their respective positions to pave the way for the election of new
set of officer’s.
MSCOC called a Special Stockholders' Meeting where in that
meeting proceeded wherein the Bernas Group were removed from
ofUice and, in their place and stead, Cinco Group were elected.
Subsequently, the removal was ratiUied during the Annual
Stockholder’s Meeting.
ISSUE:
WHETHER OR NOT THE 17 DECEMBER 1997 SPECIAL
STOCKHOLDERS' MEETING AS RATIFIED BY THE ANNUL
STOCKHOLDERS’ MEETING IS VALID
EH 404 | UNIVERSITY OF SAN CARLOS
RULING: NO, invalid
On authority of MSCOC: The removal of the Bernas Group, as well
as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void.
The MSCOC is neither empowered by law nor the MSC by-laws to
call a meeting and the subsequent ratification made by the
stockholders did not cure the substantive infirmity, the defect having
set in at the time the void act was done. The defect goes into the very
authority of the persons who made the call for the meeting.
Being void, it cannot be validated through ratification.
The power to call a special meeting, solely vested by law and the
MSC by-laws on the President or the Board of Directors. Sec. 28.
Removal of directors or trustees. xxx 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, xxx
Remedy: In case of refusal, the remedy of the stockholders would
have been to file a petition to the SEC to direct him to call a meeting
by giving proper notice required under the Code.
Where there is an officer authorized to call a meeting and that officer
refuses, fails, or neglects to call a meeting, the SEC can assume
jurisdiction and issue an order to the petitioning stockholder to call a
meeting pursuant to its regulatory and administrative powers to
implement the Corporation Code.
Sec. 50. Regular and special meetings of stockholders or
members.
xxx 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, and on a showing of good
cause therefore, may issue an order to the petitioning stockholder
or member directing him to call a meeting of the corporation. xxx
In Philippine National Construction Corporation v. Pabion, where the
Court validated the order of the SEC to compel the corporation to
conduct a stockholders' meeting in the exercise of its regulatory and
administrative powers to implement the Corporation Code:
Analysis: Illegal Acts vs. Ultra Vires Acts
ILLEGAL ACTS ULTRA VIRES ACTS
An act which are contrary Not illegal nor void ab
to law, moral, or public initio.
policy or public duty.
Cannot acquire validity by May become binding and
performance, ratification, enforceable when ratified
or estoppel. by the stockholders.
VOID VOIDABLE
Why was the meeting called by the oversight committee considered
as invalid? It was improperly called.
1. The Corporate Secretary should have called for the meeting
or
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2. Upon order of stockholders representing the majority of the
OCS; or
3. Stockholder addressing the rest of the stockholders of the
company.
Under the bylaws who should’ve called?
It was the President or the majority of the Board.
Whether it was the law or the by-laws MSC wasn’t the proper party to
call for the meeting. Since the meeting was properly called, it was
invalid. Therefore, all acts were illegal and cannot be ratified. The
ratification was also invalid.
The ousting of the Bernas group and selling of their shares was not a
valid act and could not be ratified.
Ultimately, who was the valid group?
Cinco group.
Although the special meeting was invalidated, the Supreme Court
nevertheless, during the Annual Stockholders meeting, the
stockholders still reelected the Cinco group only starting when they
were reelected in the Annual Stockholders Meeting.
Filling of Vacancies
How are vacancies in the board filled?
As a general rule, stockholders have the inherent right to fill in the
Board for whatever is the ground/reason of the vacancy. But the right
to fill in the vacancy may be delegated to the BOD (by a majority vote
of the BOD).
The law says “MAY” so it doesn’t have to be in the Board all the time.
It may be given, even to the Board, if the ground of the vacancy is
NOT: [REIn]
1. Due to Removal
2. Due to Expiration of Term
3. Due to Increase in BOD by amendment of articles
AND provided that the Board still constitutes a quorum.
For the above instances, the election should be done by the
stockholders.
If the vacancy is by resignation, abandonment, death, or any other
reason other than the above instances, the BOD may fill in if they still
constitute a quorum.
But may it be also filled in by the stockholders? Yes. Because
stockholders can fill in, whatever may be the reason of the vacancy.
Meaning, if by death, resignation, abandonment etc. but the Board
NO longer constitutes a quorum, go back to the general rule: only the
stockholders may fill in.
VALLE VERDE COUNTRY CLUB v AFRICA
FACTS:
In 1996, during the Annual Stockholders’ Meeting of Valle Verde
Country Club, Inc. (VVCC), 9 persons were elected as members of
the VVCC Board of Directors. From 1997 to 2001, the requisite
quorum for the holding of the stockholders’ meeting could not be
EH 404 | UNIVERSITY OF SAN CARLOS
obtained. Consequently, the 9 directors continued to serve in the
VVCC Board in a hold-over capacity.
In 1998, Dinglasan resigned from his position. He was replaced by
Roxas who was elected by the board still constituting a quorum. A
year later, Makalintal also resigned and was replaced by Jose
Ramirez in 2001. Ramirez was elected by the remaining members of
the Board.
Africa, a member of VVCC, questioned the election of Roxas and
Ramirez with the SEC and the RTC, respectively. Before the RTC,
Africa alleged that a year after Makalintal’s election as member of the
VVCC Board in 1996, his term – as well as those of the other
members of the VVCC Board – should be considered to have already
expired.
VVCC contends however that the vacancy in this case was caused
by Makalintal’s resignation, not by the expiration of his term, and thus
the board rightfully appointed Ramirez to fill in the vacancy.
ISSUE:
Whether the remaining directors of the corporation’s Board, still
constituting a quorum, can elect another director to fill in a vacancy
caused by the resignation of a hold-over director.
RULING:
NO. Under Section 29 of the Corporation Code, a vacancy occurring
in the board of directors caused by the expiration of a member’s term
shall be filled by the corporation’s stockholders.
The holdover period is not part of the term of office of a member of
the board of directors. 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.
Section 23 of the Corporation Code declares 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. After the lapse of
one year from his election, Makalintal’s term of office is deemed to
have already expired. With the expiration of Makalintal’s term of
office, a vacancy resulted which, by the terms of Section 29, must be
filled by the stockholders of VVCC in a regular or special meeting
called for the purpose. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration
of Makalintal’s term had been created long before his resignation.
Discussion:
You have to distinguish between term and tenure.
Term: 1 year, as provided under Section 23
Tenure: the length of office actually held by the director
When a director is re-elected, his term is always for one year. It
doesn’t change no matter how long he has held to the position, as
long as he is re-elected, it is always one year. His tenure is the actual
length of time he has stayed in the position.
When a director is in a holdover capacity/period, which means that
he is holding office because no one has been elected yet, is that
holdover period part of the term? No, it is not. The term has already
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expired. That’s why, in a holdover period, it’s only until his successor
is duly elected and qualified. So beyond that one-year term, that is
the holdover capacity. If a director resigns, it’s not a vacancy
because of resignation but it’s a vacancy because of expiration of
term.
Director is Reelected; Term
Another one year. It does not change, no matter how long he has
held to the position, as long as he is reelected. His tenure is the
actual length of time he has stayed in the position.
Holdover Capacity
This happens when a director is holding office because no one has
been elected yet. This is not part of the term because the term has
already expired. That is why hold-over period is only until his
successor is duly elected and qualified. Beyond the 1-year term,
that’s hold-over period. When he resigns, it is not a vacancy because
of resignation, but it is a vacancy because of expiration of term.
Emergency Board; When and How Constituted
When the (1) vacancy prevents the remaining directors from
constituting a quorum and emergency action is required to prevent
grave, substantial, and (2) irreparable loss or damage to the
corporation, the vacancy may be temporarily filled from among the
officers of the corporation by unanimous vote of the remaining
directors or trustees.
The action by the designated director or trustee shall be limited to the
emergency action necessary, and the term shall cease within a
reasonable time from the termination of the emergency or upon
election of the replacement director or trustee, whichever comes
earlier. (Section 28, RCC)
Unlike in a regular filling in of vacancy where you only need majority
of the members present in a quorum, here, you need a unanimous
vote.
Is the delivery and indorsement as well as execution of deed of
assignment is effective to make a person a stockholder?
No, Section 63 of the Revised Corporation Code states that:
[…]
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.
Two Kinds of Subscription
(1) Pre-incorporation - subscription is made before incorporation
GR: irrevocable for a period of 6 months from the date of
subscription
EXC: revocable if
(1) all of the other subscribers consent to the
revocation (and done without prejudice to creditors),
or
(2) the corporation fails to incorporate within the same
period or within a longer period stipulated in the
contract of subscription
- AFTER FILING OF AOI with the SEC, the pre-incorporation
subscription contract becomes irrevocable.
- But AFTER APPROVAL, the subscription contract becomes
revocable.
It is only the pre-incorpoation subscription that is Irrevocable
(1) for 6 months,
(2) before filing,
(3) during filing, and
(4) before the issuance of certificate of incorporation,
even if it is pending for more than 6 months

You can only elect from the officers of a corporation, and only on a (2) Post-incorporation - subscription is made after incorporation
temporary basis.
GR: Irrevocable
Stock and Stockholders EXC: May be revoked when corporation consents

SUMMARY OF DIFFERENCES:
Acquisition of Shares: Two Modes:
Pre-incorporation subscription Post-incorporation
(1) by subscription - applies if you are acquiring unissued stocks from
subscription
the issuer corporation; and
(2) by purchase or by assignment - applies if you are doing a  It is entered into before It is entered into after the
secondary purchase; you are buying issued shares from existing the incorporation incorporation
stockholders, including the corporation itself for treasury shares  The pre-incorporation * post-incorporation
subscription can be subscription is irrevocable
Difference between subscription and assignment: revoked because it will be in
o Subscription pertains to unissued stock, purchase or violation of the Trust fund
acquisition of unissued stock directly from the issuer while GR: A pre-incorporation Doctrine
assignment is the acquisition of issued stock from the subscription agreement is
owner of the share irrevocable for a period of six (6)
months from the date of
What are the modes of assigning shares? (Sec. 62) subscription.
1. By delivery of the certificate or certificates indorsed by the
owner, his attorney-in-fact, or any other person legally XPNs:
authorized to make the transfer. 1. If all of the other subscribers
2. Execution of Deed of Assignment consent to the revocation,
2. If the incorporation of said

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corporation fails to materialize

within said period or within a Only the right to the dividends
longer period as may be stipulated
in the contract of subscription. Thus, all rights are suspended except the right to the dividends.

XPN to XPN: No pre-incorporation Does that mean that he can truly receive the dividends?
subscription may be revoked after No, because the corporation can validly apply the dividends to the
the submission of the AOI to the unpaid subscription.
Securities and Exchange
Commission. (RCC, Sec. 60) A delinquent stockholder losses all his rights except the right to
dividends. But, even as to the rights of his dividends, the corporation
Consideration for the Purchase of Shares (Section 62, RCC) can still apply the dividends declared against the unpaid subscription.
Consideration for the issuance of stock may be:
(a) Actual cash paid to the corporation; How does one become a delinquent stockholder?
(b) Property, tangible or intangible, actually received by If no payment is made:
the corporation and necessary or convenient for its 1.) Within 30 days from the “date” specified in the subscription
use and lawful purposes at a fair valuation equal to the instrument or
par or issued value of the stock issued; 2.) 30 days from the call made by the board
i. Purchaser must submit the Certificate
of Registration, Appraisal coming from -Board Resolution is required to declare the SH as delinquent
an authorized appraisal company, and
Deed of Assignment to the corporation GR: A stockholder need not pay his subscription or even full payment
(c) Labor performed for or services actually rendered to of his subscription in order to enjoy all the rights of a stockholder.
the corporation;
i. Future services are not allowed This stops when he becomes delinquent stockholder
(d) Previously incurred indebtedness of the corporation;
(e) Amounts transferred from unrestricted retained When does he become a delinquent stockholder?
earnings to stated capital;
i. This happens when there is stock If the date for payment for his subscription has arrived, either
dividend. because the date is specified in the subscription contract, or when
(f) Outstanding shares exchanged for stocks in the event there is no date specified and the board has made a call for the
of reclassification or conversion; unpaid subscription and the stockholder still does not pay. 30 days
(g) Shares of stock in another corporation; and/or after that date, the stockholder may be declared as delinquent.
(h) Other generally accepted form of consideration.
What happens when the stockholder is declared delinquent?
Promissory Notes and Future Services are NOT ALLOWED AS Corporation can now validly exercise three ways when they can get
CONSIDERATION the payment of such subscription.

Value of consideration must not be less than the par value or issued
price of the shares
- If less, it becomes a WATERED STOCK
EFFECT: A director or officer of a corporation who:
(a) consents to the issuance of stocks for a consideration
less than its par or issued value;
(b) consents to the issuance of stocks for a consideration
other than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration, and
does not file a written objection with the corporate secretary
shall be liable.
LIABILITY: Solidarily liable to the corporation or its creditors, with the
stockholder concerned, for the difference between the value received
at the time of issuance of the stock and the par or issued value of the
same.
Consideration need not be paid upon subscription.
DELINQUENT STOCKHOLDER
If declared delinquent, what is the only right that the stock holder can
enjoy?
Effect of a stock declared delinquent to the declared dividends:
(Sec. 42)
1. When a cash dividend is declared, the cash will be first applied
to the unpaid portion of the subscription;
2. When a stock dividend is declared, the corporation will withhold
the stock dividend, it will not be issued until the subscriber paid
the balance of his subscription
Extrajudicial, Judicial, or collect from cash dividends and withholding
of stock dividends.
Extrajudicial Sale of subscription:
SEC. 67. Delinquency Sale. – The board of directors may, by resolution,
order the sale of delinquent stock and shall specifically state the amount
due on each subscription plus all accrued interest, and the date, time and
place of the sale which shall not be less than thirty (30) days nor more than
sixty (60) days from the date the stocks become delinquent.
Notice of the sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally, by registered mail, or through
other means provided in the bylaws. The same shall be published once a
week for two (2) consecutive weeks in a newspaper of general circulation
in the province or city where the principal office of the corporation is
located.

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Unless the delinquent stockholder pays to the corporation, on or before the
date specified for the sale of the delinquent stock, the balance due on the
former’s subscription, plus accrued interest, costs of advertisement and
expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at a public auction to such bidder who shall
offer to pay the full amount of the balance on the subscription together with
accrued interest, costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The stock so purchased
shall be transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in the purchaser’s favor. The
remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate of
stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement, and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount due shall be credited
as fully paid in the books of the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the corporation as treasury
shares and may be disposed of by said corporation in accordance with the
provisions of this Code
The actual sale is done through bidding.
The winning bid is determined through:
1. Highest bid should not be less than the value of the unpaid
subscription including the interests and costs.
2. Smallest number of shares
Example:
1M = unpaid subscription / Minimum amount of the bid
100,000 shares
IF:
A = 100,000 shares
B = 50,000 shares
C = 25,000 shares
So, C will be the winner as long as the total amount can reach 1M
If C will be the winner, who will get the other 75,000 shares?
The delinquent stockholder will get the remaining shares.
Delinquency sale is not based on the highest bid because the
amount is the same. It should be equal to the unpaid subscription.
But the highest bidder will be the one who has the smallest number
of shares for the same amount.
Because the highest bidder is the one who is paying with the highest
price per share. Because in the example, A will bid 100,000 shares at
P10/share. B will have 50,000 shares at P20/share. C will have
25,000 shares at P40/share.
In all these cases, the amount is the same with P1M. The winning
bidder is the one who gives you the highest price per share.
Meaning, the smallest number of share with the same amount.
Atty. Gaviola:
The winning bidder gives you the highest price per share, meaning
the lowest number of share for the same amount. What happens
now? Since you purchase only the 25, 000 shares that means the
EH 404 | UNIVERSITY OF SAN CARLOS
delinquent stockholder gets the other 75, 000 that will not result in
watered shares because the consideration has been paid.
Questions from Students:
Q: Does that mean that the remaining shares are credited to the
delinquent stockholders?
A: Yes, but it is a risk to take. For example, had I been the bidder I
would not bid 25, 000 knowing the delinquent stockholder has not
paid. In fact, most of the bidders will just bid 100, 000, 99, 000 or 98,
000 shares. Logically, I would bid 95, 995 shares and the delinquent
stockholder gets only 5 shares.
Q: Supposedly, the sale is not enough to cover the unpaid portion?
A: It is not allowed. It must not be less than the unpaid subscription. If
no one meets the requirement then the corporation can purchase the
shares itself that will become the treasury shares.
Q: With regard election, is there such thing as campaigning in the
election of Directors or Trustees and Officers?
A: No, it is different from the government elections where you
campaign to be elected. However, the nominees will secure proxies
from existing stockholders. By the time they will go the elections the
nominees already know how many votes they will secure. So if ever
one nominee cannot secure the all of the votes at least he/she
secures the majority of the votes.
Q: Is it prohibited to promise something in return for votes?
A: No, it is not illegal. After all, vote in corporations is a property right.
[Scripless Trading]
Q: Do stockholders holding shares through financial intermediaries
such as BPI have a right to vote?
A: Yes, under Sec 62 on scripless trading of the RCC. That’s how
shares are done if your shares are listed in the stock exchange
because you deliver the certificate to transfer shares but that is not
practical if your shares are listed because it will take a long time.
Under listed trading, you have to go to a stock and transfer agent,
cancel the name of the old owner of the share and transfer to the
new owner.
In scripless trading, shares in a corporation that wants to list in a
stock exchange are deposited in the Philippine Depositary Trust
Corporation (PDTC). It is the person who appears in the stock and
transfer book, it has ledgers, name of the owner of the shares,
normally in the name of the broker. So the broker have a list of the
their clients who purchase the shares, but as far as the corporation is
concerned but in the stock and transfer book it is under the name of
the PDTC. The person who purchases the share it is scripless, in
other words it has no certificate.
If you want to have to shares certificated all you have to do is have it
uplifted. Inform your broker, and he/she will inform PDTC and
withdraw the name of the PDTC in the stock and transfer book and
have it under your name in the book of the corporation. In that case,
you can attend the stockholder’s meeting because the share is now
under your name already.
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However, this process is lengthy and unpractical. So what happens
now if you don’t want to have you shares certificated, since it is under
the name of PDTC, it will issue a proxy in the name of the broker or
his nominee and in turn the broker will give you a proxy. If you go the
meeting, you have a proxy and you can vote you according the
number of shares in scripless shares.
Q: If ever I am a stockholder but I don’t exercise my right to vote,
does PDTC vote on my behalf?
A: Normally PDTC will just vote whomever the corporation
recommends. If the PDTC will not do this they might not have
quorum.
As a rule: In scripless trading, you vote by proxy.
Q: In Sec. 58 of the RCC, why does it provide for that “in the case of
a voting trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding five (5) years but
shall automatically expire upon full payment of the loan”? What’s the
reason behind it?
A: If you are a stockholder and using your share as a pledge,
normally voting trust is the means if they want to exercise their rights.
Status of a Subscriber
Post-incorporation –
He/she is a shareholder. There is already an incorporation even if
you did not pay your subscription you can become a stockholder
Discussion:
There is already an approval by the SEC. Thus, it is no longer
revocable because whether or not the subscription is paid, partially
paid, or not paid at all the subscriber is considered as a stockholder
and his subscription forms part of the asset of the corporation.
Under the trust fund doctrine, the stockholders cannot withdraw their
capital or the assets of the corporation because these assets are
considered as trust fund for the benefit of the creditors of the
corporation. NO REVOCATION ALLOWED.
Pre-incorporation –
Not a shareholder because you still have to pay the subscription
price and the corporation has not yet materialized.
Discussion:
Under Obligations and contracts, if one party has not yet delivered
his obligation, the other party can revoke especially if he has already
complied.
In order to protect the process of incorporation, the law provides that
6 months from the time you subscribed or from the date of your
subscription, your subscription is irrevocable that would give time the
incorporators to submit the application for incorporations with the
SEC. but if after the end of that 6 months the incorporators have not
yet submitted then subscriber can now revoke the subscription and
ask for his money back because the incorporators have not delivered
on their obligation to have the incorporation approved by the SEC.
EH 404 | UNIVERSITY OF SAN CARLOS
But even before the lapse of 6 months as long as other subscribers’
consent, the subscriber can also revoke. After filing with the SEC, the
subscription now becomes irrevocable. There is just that window of
irrevocability 6 months after the date of subscription but before filing
of the articles.
TRUST FUND DOCTRINE
The doctrine considers the subscribed capital as a fund, which is held
in trust as security for satisfaction to creditors in case of corporate
liquidation.
Rights of a stockholder:
2. Right to vote and be voted as a member of BOD
3. Right to dividends (receive money from the corporation)
Whether or not paid or fully paid subscription, the subscriber enjoys
the rights of a stockholder. (Sec. 71)
Section 71. Rights of Unpaid Shares, Non-delinquent. –Holders of
subscribed shares not fully paid which are not delinquent shall
have all the rights of a stockholder.
Is that statement absolutely true?
No, because a subscriber who is a stockholder who has not fully paid
his subscription may not be issued a certificate of stock. (Sec. 63)
Section 63. Issuance of Stock Certificates. – No certificate of
stock shall be issued to a subscriber until the full amount of the
subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
When does it stop enjoying the rights of a stockholder without full
payment? When the stocks become delinquent.
Difference between a share of stock and a stock certificates:
Share of stock Stock Certificate
Unit of interest in a corporation Evidence of the holder’s
ownership of the stock
and of his right as a
shareholder and of his
extent specified therein.
It is an incorporeal or intangible It is concrete and tangible
property
It may be recognized by the It may be issued only if
corporation even if the subscription the subscription is fully
is not fully paid. paid.
Transfer of Shares
How do you assign shares?
According to Sec. 62 of the Revised Corporation Code:
Section. 62. Certificate of Stock and Transfer of Shares. –
The capital stock of 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 bylaws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any other person
legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
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.
The Commission may require corporations whose securities are
traded in trading markets and which can reasonably demonstrate
their capability to do so to issue their securities or shares of
stocks in uncertificated or scripless form in accordance with the
rules of the Commission.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation.
Summary:
1. By delivery of certificate coupled with indorsement; or
2. Execution of a deed of assignment
In order to effectively make one a stockholder, the transfer MUST be
RECORDED in the books of the corporation.
The delivery coupled with indorsement or issuance of a deed of
assignment is effective only to make the person the owner thereof,
but does not yet make him a stockholder.
Teng v. SEC
Facts:
Respondent Ting Ping asked for his purchases of stocks be recorded
in the book after the death of Teng Ching and the son, Henry, took
over the management of the corporation. The corporate secretary,
Teng, however, refused.
Ting Ping claims to have purchased the following:
o 480 shares of TCL from Chiu
o 1400 shares from Teng Ching
o 1440 shares from Maluto
The RTC of Manila found Henry to have a better right to the shares of
stocks of Teng Ching. The core question in this case refers to the
shares purchased from Chiu and Maluto.
Teng and TCL filed their respective motions to quash the alias writ of
execution issued by the SEC en banc in a mandamus case filed by
respondent which was ruled in the latter’s favor – the petitioner and
TCL were ordered to issued new certificates of stock.
Petitioner pointed out that the annexes in respondent’s opposition did
not include the subject certificates of stock – she insists the surrender
is necessary before the transfer should be recorded.
Issue: Whether the surrender of the certificates of stock is a requisite
before registration of the transfer may be made in the corporate
books.
Ruling:
No. Surrender of the certificates of stock is not a requisite for the
transfer to be recorded in the corporate books.
The Corporate Secretary has a MINISTERIAL DUTY to record the
transfer. In this case, the registration of the transfer of Chiu’s and
Maluto’s shares in respondent’s favor is a mere formality in
confirming the latter’s status as a stockholder of TCL.
EH 404 | UNIVERSITY OF SAN CARLOS
Surrender of the certificates of stock is only necessary before
issuance of new certificates of stock.
So the moment that the assignee can prove that the shares have
been assigned to him, what should he do?
He shall request the corporate secretary to record such transfer in
the books of the corporation.
Can the Corp. Sec. refuse?
No, he cannot refuse since the Secretary’s duty is purely ministerial.
REMEDY:
Mandamus. In order to record the acquisition of the shares by the
transferee. Again, the duty of the Corp. Secretary is ministerial. No
discretion at all. As long as the requirements have been complied
with.
Proof of Transfer:
In practice, you show the Deed of Assignment and also the payment
of the taxes, especially the payment of the Documentary Stamp Tax.
You need to show the Certificate Authorizing Registration (CAR). So
the moment you present these documents, it is the duty of the
Secretary to record the transfer in the Stock and Transfer Book.
Ministerial Duty.
.
--LACKING 4—
--LACKING 5---
Lost certificates (Section 72)
1. The registered owner of a certificate of stock in a corporation or
such person’s 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.
The owner of such certificate of stock shall also submit such other
information and evidence as may be deemed necessary;
2. After verifying the affidavit and other information and evidence with
the books of the corporation, the corporation shall publish a notice
in a newspaper of general circulation 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 the corporation, the name of the
registered owner, the serial number of the certificate, the number
of shares represented by such certificate, and shall state that after
the expiration of one (1) year from the date of the last publication,
if no contest has been presented to the corporation regarding the
certificate of stock, the right to make such contest shall be barred
and the corporation shall cancel the lost, destroyed or stolen
certificate of stock in its books. In lieu thereof, the corporation shall
issue a new certificate of stock. xxx
How can you get a new stock certificate issued earlier?
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law
If you want to have the certificate of stock earlier, you just submit a
bond or any other security good for 1 year to answer for damages
that may occur during that 1 year period. (refer to Section 72)
[Note: on scripless trading, refer to previous discussion
Scrip – stock certificate; Scripless trading – certificate of stock need
not be transferred ]
Scripless trading is normally done by companies who list their shares
in the stock exchange. It is easier to trade without having to deliver
the stock certificates.
CORPORATE POWERS
Types of Corporate Powers:
1. Express – Those specifically mentioned in the AOI, particularly
in the primary purpose; and those expressly provided by the law.
2. Incidental - Reasonably necessary in order to achieve the
primary purpose or to accomplish the express powers.
3. Inherent/ Implied – Those that are present by virtue of the
corporation’s existence as a juridical entity.
----LACKING 7----
Teresa Electric & Power Co. Inc. v. PSC and Filipinas
Student: According to Filipinas by virtue of Paragraph 7 of AOI , it is
entitled to apply for certificate of public conveyance to operate an
electrical power plant. The commission granted its application. The
petitioner questions the grant of certificate. SC ruled that by virtue of
implied powers it is entitled to operate such electric power plant. The
provisioning of electricity is reasonably necessary for its operation as
a cement factory.
Gavi: How much capacity did Filipinas require for it to operate its
cement plant?
Student: 6000kw in order to run its plant.
Gavi: How much is the capacity of Teresa?
Student: 200kw
Gavi: Does Teresa have the capacity to supply the power
requirements of Filipinas?
Student: No
Gavi: If you were SC, if Teresa had the capacity, would you rule the
same?
Student: No. Because, in case there is an entity capable in supplying
its needs Filipinas does not need to.
Gavi: Why it is allowed in this case?
Student: Because Teresa cannot supply its needs.
Gavi: The power in this case is necessary to continue its operation.
Without power the company could not pursue its primary purpose.
Setting up a power plant although not related to the cement business
it was necessary in order to continue with the business. It would have
been different if Teresa were able to supply. Hence, SC would not
EH 404 | UNIVERSITY OF SAN CARLOS
have approved. In fact it is the first thing that you need to prove right
now if you want to set up your own plant. You need to prove that
there is no distribution utility that could supply your power needs.
Otherwise you will not be allowed. SC said, even if Filipinas its not
expressly provided in its articles it had the power to put up a power
plant because it is necessary for the pursuit of its primary purpose.
Gavi calls another student for Acoje Case
Student: Acoje is a mining corporation operating in Zambales. They
requested to open a post, telegraph and money order offices.
Postmaster agreed on the condition that Acoje will be liable for any
damage caused by post employee.
-LACKING 9 AND 10—
Difference between 35 (f) and 37:
Section 35 (f) Section 37
Pertains to unissued but Additional authorized capital
authorized capital
No required approval from the SEC approval is required-
SEC but required only to report increase or decrease- because
AOI is amended hence, the
approval by the SEC
Voting requirement: majority of Voting requirement: majority of
the BOD in quorum the BOD in quorum AND vote
of the stockholders
representing 2/3 of the OCS
no requirement- even if 1 share 25% of the ACS shall be
as long as not an additional subscribed and 25% of which
authorized capital, it is still shall be paid
within your unissued but
authorized share so 35 (f)
applies
ILLUSTRATION 1 – Depicting Sec. 35(f): Suppose Corporation X has
an authorized capital stock of 1,000,000 at a par value of 1 PESO per
share.
Corporation X at the inception of its corporate life issued 500,000
which were subscribed thus leaving it with another 500,000 unissued
and unsubscribed shares.
Given:
ACS – 1 000 000 shares at a par value of P1/share
Issued Shares – 500 000
Unissued and unsubscribed shares – 500 000
What power under the Revised Corporation Code is exercised if the
corporation intends to sell/issue the remaining 500,000 shares?
In issuing or selling the remaining 500,000 shares, the corporation
exercises its power under Section 35(f):
“xxx…In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stock in accordance with the
provision of this Code; and admit members to the corporation if it
be a non-stock corporation; …xxx”
In exercising the power under Section 35(f) what is the
approval/voting requirement under the Revised Corporation Code?
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What is required to exercise such power would be the majority vote

of the Board of Directors in a meeting where a quorum exists. NOTE: Even after the filing of these necessary requirements, the
increase or decrease shall only take effect upon the issuance by the
If we are issuing 300,000. How much will be your subscribed at the Commission of the certificate of filing.
end of the transaction? 800 subscribed.
Regardless of the increase in the issued shares, the ACS would still [REFER TO ILLUSTRATION 1.5]
be 1M. If the:
Original ACS was – 1M
No change in ACS. Only a change in subscribed and outstanding Proposed increase – 1M
because here we are talking about sale of shares which are unissued Current ACS – 2M
but already authorized.
Original subscribed – 500 000
ILLUSTRATION 1.5 – Depicting Sec. 37: Min. required subscription (25%-25%) - 250 000
Given: Current subscribed: 750 000
Original ACS – 1M
Proposed Increase in ACS – 1M Question from student:
Subscribed – 500 000
Under Sec 37, do you have to issue new shares or can you just do so
Procedure for Sec. 37 before any increase/decrease in ACS may by increasing the par value?
take effect:
1. Approval of increase or decrease by: You can increase (Sec 37) without increasing par value by increasing
a) Majority vote of BOD; AND the number of shares. If you increase the par value, it also depends
b) 2/3 of the outstanding capital stock at a on whether or not you are increasing your ACS or just changing the
stockholders meeting called for that purpose par. It can be that you are changing the par but you are not changing
2. There should be a certificate signed by majority of the your ACS, in such case, you have to surrender all the shares and
directors countersigned by the chairperson and the secretary issue all you want. But, if ordinary increase, just additional shares
in the meeting. without changing par.

It should contain the following:
a) provide that the requirements have been
complied with;
b) amount of increase/decrease;
c) in case of increase:
i. amount of capital stock or number of shares
of no-par stock ACTUALLY subscribed
ii. names and nationalities and addresses of
the persons subscribing
iii. amount of capital stock or number of no-par
stock subscribed by each
iv. amount paid by each on the subscription in
cash or property or the amount of capital
stock or no-par stock allotted to each
stockholder
v. any bonded indebtedness to be incurred,
created or increased
vi. amount of stock represented at the meeting
vii. vote authorizing the increase or decrease of
the capital stock
3. Copies of the certificate kept in the office of the corporation
and filed with the SEC and attached to the original AOI;
4. Approval by the SEC and where appropriate, of the
Philippine Competition Commission;
5. Issuance of the certificate of filing
 In case of increase of capital stock – ADDITIONAL
REQUIREMENTS
a) Certificate must be accompanied by a SWORN
STATEMENT of the treasurer showing:
i. At least 25% of the increase has been
subscribed; and
ii. At least 25% of the amount subscribed has
been paid in actual cash or that property, the
valuation is equal to 25% of the subscription
There are some questions from the students but I think not so
relevant.
Under 37, if you comply with all the requirements, and no corrections,
then it will be ministerial for the SEC to approve and they have no
discretion but, the requirements are stringent, first, you need to
prove, you did not violate any SEC rule or regulation, prove that you
have updated filings of your GIS and complete all documentary
requirements. Once those are done, the SEC shall approve but it’s a
long process and a lot of documents that the SEC will require.
If you have complied with all the requirements under Sec. 37, is it
ministerial for the SEC to approve the increase or decrease in the
capital stock or the incurring, creating or increasing of any bonded
indebtedness?
YES. If you can complete all the documentary requirements, no
corrections needed, then it would be ministerial for the SEC to
approve. They have no discretion. But the requirements are so
stringent. First of all, you have to prove that you have not committed
a violation of any SEC Rules or Regulations as the SEC will monitor
that. You also have to prove that you have updated filing of your GIS
and your FS; and then you have to complete all the documentary
requirements. Once that’s done, then the SEC will approve. But it is a
long process. There are a lot of documents that the SEC will require.
Continuation on the discussion of Sec. 35:
(g) 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;

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How is Sec. 35(g) different from Sec. 39?
Sec. 35(g) contemplates the disposition of the assets of the
corporation in the ordinary course of its business or incidental to its
business; while Sec. 39 refers to a situation where there is a
disposition of all or substantially all of the corporation’s properties
and assets, including its goodwill (which could constitute a transfer or
a merger of the business with another corporation or entity).
How do you know whether the transfer is under Sec. 35(g) or under
Sec. 39?
First, there is a need for us to determine whether the assets disposed
of are all or substantially all of the assets of the corporation. The
disposal is deemed to be of all or substantially all of the assets of the
corporation when after the disposal, the corporation could no longer
continue in its existence or it could no longer continue with its primary
purpose.
And what is the difference, regulatory wise, with respect to Sec. 35(g)
or under Sec. 39?
Under Sec. 35(g), there is no need to secure the consent of the BOD
or the stockholders so long as the transaction involving the
corporation’s property is necessary or incidental to the regular course
of business of the corporation.
For example, if you are engaged in the real estate business, in order
to sell a condominium, do you still have to get a board approval?
No. You just need to have an authorized representative. No board
approval is required. If it’s part of the ordinary course of business
(regular business of the corporation to sell the assets), you don’t
even need board approval, the same is already implied as it is part of
your primary purpose and a part of your operations.
But if it’s incidental, meaning the corporation is not engaged in the
buy and sell of real estate, but it has an idle property that it wants to
sell as it has no use anymore, what approval do you need?
Since the transaction is merely incidental to the business of the
corporation (it is not part of your regular operations), you will need
the approval of the majority of the BOD in a meeting where there is a
quorum.
On the other hand, if it involves all or substantially all of the assets of
the corporation?
You would need a majority vote of the BOD plus the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or at least two-thirds (2/3) of the members, in a
stockholders’ or members’ meeting duly called for the purpose.
By the way, for Sec. 37 and Sec. 39, when we say vote of the
stockholders holding 2/3 of the OCS, what kind of stock are we
talking about?
We are referring to both voting and non-voting stocks pursuant to
Sec. 6 of the Corporation Code.
What shares should vote under Section 37 and 39?
- outstanding capital stock, voting and non-voting
- BASIS: Section 6 of the Revised Corporation Code
EH 404 | UNIVERSITY OF SAN CARLOS
Holders of non-voting shares shall nevertheless be entitled to vote on
the matter of sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the corporate property
SECTION 35 (continuation)
(h) To enter into a partnership, joint venture, merger, consolidation,
or any other commercial agreement with natural and juridical
persons;
(i) To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no foreign corporation shall give donations
in aid of any political party or candidate or for purposes of partisan
political activity;
(j) To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers, and employees; and
(k) 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.
Section 35 gives you the incidental powers of a corporation.
SECTION 36, RCC – Power to Extend of Shorten Corporate Term
Requisites:
1. Approved by a majority vote of the board of directors or trustees,
and
2. Ratified at a meeting by the stockholders or members
representing at least two-thirds (2/3) of the outstanding capital
stock or of its members.
3. AOI must be amended and approved by SEC
4. A written notice must sent to stockholders or members at their
respective place of residence as shown in the books of the
corporation
----LACKING 16----
----LACKING 17----
MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL
CORPORATION vs MIGUEL LIM et al.
Topic: POWER of CORPORATION, Pre-emptive right
Ruby Industrial Corporation (RUBY) is a domestic corporation
engaged in glass manufacturing. Reeling from severe liquidity
problems beginning in 1980, RUBY filed on December 13, 1983 a
petition for suspension of payments with the Securities and
Exchange Commission (SEC).
On August 10, 1984, the SEC Hearing Panel created the
management committee (MANCOM) for RUBY to perform the
following functions: (1) undertake the management of RUBY; (2) take
custody and control over all existing assets and liabilities of RUBY;
(3) evaluate RUBYs existing assets and liabilities, earnings and
operations; (4) determine the best way to salvage and protect the
interest of its investors and creditors; and (5) study, review and
evaluate the proposed rehabilitation plan for RUBY.
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Subsequently, two (2) rehabilitation plans were submitted to the SEC:
the BENHAR/RUBY Rehabilitation Plan of the majority stockholders
led by Yu Kim Giang, and the Alternative Plan of the minority
stockholders represented by Miguel Lim (Lim).
Plan 1 (BENHAR/RUBY): Benhar International, Inc. (BENHAR) — a
domestic corporation engaged in the importation and sale of vehicle
spare parts which is wholly owned by the Yu family and headed by
Henry Yu, who is also a director and majority stockholder of RUBY —
shall lend its P60 million credit line in China Bank to RUBY, payable
within ten (10) years. Moreover, BENHAR shall purchase the credits
of RUBY's creditors and mortgage RUBY's properties to obtain credit
facilities for RUBY. Upon approval of the rehabilitation plan, BENHAR
shall control and manage RUBY's operations. For its service,
BENHAR shall receive a management fee equivalent to 7.5% of
RUBY's net sales.
Plan 2 (Alternative/Minority): On the other hand, the Alternative Plan
of RUBY's minority stockholders proposed to: (1) pay all RUBY's
creditors without securing any bank loan; (2) run and operate RUBY
without charging management fees; (3) buy-out the majority shares
or sell their shares to the majority stockholders; (4) rehabilitate
RUBY's two plants; and (5) secure a loan at 25% interest, as against
the 28% interest charged in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for
evaluation. In 1988, SEC approved BENHAR/RUBY Plan.
Meanwhile, BENHAR started to pay off secured creditors of RUBY
and executed deeds of assignments of credit and mortgage rights in
favor of BENHAR. These were done despite the TRO and injunction
and even before the SEC Hearing Panel.
AFLC and Lim moved to nullify the deeds of assignment in favor of
BENHAR and cite the parties in contempt for willful violation of SEC
order on suspension of payments. They also charged that in paying
of FEBTC debts, it was given undue preference over the other
creditors of Ruby. SEC nullified the deeds of assignments, upon
appeal SEC En Banc denied appeal for BENHAR et al, CA affirmed
SEC ruling nullifying the deeds.
On the other hand, it appears that even during the pendency of
appeals, BENHAR and Ruby have performed other acts in pursuance
of BENHAR/RUBY Plan approved by SEC (even if there was an
injunction).
Lim received a notice of stockholder’s meeting signed by Mr
Magtalas the “designated secretary” of Ruby and stating the matters
to be taken up in said meeting which includes extention of Ruby’s
corporate term for another 25 years and election of directors. At the
scheduled stockholder’s meeting, Lim together with other minority
stockholders appeared in order to put on record their objections on
the validity of the holding thereof and the matters taken therein.
Specifically, they questioned the percentage of stockholders present
in the meeting which the majority claimed stood at 74.75% of Ruby.
Lim also argued that a majority of the stockholders claiming to be
74.75% of Ruby increased their shares to 75.75% by subscribing
from the unissued shares of the authorized capital stock as “capital
infusion”.
EH 404 | UNIVERSITY OF SAN CARLOS
Accordingly, Lim said that the extension of corporate term and
increase in capital stock were done in violation CA and without
compliance to legal requirements of Corporation Code.
ISSUE: Whether the minority’s pre-emptive rights were violated by
the BOD meeting conducted to issue additional shares and to extend
the corporate term of Ruby to 25 years?
RULING:
Yes, there was a blatant violation of the pre-emptive right of minority
stockholders.
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.
Lamentably, the SEC refused to heed the plea of the minority
stockholders and MANCOM for the SEC to order RUBY to
commence liquidation proceedings, which is allowed under Sec. 4-9
of the Rules on Corporate Recovery.
Under the circumstances, liquidation was the only hope of the
minority stockholders for effecting an orderly and equitable
settlement of RUBYs obligations, and compelling the majority
stockholders to account for all funds, properties and documents in
their possession, and make full disclosure on the nullified credit
assignments.
Oblivious to these pending incidents so crucial to the protection of the
interest of the majority of creditors and minority shareholders, the
SEC simply stated that in the interim, RUBYs corporate term was
validly extended, as if such extension would provide the solution to
RUBYs myriad problems.
Extension of corporate term requires the vote of 2/3 of the
outstanding capital stock in a stockholders meeting called for the
purpose. The actual percentage of shareholdings in RUBY as of
September 3, 1996 — when the majority stockholders allegedly
ratified the board resolution approving the extension of RUBY’s
corporate life to another 25 years was seriously disputed by the
minority stockholders, and we find the evidence of compliance with
the notice and quorum requirements submitted by the majority
stockholders insufficient and doubtful. Consequently, the SEC had no
basis for its ruling denying the motion of the minority stockholders to
declare as without force and effect the extension of RUBY’s.
Discussion of Atty. Gaviola on the case:
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A.Y. 2018-2019 (Second Semester) Atty. Gaviola | Corporation Law EH 404 | UNIVERSITY OF SAN CARLOS

SC held that there was a violation of the preemptive right of

stockholders since not all the existing stockholders were given such
right. In case of increase in authorized capital stock, all of the existing
stockholders must be given the right to subscribe to the additional
issuance in proportion to their interest in the corporation. However,
Lim and other minority stockholders were deprived of such right
because the additional stocks were only offered to particular majority
stockholders.

It does not matter if the majority stockholders were also creditors of

the corporation. The exception that the issuance for shares for
previously contracted debt is not a violation of preemptive right does
not apply in this case. SC said that even if it falls under the
exceptions to preemptive right under Sec. 39[now 38] or even if the
AOI deny the pre-emptive right, the issuance of new shares may be
objectionable for violating the preemptive rights if the issuance is in
breach of trust and their primary purpose is merely to shift the control
of the corporation. It is done specifically to dilute the shares of
minority stockholders.

SALE OR OTHER DISPOSITION OF ASSETS (SEC. 39)

Requirements for the Sale, Lease, Exchange, Mortgage, Pledge, or
other dispose of property and assets
1. Approval of BOD/BOT
2. Approval of stockholders/members
3. Notify Philippine Competition Commission (PCC) if the
transactions exceeds P1 Billion

Vote Required:
GR: Majority votes of its BOD or BOT
EXC: When the sale or disposition involves all or substantially all of
the property and assets

 Stockholders representing 2/3 of the OCS or at least 2/3

of the members
 Where there is no members with voting rights, majority of
the trustees in office

Consideration:
1. Money,
2. Stocks,
3. Bonds, or
4. Other instruments for the payment of money or other property or
consideration.
Valuation of the Property
Determination of whether or not the sale involves all or substantially
all of the corporation’s properties and assets must be computed
based on its net asset value, as shown in its latest financial
statements.

Substantially all of the corporate property and assets

Sale or other disposition shall be deemed to cover substantially all of
the corporate property and assets if:

1. The corporation would be rendered incapable of continuing the

business or
2. The corporation would be rendered incapable of accomplishing
the purpose for which it was incorporated

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