University of the Philippines

COLLEGE OF LAW
Diliman, Quezon City

CORPORATION LAW
CAMPOS NOTES
Chapter I: Introduction 3–7

Chapter II: Classification of Private Corporations 7 – 10

Chapter III – Formation/Organization 11 – 29

Chapter IV – The Corporate Entity 29 – 41

Chapter V – Promoter’s Contracts 42 – 46

Chapter VI – Corporate Powers 46 - 58

Chapter VII – Control/Management 58 - 100

Chapter VIII – Duties of Directors and Controlling Stockholders 101 - 109

Chapter IX – Inspection 110 - 113

Chapter X – Derivative Suits 113 - 115

Chapter XI – Financing the Corporation: The Capital Structure 115 - 128

Chapter XII – Consideration for Shares 128 - 138

Chapter XIII – Dividends/Purchase by Corporations of Shares 138 - 145

Chapter XIV – Amendments to Charter 146 - 151

Chapter XV – Transfer of Shares 152 - 161

Chapter XVI – Dissolution 162 - 173

Chapter XVII – Corporate Combinations 173 - 178

Chapter XVIII – Foreign Corporations 178 - 186

 Chapters I: Introduction 1. strong legal personality
2. limited liability to investors
Role of corporation in modern business a. limited to their shares
b. in partnerships—creditors can still go after individual properties of the
— Corporate form of business organization permits the combination of funds partners
from various sources to raise the big capital needed for large business and 3. free transferability of units of investment
industrial enterprise a. GR: shares of stocks can be transferred even without the consent of
— Combination of resources+advantages of limited liability= corporation’s other SHs
popularity 4. Centralized management
a. Centralized in the Board
Definition and attributes of a corporation b. SHs are not agents and cannot bind the corporation
c. SHs are bound by management decisions and transactions of the board,
generally
Section 2. Corporation defined. - A corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. (2) Advantages Disadvantages
1 Strong legal personality Complicated and costly formation
Four attributes: 2 Limited liability Lack of personal element
3 Free transferability Abuse of corporate management
(1) artificial being— 4 Centralized management Limited liability hits innocent victims
— By operation of law, becomes a being with the attributes of an individual with
5 Double taxation
full capacity to enter into contractual relations
— a juridical person capable of having rights and obligations;
— with a personality separate and distinct from its members or SHs
— fundamental principle in corporate law: SHs are not personally liable for Laws governing Philippine corporations
corporate obligations, and cannot be liable beyond their contribution to the
corporate capital Choice of Business organizations
— corporation not liable for personal obligations of its SHs
(2) created by operation of law (1) The Individual Proprietorship
— from a strict legal point of view, a corporation cannot come into being by mere — works well for carrying simple or small businesses
consent of the parties — owner’s unlimited personal liability
o there must be a law granting it — difficulties in expansion
o once granted, form the primary franchise of the corporation — upon death business will have to stop and be liquidated
o mere consent insufficient
— State must have given its consent either through a special law or general (2) The Partnership
enabling law — 1767: two or more persons bind themselves to contribute money or industry to
o General law: The Corporation Code a common fund, with the intention of dividing the profits among themselves
o Compliance with the Code=acquisition of juridical personality — partners are personally liable for debts of the partnership; while SHs cannot
— There must be an underlying contract among the individuals forming the be made to personally answer to corporate creditors beyond the amount
corporation contributed
o Interplay of State grant and contractual relations — much simpler to form a partnership: 5 incorporators vs. at least 2 for partners
(3) right of succession — Personal relationship between and among partners based on mutual trust and
— Continued existence cannot be affected by any change in the members or confidence
SHs o Death or insolvency of partner will result in dissolution
(4) powers, attributes, and properties expressly authorized by law or incident to its existence o Corporations cannot be voluntarily dissolved except by 2/3 vote of stock +
some State act, whether judicial or administrative (SEC)
Advantages of Corporate Form — Mere agreement is sufficient to give rise to a partnership v. substantial
compliance with the Corpo Code for corporations
 — Management—every partner is an agent of the partnership, with capacity to
bind vs. centralized management in the BoD for corporations
o SH has no voice in the management except to elect directors
(3) The Close Corporation
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of
this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (2) all the issued stock of all
classes shall be subject to one or more specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of
this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
— Small closely-knit group like a family
— They act and feel as partners but wishing to avail of limited liability
— Most distinct characteristic: all or most SHs are active in the corporate
business either as directors or officers
— “De facto partnership with a corporate shell”
o AOI of close corp can do away with a BOD
o Can vest management exclusively with the SHs
o SHs active in management are made liable for personal torts
o Business/industry imbued with public interest cannot be by a close
corporation
(4) The Joint Venture—a form of partnership and should be governed by the law
on partnerships
— Common defn: organization formed for some temporary purpose
— Community of interests, sharing of profits and losses, mutual agency
— Formed for the execution of a single transaction, and is thus of a temporary
nature
— Form of partnership and should be governed by the law on partnerships
— SC has ruled that a corporation can enter into a JV, but not a partnership
— Separate juridical personality
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— Mutual agency
— Unlimited liability
The Business Trust—a vesting of title to the assets of a business enterprise in
trustees who act as representative thereof, for the benefit of others called the cestui que trust
— deed of trust which is easier and less expensive to constitute for it is not
bound by any legal requirements
— No separate juridical personality
— Governed by contract law and common law principles on trusts
Government regulation of corporations
By the Legislature
By the SEC
Union Glass v SEC. F: The complainant Carolina Hofileña is a stockholder of Pioneer Glass
Manufacturing Corporation, engaged in the operation of silica mines and the manufacture of
glass and glassware. Since 1967, Pioneer Glass had obtained various loan accommodations
from the Development Bank of the Philippines [DBP], and also from other local and foreign
sources which DBP guaranteed. As security for said loan accommodations, Pioneer Glass
mortgaged and/or assigned its assets, real and personal, to the DBP, in addition to the
mortgages executed by some of its corporate officers over their personal assets. The
proceeds of said financial exposure of the DBP were used in the construction of a glass plant
in Rosario, Cavite, and the operation of seven silica mining claims owned by the corporation.
Through the conversion into equity of the accumulated unpaid interests on the various loans
amounting to P5.4 million as of January 1975, and subsequently increased by another P2.2
million in 1976, the DBP was able to gain control of the outstanding shares of common
stocks of Pioneer Glass, and to get two, later three, regular seats in the corporation's board
of directors. When Pioneer Glass suffered serious liquidity problems such that it could no
longer meet its financial obligations with DBP, it entered into a dacion en pago agreement
with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full
satisfaction of the corporation's obligations in the total amount of P59,000,000.00. Part of the
assets transferred to the DBP was the glass plant in Rosario, Cavite, which DBP leased and
subsequently sold to herein petitioner Union Glass and Container Corporation, hereinafter
referred to as Union Glass. Hofileña filed a complaint before the respondent SEC against the
DBP, Union Glass and Pioneer Glass, asserting the alleged illegality of the aforesaid dacion
en pago resulting from: [1] the supposed unilateral and unsupported undervaluation of the
assets of Pioneer Glass covered by the agreement; [2] the self-dealing indulged in by DBP,
having acted both as stockholder/director and secured creditor of Pioneer Glass; and [3] the
wrongful inclusion by DBP in its statement of account of P26M as due from Pioneer Glass
when the same had already been converted into equity. Union Glass moved for dismissal of
the case on the ground that the SEC had no jurisdiction over the subject matter or nature of
the suit.
I: W/N the SEC or the TC has jurisdiction over the suit of Hofilena
H: In the ordinary course of things, petitioner Union Glass, as transferee and possessor of
the glass plant covered by the dacion en pago agreement, should be joined as party-
defendant under the general rule which requires the joinder of every party who has an
interest in or lien on the property subject matter of the dispute. But since petitioner Union
Glass has no intra-corporate relation with either the complainant or the DBP, its joinder as
party-defendant in SEC Case No. 2035 brings the cause of action asserted against it outside
the jurisdiction of the respondent SEC, as delineated by Section 5 of PD No. 902-A. This
grant of jurisdiction must be viewed in the light of the nature and function of the SEC under
the law. Section 3 of PD No. 902-A confers upon the latter (SEC) "absolute jurisdiction,
supervision, and control over all corporations, partnerships or associations, who are
grantees of primary franchise and/or license or permit issued by the government to operate
in the Philippines ... " The principal function of the SEC is the supervision and control over
corporations, partnerships and associations with the end in view that investment in these
entities may be encouraged and protected, and their activities pursued for the promotion of
economic development. Otherwise stated, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following relationships:
[a] between the corporation, partnership or association and the public;
[b] between the corporation, partnership or association and its stockholders, partners,
members, or officers;
[c] between the corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; and
[d] among the stockholders, partners or associates themselves.
The fact that the controversy at bar involves the rights of petitioner Union Glass who has no
intra-corporate relation either with complainant or the DBP, places the suit beyond the
jurisdiction of the respondent SEC. The case should be tried and decided by the court of
general jurisdiction, the Regional Trial Court. Since petitioner has no intra-corporate
relationship with the complainant, it cannot be joined as party-defendant in said case as to
do so would violate the rule or jurisdiction. Hofileñas complaint against petitioner for
cancellation of the sale of the glass plant should therefore be brought separately before the
regular court. The SC added however that for Hofileñas complaint against Union Glass to
prosper, final judgment must first be rendered in the issue of the validity of the dacion en
pago, which is a prejudicial question, the resolution of which is a logical antecedent of the
issue involved in the action against petitioner Union Glass. But the Court held that the SEC
had no jurisdiction over petitioner Union Glass Corp., impleaded as third party purchaser of
the plant from DBP in the action to annul the dacion en pago. The Court held that such
action for recovery of the glass plant could be brought by the dissenting stockholder to the
regular courts only if and when the SEC rendered final judgment annulling the dacion en
pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith.
Abejo v dela Cruz. F: Case involves a dispute between the principal stockholders of the
corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging corporation,"
namely, the spouses Jose Abejo and Aurora Abejo vs. De la Cruz Abejo (hereinafter referred
to as the Abejos) and the purchaser, Telectronic Systems, Inc. (hereinafter referred to as
Telectronics) of their 133,000 minority shareholdings (for P6 million) and of 63,000 shares
registered in the name of Virginia Braga and covered by five stock certificates endorsed in
blank by her (for P1,674,450.00), and the spouses Agapito Braga and Virginia Braga
(hereinafter referred to as the Bragas), erstwhile majority stockholders. With the said
purchases, Telectronics would become the majority stockholder, holding 56% of the
outstanding stock and voting power of the corporation Pocket Bell. Telectronics requested
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the corporate secretary of the corporation, Norberto Braga, to register and transfer to its
name, and those of its nominees the total 196,000 Pocket Bell shares in the corporation's
transfer book, cancel the surrendered certificates of stock and issue the corresponding new
certificates of stock in its name and those of its nominees. Norberto Braga, the corporate
secretary and son of the Bragas, refused to register the aforesaid transfer of shares in the
corporate books, asserting that the Bragas claim preemptive rights over the 133,000 Abejo
shares and that Virginia Byaga never transferred her 63,000 shares to Telectronics but had
lost the five stock certificates representing those shares. This triggered off the series of
intertwined actions between the protagonists, all centered on the question of jurisdiction over
the dispute. The Bragas assert that the regular civil court has original and exclusive
jurisdiction as against the Securities and Exchange Commission, while the Abejos and
Telectronics, as new majority shareholders, claim the contrary. Respondent Judge de la
Cruz issued an order rescinding the order which dismissed the complaint of the Bragas in
the RTC, thus holding that the RTC and not the SEC had jurisdiction. Respondent judge also
revived the temporary restraining order previously issued restraining Telectronics' agents or
representatives from enforcing their resolution constituting themselves as the new set of
officers of Pocket Bell and from assuming control of the corporation and discharging their
functions.
The Abejos filed a MR, which motion was duly opposed by the Bragas, which was denied by
respondent Judge.
I: W/N the RTC, as claimed by the Bragas, has jurisdiction over the case or the SEC, as
claimed by the Abejos
H: The Court ruled that the SEC has original and exclusive jurisdiction over the dispute
between the principal stockholders of the corporation Pocket Bell, namely, the Abejos and
Telectronics, the purchasers of the 56% majority stock on the one hand, and the Bragas,
erstwhile majority stockholders, on the other, and that the SEC, through its en banc
Resolution of May 15, 1984 correctly ruled in dismissing the Bragas' petition questioning its
jurisdiction, that "the issue is not the ownership of shares but rather the nonperformance by
the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the
Corporation of which he is secretary." The SEC ruling upholding its primary and exclusive
jurisdiction over the dispute is correctly premised on, and fully supported by, the applicable
provisions of P.D. No. 902-A which reorganized the SEC with additional powers "in line with
the government's policy of encouraging investments, both domestic and foreign, and more
active public participation in the affairs of private corporations and enterprises through which
desirable activities may be pursued for the promotion of economic development and, to
promote a wider and more meaningful equitable distribution of wealth.” The dispute at bar,
as held by the SEC, is an intracorporate dispute that has arisen between and among the
principal stockholders of the corporation Pocket Bell due to the refusal of the corporate
secretary, backed up by his parents as erstwhile majority shareholders, to perform his
"ministerial duty" to record the transfers of the corporation's controlling (56%) shares of
stock, covered by duly endorsed certificates of stock, in favor of Telectronics as the
purchaser thereof. Mandamus in the SEC to compel the corporate secretary to register the
transfers and issue new certificates in favor of Telectronics and its nominees was properly
resorted to therefore.
The very complaint of the Bragas for annulment of the sales and transfers as filed by them in same. (n)
the regular court questions the validity of the transfer and endorsement of the certificates of
stock, claiming alleged preemptive rights in the case of the Abejos' shares and alleged loss
— Must be understood to be subject to the accrued or vested rights of the existing
of the certificates and lack of consent and consideration in the case of Virginia Braga's
corporation, its SHs and 3rd parties
shares. Such dispute clearly involves controversies "between and among stockholders," as
— Any rights accrued or liabilities incurred prior to the effectivity of the latter in favor of or
to the Abejos' right to sell and dispose of their shares to Telectronics, the validity of the
against such corporation, its SHs must be respected
latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos'
— Any additional requirements imposed by the Code must be complied with within 2 years
transferee should be recognized as the controlling shareholders of the corporation, with the
from its effectivity
right to elect the corporate officers and the management and control of its operations. Such a
dispute and case clearly fall within the jurisdiction of the SEC to decide, under Section 5 of
Magalad v Premiere Financing Corporation (209 SCRA 261). F: Premiere is a financing
P.D. 902-A.
company engaged in soliciting and accepting money market placements or deposits. On
September 12, 1983 with expired permit to issue commercial papers and with intention not to
Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation
pay or defraud its creditors, Premiere induced and misled Magalad into making a money
Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be deemed
market placement of P50,000.00 at 22% interest per annum for which it issued a receipt as
a device or scheme amounting to fraud and misrepresentation employed by them to keep
well as two (2) post-dated checks in the total sum of P51,079.00 and assigned to Magalad
themselves in control of the corporation to the detriment of Telectronics (as buyer and
its receivable from a certain David Saman for the same amount. Drawee bank dishonored
substantial investor in the corporate stock) and the Abejos (as substantial stockholders-
the checks for lack of sufficient funds to cover the amount. Despite demands by Magalad for
sellers), the case falls under paragraph (a). The dispute is likewise an intra-corporate
the replacement of said checks with cash, Premiere, for no valid reason, failed and refused
controversy between and among the majority and minority stockholders as to the transfer
to honor such demands and due to fraudulent acts of Premiere. The TC found that Magalad
and disposition of the controlling shares of the corporation, falling under paragraph (b) of Sec
has fully established her claim that defendant had indeed acted fraudulently in incurring the
5 PD 902-A. As pointed out by the Abejos, Pocketbell is not a close corporation, and no
obligation and considering that no evidence has been adduced by the defendant to
restriction over the free transferability of the shares appears in the Articles of Incorporation,
contradict the same, judgment is hereby rendered ordering the defendant to pay Magalad.
as well as in the bylaws 10 and the certificates of stock themselves, as required by law for
Premiere contends that the Securities and Exchange Commission (SEC) has exclusive and
the enforcement of such restriction. As the SEC maintains, "There is no requirement that a
original jurisdiction over a corporation under a state of suspension of payments. Magalad
stockholder of a corporation must be a registered one in order that the Securities and
submits that the legal suit which she has brought against Premiere is an ordinary action for
Exchange Commission may take cognizance of a suit seeking to enforce his rights as such
damages with the preliminary attachment cognizable solely by the RTC.
stockholder." This is because the SEC by express mandate has "absolute jurisdiction,
supervision and control over all corporations" and is called upon to enforce the provisions of
H: Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and
the Corporation Code, among which is the stock purchaser's right to secure the
misrepresentation committed by Premiere, the SEC must be held to retain its original and
corresponding certificate in his name under the provisions of Section 63 of the Code.
exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums
of money paid to said corporation, the recovery of which would originally fall within the
An intra-corporate controversy is one which arises between a stockholder and the
jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public
corporation. There is no distinction, qualification, nor any exemption whatsoever. The
and, therefore, encompasses a category of relationship within the SEC jurisdiction.
provision is broad and covers all kinds of controversies between stockholders and
Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must
corporations.
pertain to any of the following relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation, partnership or association and its
stockholders, partners, members or officers; (c) between the corporation, partnership or
Effect of Corporation Code on Existing Corporations
association and the state so far as its franchise, permit or license to operate is concerned;
and (d) among the stockholders, partners or associates themselves (Union Glass &
Section 148. Applicability to existing corporations. - All corporations lawfully existing and Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654,
doing business in the Philippines on the date of the effectivity of this Code and heretofore 1987).
authorized, licensed or registered by the Securities and Exchange Commission, shall be
deemed to have been authorized, licensed or registered under the provisions of this Code, The fact that Premiere's authority to engage in financing already expired will not have the
subject to the terms and conditions of its license, and shall be governed by the provisions effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction
hereof: Provided, That if any such corporation is affected by the new requirements of this of the SEC was conceived primarily to protect the interest of the investing public. That
Code, said corporation shall, unless otherwise herein provided, be given a period of not Magalad's money placements were in the nature of investments in Premiere can not be
more than two (2) years from the effectivity of this Code within which to comply with the gainsaid. Magalad had reasonably expected to receive returns from moneys she had paid to

6
Premiere. Unfortunately, however, she was the victim of alleged fraud and Chapter II: Classification of Private Corporations
misrepresentation. Reliance by Magalad on the case of Union Glass & Container Corp. v.
SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts was upheld, is misplaced Stock and Non-stock Corporations
for, as explicitly stated in those cases, nowhere in the complaints therein is found any
averment of fraud of misrepresentation committed by the respective corporations involved.
Section 3. Classes of corporations. - Corporations formed or organized under this Code
The causes of action, therefore, were nothing more than simple money claims. Further
may be stock or non-stock corporations. Corporations which have capital stock divided into
bolstering the jurisdiction of the SEC in this case is the fact that said agency already
shares and are authorized to distribute to the holders of such shares dividends or allotments
appointed a Rehabilitation Receiver for Premiere and has directed all proceedings or claims
of the surplus profits on the basis of the shares held are stock corporations. All other
against it be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing
corporations are non-stock corporations. (3a)
that "upon appointment of a . . . rehabilitation receiver . . . all actions for claims against
corporations . . . under receivership pending before any court, tribunal, board or body shall
be suspended accordingly." By so doing, SEC has exercised its original and exclusive Section 87. Definition. - For the purposes of this Code, a non-stock corporation is one where
jurisdiction to hear and decide cases involving: "a) Petitions of corporations, partnerships or no part of its income is distributable as dividends to its members, trustees, or officers,
associations to be declared in the state of suspension of payments.” subject to the provisions of this Code on dissolution: Provided, That any profit which a non-
stock corporation may obtain as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.

The provisions governing stock corporation, when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific provisions of this Title. (n)

Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service,
or similar purposes, like trade, industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this Title governing particular classes of non-
stock corporations. (n)

— 2 elements to become a stock corporation:

o capital stock divided into shares
o stock must be authorized to distribute dividends to its SHs
o because the main purpose of the corporation is to make profits for its
shareholders
— GR: a business corporation should organize as a stock corporation
— Non-stock corporation: special kind of corporation with needs different from
those of stock corporations

CIR v Club Filipino. The "Club Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation, owning and operating a club house, a bowling alley, a golf course, and a bar-
restaurant where it sells wines and liquors, soft drinks, meals and short orders to its
members and their guests. The bar-restaurant was a necessary incident to the operation of
the club and -its golf-course. The club is operated mainly with funds derived from
membership fees and dues. Whatever profits it had, were used to defray its overhead
expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising
from the re-valuation of its real properties, the value or price of which increased, the Club
declared stock dividends; but no actual cash dividends were distributed to the stockholders.

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In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross
receipts of its bar and restaurant. The Collector of Internal Revenue assessed against and
demanded from the Club, percentage taxes on its gross receipts as well as fixed taxes and
compromise penalty. The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the instant petition for review.
I: W/N the respondent Club is liable for the payment of the sum of P12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code,
under which the assessment was made, in connection with the operation of its bar and
restaurant, during the periods mentioned
H: It has been held that the liability for fixed and percentage taxes, as provided by these
sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant.
For the liability to attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur. The plain and ordinary of a business is restricted to activities or
affairs where profit is the purpose or livelihood is the motive, and the term business when
used without qualification, should be construed in its plain and ordinary meaning, restricted
to activities for profit or livelihood. Having found as a fact that the Club was organized to
develop and cultivate sports of all, class and denomination, for the healthful recreation and
entertainment of its stockholders and members; that upon its dissolution, its remaining
assests, after paying debts, shall be donated to a charitable Philippine Institution in Cebu;
that it is operated mainly with funds derived from membership fees and dues; that the Club's
bar and restaurant catered only to its members and their guests; that there was in fact no
cash dividend distribution to its stockholders and that whatever was derived on retail from its
bar and restaurant was used to defray its overall overhead expenses and to improve its golf-
course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the
business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but
such fact does not necessarily convert it into a profit-making enterprise. The bar and
restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived
therefrom are necessarily incidental to the primary object of developing and cultivating sports
for the healthful recreation and entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit making club.
The fact that the capital stock of the respondent Club is divided into shares, does not detract
from the finding of the trial court that it is not engaged in the business of operator of bar and
restaurant. What is determinative of whether or not the Club is engaged in such business is
its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual
purpose is not controlled by the corporate form or by the commercial aspect of the business
prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method
of operation.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits on the basis of the shares held (see. 3,
Act No. 1459). In the case at bar, while the respondent Club's capital stock is divided into
shares, nowhere in its articles of incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be
considered a stock corporation, within the contemplation of the corporation law. "A tax is a
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burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, non-
stock organizations, unless the intent to the contrary is manifest and patent."
Manual R. Dulay Ent. Inc. v. CA (225S 678). Petitioner corporation through its president,
Manuel Dulay, obtained various loans for the construction of its hotel project, Dulay
Continental Hotel (now Frederick Hotel). It even had to borrow money from petitioner Virgilio
Dulay to be able to continue the hotel project. As a result of said loan, petitioner Virgilio
Dulay occupied one of the unit apartments of the subject property since 1973 while at the
same time managing the Dulay Apartment as his shareholdings in the corporation was
subsequently increased by his father. Manuel Dulay by virtue of Board Resolution No. 186 of
petitioner corporation sold the subject property to private respondents spouses, Maria
Theresa and Castrense Veloso in the amount of P300,000.00. The parties then executed a
Memorandum to the Deed of Absolute, giving Manuel Dulay within two (2) years or until
December 9, 1979 to repurchase the subject property for P200,000.00 which was however,
not annotated. Thereafter private respondent Maria Veloso, without the knowledge of Manuel
Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of
P250,000.00 which was duly annotated. The subject property was sold on April 1, 1978 to
private respondent Torres as the highest bidder in an extrajudicial foreclosure, upon default
of Veloso to pay the loan. Veloso then executed a Deed of Absolute Assignment of the Right
to Redeem in favor of Manuel Dulay assigning her right to repurchase the subject property
from private respondent Torres. As neither private respondent Maria Veloso nor her
assignee Manuel Dulay was able to redeem the subject property within the one year
statutory period for redemption, private respondent Torres sought to consolidate his
ownership over the property. Petitioner Virgilio Dulay appeared in court to intervene in said
case alleging that Manuel Dulay was never authorized by the petitioner corporation to sell or
mortgage the subject property, and sought to cancel the sheriff sale to Torres and regain
possession of the property. TC rules ifo Torres, Veloso et al. The corporation and Virgilio
Dulay contend that the respondent court had acted with grave abuse of discretion when it
applied the doctrine of piercing the veil of corporate entity in the instant case considering that
the sale of the subject property between private respondents spouses Veloso and Manuel
Dulay has no binding effect on petitioner corporation as Board Resolution No. 18 which
authorized the sale of the subject property was resolved without the approval of all the
members of the board of directors and said Board Resolution was prepared by a person not
designated by the corporation to be its secretary.
H: In the instant case, petitioner corporation is classified as a close corporation and
consequently a board resolution authorizing the sale or mortgage of the subject property is
not necessary to bind the corporation for the action of its president. At any rate, a corporate
action taken at a board meeting without proper call or notice in a close corporation is
deemed ratified by the absent director unless the latter promptly files his written objection
with the secretary of the corporation after having knowledge of the meeting which, in this
case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a personality distinct
and separate from its individual stockholders or members, the veil of corporate fiction may
be pierced when it is used to defeat public convenience, justify wrong, protect fraud or
defend crime. The privilege of being treated as an entity distinct and separate from. its
stockholders or members is therefore confined to its legitimate uses and is subject to certain
limitations to prevent the commission of fraud or other illegal or unfair act. When the
corporation is used merely as an alter ego or business conduit of a person, the law will
regard the corporation as the act of that person. The Supreme Court had repeatedly
disregarded the separate personality of the corporation where the corporate entity was used
to annul a valid contract executed by one of its members.
Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to
private respondents spouses Veloso is null and void as the alleged Board Resolution No. 18
was passed without the knowledge and consent of the other members of the board of
directors cannot be sustained. Virgilio is very much privy to the transactions involved. To
begin with, he is an incorporator and one of the board of directors designated at the time of
the organization of Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the said entity is
loosely referred to as a family corporation'. The nomenclature, if imprecise, however, fairly
reflects the cohesiveness of a group and the parochial instincts of the individual members of
such an aggrupation of which Manuel R. Delay Enterprises, Inc. is typical: four-fifths of its
incorporators being close relatives namely, three (3) children and their father whose name
identifies their corporation.
Petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject
property to private respondents by Manuel Dulay is valid and binding. The sale between
Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and Castrense
C. Veloso, was a corporate act of the former and not a personal transaction of Manuel R.
Dulay. This is so because Manuel R. Dulay was not only president and treasurer but also the
general manager of the corporation. The corporation, was a closed family corporation, where
the incorporators and directors belong to one single family. It cannot be concealed that
Manuel R. Dulay as president, treasurer and general manager almost had absolute control
over the business and affairs of the corporation.
NDC v Philippine Veterans Bank (192 SCRA 257). AGRIX executed ifo Phil Veterans
Bank a REM over 3 parcels of land. During the existence of the mortgage, AGRIX went
bankrupt. Veterans Bank than filed a claim with the AGRIX Claims Committee for the
payment of its loan credit. Agrix and NDC refused to recognize the claim, invoking PD 1717
which ordered the rehabilitation of the Agrix Group of Companies is administered by the
National Development Company. Sec 4(1) thereof provides all mortgages and other liens
attached to the assets of the dissolved corporations are hereby extinguished. Agrix
proceeded to cancel the mortgage lien in light of the PD. TC annulled the entire PD 1717.
NDC appeals. It claims that since Veterans Bank invoked questioned PD when it filed a
claim with the Agrix Claims committee, it is thus estopped from questioning the validity of the
PD which also provides that all mortgages attached to properties of Agrix shall be
extinguished.
H: Estoppel does not apply where Veterans Bank invoked the questioned PD when Pres
Marcos was still absolute ruler and his decrees were absolute law. Not a single act or
issuance of Marcos was ever declared unconstitutional as long as he was in power.
9
In this case, Veterans Bank has not been paid a single centavo on its claim, which was kept
pending for more than 7 years. The new corporation, New Agrix Inc, is neither owned nor
controlled by the government. The DC was merely required to extend a loan of not more than
P10M to New Agrix Inc. it is entirely private and so should have been organized under the
Corporation Law. The Court thus declared the PD 1717 as unconstitutional.
Does a defective incorporation result into a partnership? NO.
1. If parties intended to create a corporation, then a partnership arrangement
cannot be created in its stead since such is not within their intent
2. Important differences between the corporation and partnership, such as
limited liability, centralized management, and easy transferability of shares are
by themselves strong factors to be bound by a corporate agreement
Pioneer Insurance v CA (175 SCRA 668). F: In 1965, Jacob S. Lim was engaged in the
airline business as owner-operator of Southern Air Lines (SAL) a single proprietorship. On
May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract for the sale and purchase of two (2) DC-3A Type aircrafts and one
(1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. The 2 planes were delivered to Lim in Manila. On May 22, 1965, Pioneer
Insurance and Surety Corporation as surety executed and issued its Surety Bond in favor of
JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It
appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana contributed some
funds used in the purchase of the above aircrafts and spare parts. The funds were supposed
to be their contributions to a new corporation proposed by Lim to expand his airline business.
Lim had duly received the amount of P151,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes and spare
parts. The indemnitors then executed two (2) separate indemnity agreements in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and
the Cervanteses. The indemnity agreements stipulated that the indemnitors principally bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from and
against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of
whatever kind and nature which Pioneer may incur in consequence of having become surety
upon the bond. Lim doing business under the name and style of SAL executed in favor of
Pioneer as deed of chattel mortgage as security for Pioneer’s suretyship. Lim defaulted on
his subsequent installment payments prompting JDA to request payments from the surety.
Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial
foreclosure of the said chattel mortgage. The Cervanteses and Maglana, however, filed a
third party claim alleging that they are co-owners of the aircrafts. Pioneer also filed an action
for judicial foreclosure with an application for a writ of preliminary attachment against Lim
and respondents, the Cervanteses, Bormaheco and Maglana. After trial on the merits, a
decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint
against all other defendants. CA modified the trial court's decision in that the plaintiff’s
complaint against all the defendants was dismissed. In all other respect the trial court's
decision was affirmed. Lim asserted that as a result of the failure of respondents Bormaheco,
Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a consequence of such relationship all Corporation Sole
must share in the losses and/or gains of the venture in proportion to their contribution. — only a religious corporation can become a corporation sole

I: What legal rules govern the relationship among co-investors whose agreement was to do
business through the corporate vehicle but who failed to incorporate the entity in which they
had chosen to invest? How are the losses to be treated in situations where their
contributions to the intended 'corporation' were invested not through the corporate form?
H: it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se. Where
persons associate themselves together under articles to purchase property to carry on a
business, and their organization is so defective as to come short of creating a corporation
within the statute, they become in legal effect partners inter se, and their rights as members
of the company to the property acquired by the company will be recognized.
However, such a relation does not necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between themselves, when their purpose is that no
partnership shall exist, and it should be implied only when necessary to do justice between
the parties; thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other subscribers
who engage in business under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and contribution. A partnership
relation between certain stockholders and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the former liable to contribute
for payment of debts illegally contracted by the latter.
Parent and Subsidiary corporations; holding companies; affiliate corporations
— subsidiary corporation: one where the control, in the form of ownership
of majority shares, is in another corporation called the parent
corporation
— parent has the power to elect the subsidiary’s directors, thus controlling
management properties
— holding company: a parent company where the sole function is to hold
the shares of other corporations which it controls
i. no other business other than holding of shares
— investment company: a corporation which holds shares not for control
but for investment
— affiliates: corporations subject to common control and operated as part
of a system
i. also called sister corporations

In this case, it was established by the evidence contrary to Lim’s postulations, that
Cervantes, Bormacheo, and Maglana contributed the amount needed by Lim to put up the
corporation as he promised, which he received. It is therefore clear that the petitioner never
had the intention to form a corporation with the respondents despite his representations to
them. This gives credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed corporation which
was never formed because the petitioner reneged on their agreement. Necessarily, no de
facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that
the petitioner was acting on his own and not in behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare parts.

(When parties come together intending to form a corporation, but no corporation is formed
due to some legal cause:
(1) parties who intended to participate or actually participated in the business affairs of
the proposed corporation would be considered as partners under a de facto
corporation
(2) parties who took no part except to subscribe for stock in a proposed corporation,
do not become partners with the subscribers engaged in the business of the
corporation)

10
 Chapter III – Formation/Organization
Who may form a corporation?
Section 5. Corporators and incorporators, stockholders and members. - Corporators are
those who compose a corporation, whether as stockholders or as members. Incorporators
are those stockholders or members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders. Corporators in a
non-stock corporation are called members. (4a)
— Incorporators: SHs or members mentioned in the AOI as originally forming and
composing the corporation and who are signatories thereof
— Corporators: all SHs or members, whether incorporators or those joining the corporation
after incorporation
— Every incorporator must be a stockholder
Section 10. Number and qualifications of incorporators. - Any number of natural persons not
less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation. (6a)
1. Must be natural persons
— Only natural persons can be incorporators
o Excluding partnerships and other corporations
— But partnerships and other corporations can be stockholders in another
corporation as long as they are not incorporators thereof (El Hogar case)
2. At least five (5) incorporators, but not more than 15
— At least 5 incorporators must sign the AOI
— If only 2 incorporators are residents of the RP, a corporation still exists—
a de facto corporation, provided…
o At least 5 incorporators must sign the AOI
— One-man corporations: owner can still incorporate by giving nominal
ownership of one share of stock each to four other persons (legal)
— Incorporator will always retain his status as incorporator of the
corporation
— Reason for 5 incorporator requirement: if anything goes wrong if the
incorporation process, and liabilities created at the time of incorporation,
then the existence of 5 allows the public or injured party to run after the
persons
11
3. Residence requirement; citizenship requirement only in certain areas
— No general requirement of RP citizenship
— Some areas of industry and business are limited/reserved for Filipino
citizens
o Public utilities
o Retail trade
o Banks
o Investment houses
o Savings and loan associations
o Schools
o Other areas Congress may by law provide
— Where more than 40% of outstanding capital is to be owned or controlled
by aliens: written authorization must first be sought with the BOI before
registration with the SEC
4. Restrictions on stock ownership of closely-knit groups
— Sensitive areas where ownership by a close-knit group may be
detrimental to the public interest
o Ex. Banks—no bank may be licensed to operate if equity of
one person or persons related to each other within the 3rd
degree of consanguinity/affinity exceed 20% of bank voting
stock
Section 140. Stock ownership in certain corporations. - Pursuant to the duties specified by
Article XIV of the Constitution, the National Economic and Development Authority shall, from
time to time, make a determination of whether the corporate vehicle has been used by any
corporation or by business or industry to frustrate the provisions thereof or of applicable
laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of
its findings, including recommendations for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations
declared by it to be vested with a public interest pursuant to the provisions of this section,
belonging to individuals or groups of individuals related to each other by consanguinity or
affinity or by close business interests, or whenever it is necessary to achieve national
objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement
national economic policies declared in laws, rules and regulations designed to promote the
general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to be
declared vested with a public interest and in formulating proposals for limitations on stock
ownership, the National Economic and Development Authority shall consider the type and
nature of the industry, the size of the enterprise, the economies of scale, the geographic
location, the extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and promotion of — Must appear in a registration statement
business and industry. o Filed with the SEC
o Published in 2 newspapers of gen. circulation
o Once a week for 2 consecutive weeks
o Stock ownership in close corporations may be limited by the
— If all requirements are complete, SEC issues an order making registration
AOI ifo members of the same family or group
effective
— SEC grants corporation a permit to offer securities for sale
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation
may provide: 2. Articles of Incorporation; drafting

1. For a classification of shares or rights and the qualifications for owning or holding AOI: constitute the charter of the corporation. It is the contract between the corporation and
the same and restrictions on their transfers as may be stated therein, subject to the its SHs as well as the agreement among SHs
provisions of the following section; — Basic contract document in Corporate Law
o Defines the charter of the corporation
-- x X x -- o Defines contractual relationships between and among:
§ State and corporation
§ SHs and State
Steps in Formation of Corporation § Corporation and SHs
— AOI does not become binding unless they have been filed with the registered
1. Promotional stage by the SEC

— Promoter, Defn: one who brings together persons who become interested Section 14. Contents of the articles of incorporation. - All corporations organized under this
in enterprise, aids in procuring subscriptions and sets in motion the code shall file with the Securities and Exchange Commission articles of incorporation in any
machinery which leads to the formulation of the corporation of the official languages duly signed and acknowledged by all of the incorporators, containing
— Securities Regulation Code: promoter is a person who, acting alone or substantially the following matters, except as otherwise prescribed by this Code or by special
with others, takes initiative in founding and organizing the business of the law:
issuer and receives consideration therefor
o He formulates the necessary initial business and financial 1. The name of the corporation;
plans
o If necessary, buys the rights and property which the business
may need; with the understanding that once formed, he shall 2. The specific purpose or purposes for which the corporation is being
take over the same incorporated. Where a corporation has more than one stated purpose, the articles
o Promoters may also be incorporators of incorporation shall state which is the primary purpose and which is/are the
o Revised securities act sec 2 secondary purpose or purposes: Provided, That a non-stock corporation may not
— Code: before incorporation, include a purpose which would change or contradict its nature as such;
o at least 25% authorized capital stock should be subscribed
o at least 25% of subscribed stock is paid-in 3. The place where the principal office of the corporation is to be located, which
— if initial capital requirements cannot be met, then promoters have to must be within the Philippines;
“promote” the business so other persons could invest
— shares of stock cannot be sold publicly unless they are first registered
4. The term for which the corporation is to exist;
with the SEC
— SEC requires disclosure of all pertinent information regarding:
o purposes, 5. The names, nationalities and residences of the incorporators;
o character and nature of business,
o financial position, 6. The number of directors or trustees, which shall not be less than five (5) nor
o financial responsibility of directors and officers,
o nature of shares to be issued

12
 more than fifteen (15); the laws of the Republic of the Philippines;

7. The names, nationalities and residences of persons who shall act as directors or
trustees until the first regular directors or trustees are duly elected and qualified in
accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided, and in case
the share are par value shares, the par value of each, the names, nationalities and
residences of the original subscribers, and the amount subscribed and paid by
each on his subscription, and if some or all of the shares are without par value,
such fact must be stated;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be "_____________________, INC. or
CORPORATION";
SECOND: That the purpose or purposes for which such corporation is incorporated are: (If
there is more than one purpose, indicate primary and secondary purposes);
THIRD: That the principal office of the corporation is located in the City/Municipality of
________________________, Province of _______________________, Philippines;

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities

and residences of the contributors and the amount contributed by each; and FOURTH: That the term for which said corporation is to exist is _____________ years from
and after the date of issuance of the certificate of incorporation;
10. Such other matters as are not inconsistent with law and which the incorporators
may deem necessary and convenient. FIFTH: That the names, nationalities and residences of the incorporators of the corporation
are as follows:
The Securities and Exchange Commission shall not accept the articles of incorporation of
any stock corporation unless accompanied by a sworn statement of the Treasurer elected by NAME NATIONALITY RESIDENCE
the subscribers showing that at least twenty-five (25%) percent of the authorized capital
stock of the corporation has been subscribed, and at least twenty-five (25%) of the total ___________________ ___________________ ___________________
subscription has been fully paid to him in actual cash and/or in property the fair valuation of
which is equal to at least twenty-five (25%) percent of the said subscription, such paid-up
___________________ ___________________ ___________________
capital being not less than five thousand (P5,000.00) pesos.

___________________ ___________________ ___________________

Section 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by special law,
articles of incorporation of all domestic corporations shall comply substantially with the
following form: ___________________ ___________________ ___________________

ARTICLES OF INCORPORATION OF ___________________ ___________________ ___________________

__________________________ SIXTH: That the number of directors or trustees of the corporation shall be _______; and the
names, nationalities and residences of the first directors or trustees of the corporation are as
follows:
(Name of Corporation)

NAME NATIONALITY RESIDENCE

KNOW ALL MEN BY THESE PRESENTS:

___________________ ___________________ ___________________

The undersigned incorporators, all of legal age and a majority of whom are residents of the
Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under

13
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
___________________ ___________________ ___________________
SEVENTH: That the authorized capital stock of the corporation is
______________________ (P___________) PESOS in lawful money of the Philippines,
divided into __________ shares with the par value of ____________________
(P_____________) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ______________ shares without par value. (In
case some shares have par value and some are without par value): That the capital stock of
said corporation consists of _____________ shares of which ______________ shares are of
the par value of _________________ (P____________) PESOS each, and of which
_________________ shares are without par value.
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock above
stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed Subscribed
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________
NINTH: That the above-named subscribers have paid at least twenty-five (25%) percent of
the total subscription as follows:
14
Name of Subscriber Amount Subscribed Total Paid-In
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
_________________ ___________________ _______________
(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock,
Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the
articles state the amount of capital or money contributed or donated by specified persons,
stating the names, nationalities and residences of the contributors or donors and the
respective amount given by each.)
TENTH: That _____________________ has been elected by the subscribers as Treasurer
of the Corporation to act as such until his successor is duly elected and qualified in
accordance with the by-laws, and that as such Treasurer, he has been authorized to receive
for and in the name and for the benefit of the corporation, all subscription (or fees) or
contributions or donations paid or given by the subscribers or members.
ELEVENTH: (Corporations which will engage in any business or activity reserved for Filipino
citizens shall provide the following):
"No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less
than the required percentage of the capital stock as provided by existing laws shall be
allowed or permitted to be recorded in the proper books of the corporation and this restriction
shall be indicated in all stock certificates issued by the corporation."
IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this
__________ day of ________________, 19 ______ in the City/Municipality of
____________________, Province of ________________________, Republic of the
Philippines.
_______________________ _______________________
_______________________ _______________________
________________________________ _________, 19 _____

(Names and signatures of the incorporators) Doc. No. _________;

SIGNED IN THE PRESENCE OF: Page No. _________;

_______________________ _______________________ Book No. ________;

(Notarial Acknowledgment) Series of 19____ (7a)

TREASURER'S AFFIDAVIT Contents of AOI (Sec 14)

(1) Corporate name

REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I, ____________________, being duly sworn, depose and say:
That I have been elected by the subscribers of the corporation as Treasurer thereof, to act
as such until my successor has been duly elected and qualified in accordance with the by-
laws of the corporation, and that as such Treasurer, I hereby certify under oath that at least
25% of the authorized capital stock of the corporation has been subscribed and at least 25%
of the total subscription has been paid, and received by me, in cash or property, in the
amount of not less than P5,000.00, in accordance with the Corporation Code.
____________________
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the City/Municipality
of ___________________ Province of _____________________, this _______ day of
___________, 19 _____; by __________________ with Res. Cert. No. ___________ issued
at _______________________ on ____________, 19 ______
NOTARY PUBLIC
My commission expires on
— Name is essential to corporate existence
— It is through the name that the corporation can sue and be sued and
perform all legal acts
— Code does not allow the corporation to adopt a name identical or
deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or which is patently deceptive,
confusing, or contrary to existing laws
— If name is legally permissible the SEC allow the parties to reserve it for a
reasonable period
— Code requires a corporation to append the word “Corporation” or “Inc.” to
its chosen name
— A corporation should transact business only in its corporate name
— Can amend the name provided it is done in accordance with the
procedure laid down by the Code for amendments of AOI and approval
by SEC of the change in corporate name
— Once approved SEC issues an amended certificate of incorporation
under the corporation’s new name
— Change of name does not result in dissolution
Philips Export BV v CA (206 S 457). Philips of the Netherlands files an action with the SEC
to delete the name “Philips” from the corporate name of Standard Philips Company.
Standard refuses, and Philips sought an injunction to enjoin Standards from the use if the
name Philips. SEC Hearing Officer dismisses Philips petition, arguing that Sec 18 of Corpo
Code is only applicable when the corporate names are identical. SEC en banc affirms HO’s
decision; corporate names contain at least two different words and rules out confusion. CA
dismisses Philips petition, saying that Standard’s products are unrelated and do not compete
with Philips products and would not mislead consumers. I: W/N Standard’s use of the word
Philips in its corporate name is unlawful and may be removed under the Corpo Code. H:
Yes. The corporation’s right to use its corporate name is a property right, a right in rem which
it may assert and protect against the world. A name is secularly important as necessary to
the very existence of a corporation. Its name is one of its attributes, an element of its

15
existence, and essential to its identity. GR: each corp must have a name by which it is to sue (2) Purpose clause
and be sued and do all legal acts. A corp acquires its name by choice and need not select a
name identical with or similar to one already appropriated. To come under the application of — Confers as well as limits the powers which a corporation may exercise
Sec 18 of the Corpo Code, 2 requisites must be proven: (1) corp has a prior right over the — Sec 45: corporate powers:
use of the name, or; (2) proposed name is either identical or deceptively/confusingly similar, o Expressly granted by law and the AOI
or; (3) it is patently deceptive, confusing or contrary to existing law. The right to exclusive o Incidental to conferred powers
use of corporate name is determined by priority of adoption. Philips was incorporated on o Reasonably necessary to accomplish its purposes and incidental to its
1956 and Standard only 2 years later. In determining the existence of confusing similarity in existence
corporate names, the test is w/n the similarity is such as to mislead a person using ordinary — Must specify primary and secondary purposes
care and discrimination. A reading of the names of Philips and its subsidiary companies o Secondary purpose need not be related to the main purpose
indicate that Philips is indeed a dominant word in that all companies affiliated with the — Three reasons for requiring a purpose clause in the AOI
principal corp are known in the RP. Given also Standard’s primary purpose, nothing could o So that a prospective SH contemplating an investment shall know within
prevent it from dealing in the same line of business of electrical devices, products, or what lines of business his money is to be risked
supplies which fall under its primary purposes. Standard’s use also tends to show its o So that management may know within what lines of business it is
intention to ride on the popularity and established goodwill of Philips. Furthermore, because authorized to act
Philips is a trademark or trade name registered as far back as 1922, they have the exclusive o So that anyone who deals with the corporation may ascertain w/n a
right to use the name free from infringement by similarity. contract or transaction is within the general authority of management
— Sec 14(2): a corporation can have as many purposes as it may wish to include
Lyceum of the Phils. v CA (219 S 610). Lyceum of the Philippines Inc sues all academic in its AOI, subject to the ff conditions:
institutions it could find having the corporate name “Lyceum.” SEC rules against Lyceum and a) The AOI must specify which is the primary purpose and which are the
upheld by the CA. I: W/n use of word Lyceum in its corporate name has been for such length secondary purposes (need not be related)
of time and with such exclusivity as to have been associated with Lyceum of RP. b) For corporations governed by special laws or covered by special
H: Lyceum is not entitled to a legally enforceable exclusive right to use the word Lyceum in provisions in the Code: can have only ONE purpose peculiar to them and
its corporate name. (1) corporate names of the other Lyceums not identical with, or no other (ex educational corporations cannot engage in export and
deceptively or confusingly similar to Lyceum of the RP. Confusion and deception are import)
precluded by the appending of the geographic name after Lyceum. (2) Lyceum the word is c) Purpose(s) must be lawful
as generic in character as the word university. But Lyceum of RP’s use of the word Lyceum § NEDA has the power to refuse or deny the application for
in its corporate name has not been attended with the exclusivity essential for applicability of registration of any corporation if not consistent with the declared
the doctrine of secondary meaning. In fact Western Lyceum used the word 17 years before national economic policies
Lyceum of RP. (3) even if Western Lyceum is deemed to have lost its rights under the § A corporation cannot be formed for the purpose of practicing a
original registration which was never restored when destroyed by fire, the point was merely profession
to emphasize that the word has already been used previously and is not exclusive to Lyceum § Non-stock corporations:
of RP.
Section 88. Purposes. - Non-stock corporations may be formed or organized for charitable,
PC Javier and Sons v CA. H: From the foregoing documents, it cannot be denied that religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service,
petitioner corporation was aware of First Summa Savings and Mortgage Bank's change of or similar purposes, like trade, industry, agricultural and like chambers, or any combination
corporate name to PAIC Savings and Mortgage Bank, Inc. Knowing fully well of such thereof, subject to the special provisions of this Title governing particular classes of non-
change, petitioner corporation has no valid reason not to pay because the IGLF loans were stock corporations. (n)
applied with and obtained from First Summa Savings and Mortgage Bank. First Summa
Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and the
— Investment in activities not within its primary purpose
same bank to which petitioner corporation is indebted. A change in the corporate name does
o Sec 42: allowed provided…
not make a new corporation, whether effected by a special act or under a general law. It has
§ Approved by majority of Board
no effect on the identity of the corporation, or on its property, rights, or liabilities. The
§ Ratified by 2/3 of outstanding capital stock
corporation, upon such change in its name, is in no sense a new corporation, nor the
o Exception: where reasonably necessary to accomplish primary
successor of the original corporation. It is the same corporation with a different name, and its
purposes, SHs approval not necessary
character is in no respect changed.
— Interpretation of purpose clauses

16
 o GR: construed as including incidental powers reasonably necessary
to the proper exercise of the powers enumerated in the AOI
o Detailed specification of powers enumerated, by implication,
excludes all other powers or rights
§ Except incidental or subordinate powers and rights
necessary to an exercise of powers expressly given
(3) Place of Principal office of the corporation
— Residence of the corporation
— Must be within the Philippines
— Specify city or town where located
(4) Term of existence
— Not to exceed 50 years from date of incorporation
o extendible for a period not exceeding 50 years by amendment to AOI
o no extension made earlier than 5 years before original or subsequent
expiry date
§ exception: justifiable reasons
Section 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50)
years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single instance by an amendment
of the articles of incorporation, in accordance with this Code; Provided, That no extension
can be made earlier than five (5) years prior to the original or subsequent expiry date(s)
unless there are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission. (6)
(5) Names, nationalities, and residencies of the Incorporators and
directors;
— Names, nationalities, and residencies of the incorporators, and directors or
trustees who will act as such until the first regular directors/trustees are
elected
o AOI must also name the treasurer chosen by the pre-incorporation
subscribers
(6) Number of directors or trustees; qualifications
— Number of directors: not less than 5, not more than 15
o For non-stock: can exceed 15 trustees
o Merger of banks: total number of directors of the merged banks (may
exceed 15)
17
o Educational non-stock: multiples of 5
— Code is SILENT on amendment of AOI to increase number of directors to
more than 15
— Incorporators must own at least one share of capital stock
— Directors must own at least one share of stock of a corporation of which he is
a director
— In non-stock corps, a trustee must be a member thereof
— Aliens may be directors, but only in such number proportional to their
allowable participation in the capital of an entity
(7) Names, nationalities and residencies of persons acting as
directors/trustees until the 1st regular directors/trustees are duly
elected and qualified
(8) Amount of authorized capital stock, number of shares—par value or
no-par value, original subscribers and the amounts subscribed and
paid by each; subscription; payment
— Sec 12: corporations shall not be required to have any minimum authorized
capital stock except where provided by special law
— In normal practice, SEC will not allow incorporation for P5000 minimum paid-
up capital
— Maximum capitalization is needed to protect SHs
— Capital stock, defn: the amount fixed in the articles of incorporation to be
subscribed and paid in or secured to be paid in by the shareholders, at the
organization of the corporation or afterwards
— Outstanding Capital Stock: total shares of stock issued to subscribers or
SHs, whether or not fully or partially paid except treasury shares
— Subscribed Capital Stock: portion of capital stock subscribed (i.e. procured
to be paid) whether or not fully paid
— Subscription, defn: mutual agreement of the subscribers to take and pay for
the stock of a corporation
o AOI must show:
§ the names, nationalities, and residencies of the original
subscribers,
§ the amount subscribed, and
§ how much is paid thereon
o Sec 13: at least 25% of authorized capital stock, at least 25% of total
subscription to be paid upon subscription
o for non-stock: minimum authorized capital stock not required, but subject
to Sec 13
Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as stated in
the articles of incorporation must be subscribed at the time of incorporation, and at least
twenty-five (25%) per cent of the total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less than five
Thousand (P5,000.00) pesos. (n)
— Paid-up capital at time of incorporation must be in cash deposited in a bank or
property
— Pre-incorporation subscription: amount which each incorporator or SH
agrees to contribute to a proposed corporation
o Embodied in an agreement which takes and pays for the original
unissued shares of a corporation formed or to be formed (Delpher)
Section 60. Subscription contract. - Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or
some other contract. (n)
Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a
corporation still to be formed shall be irrevocable for a period of at least six (6) months from
the date of subscription, unless all of the other subscribers consent to the revocation, or
unless the incorporation of said corporation fails to materialize within said period or within a
longer period as may be stipulated in the contract of subscription: Provided, That no pre-
incorporation subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission. (n
— Par value share: appears in the stock certificate specifiying the amount in
pesos as the nominal value of the shares appearing in the certificate of stock
o Must be stated in the AOI
o Cannot be issued at less than stipulated par value
o Can only be changed by amendment in the AOI
— Sec 62: Consideration for no par value shares issued is the issued value, to
be fixed in the ff ways:
o AOI
o By the BOD when authorized by the AOI or BLs
o SHs representing at least a majority of outstanding capital stock
Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for the issuance of stock may be any or a
combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal to
18
the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall initially be determined by the incorporators
or the board of directors, subject to approval by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable, may
be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred upon it by the articles of incorporation or
the by-laws, or in the absence thereof, by the stockholders representing at least a majority of
the outstanding capital stock at a meeting duly called for the purpose. (5 and 16)
— Issuance of no par value must be reflected in the AOI
o Consideration cannot be less than issued value—cannot be less than 5
pesos
(9) Treasurer’s Affidavit
— SEC shall not accept AOI unless accompanied by a sworn statement by the
Treasurer that:
o at least 25% of TOTAL authorized capital stock has been subscribed
o at least 25% of subscribed and authorized capital stock has been fully
paid-up
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number of
no-par stock subscribed by each, and the amount paid by each on his subscription
in cash or property, or the amount of capital stock or number of shares of no-par
stock allotted to each stock-holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the
original articles of incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any certificate of increase of
19
capital stock unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least twenty-
five (25%) percent of such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if its effect shall prejudice
the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same,
with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of
the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
(17a)
— Treasurer must make sworn statement that minimum requirements of
subscription and payment have been complied with
o If false, AOI disapproved or certificate of registration revoked
(10) Other matters
— AOI may include other matters not inconsistent with law, such as:
o classes of shares into which shares of stock have been divided
o Preferences of and restrictions on any class
o Denial of voting rights on certain shares or pre-emptive right of SHs
o Prohibition against transfer of stock which would reduce ownership to
less than required minimum for wholly or partially nationalized
businesses/industries
(11) Close corporations
— A corporation will be governed by Title XII on Close Corporations only if its
articles provide for certain specific matters
TITLE XII - CLOSE CORPORATIONS
Section 96. Definition and applicability of Title. - A close corporation, within the meaning of
this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (2) all the issued stock of all
classes shall be subject to one or more specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of
this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a board
of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the corporation
shall be deemed to be directors for the purpose of applying the provisions of this
Code; and
3. The stockholders of the corporation shall be subject to all liabilities of directors.
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders, instead of
by the board of directors.
20
— Code allows a close corporation to provide in its AOI special provisions which
would exclude it from the operation of some of the requirements and
prohibition imposed on corporations in general, and in effect make it an
“incorporated partnership” (Sec 97)
3. Filing of articles; payment of fees
— AOI and treasurer’s affidavit filed with the SEC and corresponding fees paid
— Failure to file AOI will prevent due incorporation and will not give rise to
juridical personality and will not even be a de facto corporation
4. Examination of articles; approval or rejection by SEC
— Upon receipt the SEC shall examine the AOI to determine conformity with law
— If not, SEC must give the incorporators reasonable time within which to correct
or modify objectionable portions
— Grounds for rejection by the SEC:
1) AOI or any amendment thereto is not substantially in accordance with the
prescribed form
2) Purpose(s) are patently unconstitutional, illegal, immoral or contrary to
government rules/regulations
3) Treasurer’s Affidavit concerning the amount of capital stock paid or
subscribed is false
4) Required percentage of ownership to be owned by Filipino citizens has
not been complied with
— SEC may, after consultation with BOI and NEDA, reject or deny registration if
not consistent with the declared national economic policies
— SEC decision appealable to CA
5. Issuance of certificate of incorporation
— It is only upon issuance of the certificate of incorporation that the corporation
acquires a juridical personality distinct and separate from its members or SHs,
with power to sue and be sued and to perform all other legal acts
— Corporation DEEMED incorporated from the date SEC issues the certificate of
incorporation
Section 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical personality
and is deemed incorporated from the date the Securities and Exchange Commission issues
a certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate
under the name stated in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner dissolved in accordance
with law. (n)

6. Amendment of AOI
— Sec 16: any provision may be amended by:
o majority vote of the Board of Directors AND…
o WRITTEN ASSENT of SHs representing at least 2/3 of OCS or 2/3
members of non-stock entitled to vote
o Without prejudice to appraisal right of dissenting SH
o Unless otherwise provided in the Code or special law
AOI: Contractual implications
— AOI is the contract between the three (3) parties:
o State and corporation
o Stockholders and State
o Corporation and stockholders
Defectively incorporated entities;
De jure corporation
— Not every defect precludes a de jure corporation; as long as the mandatory
requirements for incorporation are substantially complied with, a corporation
de jure will be formed
— A de jure corporation’s due incorporation cannot be successfully attacked
even in quo warranto proceedings
De facto corporations
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. (n)
— If there is no substantial compliance with the mandatory requirements for
incorporation, a corporation be deemed to exist as a person distinct and
separate from its members or SHs if all of the ff are present:
(1) there must be an apparently valid statute
(2) there has been colorable compliance with the legal requirements in GF
(3) there has been user of corporate powers i.e. transaction of business in
some way as if it were a corporation
— if all are met by the defectively formed corporation, it will be considered a de
facto corporation
21
— the due incorporation of a de facto corp cannot be collaterally attacked either
by the State or by private individuals
— such incorporation must be attacked by the State through a quo warranto
proceeding
— where requirements for a de jure or de facto corporation are not present, then
the associates may be held liable as partners for obligations of the alleged
corporation
o unless estoppel can apply (Sec 21)
1. User of corporate powers
— A slight evidence of conducting business is deemed sufficient
— It is not necessary that the dealings between the parties should be on a corporate basis
— Ex. Buying a lot and constructing and leasing a building will constitute sufficient user of
corporate powers
2. Law subsequently declared void
— GR: there can be no de facto corporation under a statute subsequently
declared unconstitutional
— Exception: where the corporation in GF did all that is required under the
statute to form a valid corporation
Municipality of Malabang v Benito. Balindog, mayor of Malabang, files an action to nullify
EO 386 which created the municipality of Balabagan, of which the mayor is Benito. They
invoke SC’s ruling in Pelaez v Audito General declaring as unconstitutional RA2370 or the
Barrio Charter Act and Sec 68 of the Administrative Code for being a statutory denial of the
President’s authority to create a new barrio and for being an undue delegation of legislative
powers, respectively. Benito counters that Pelaez does not apply to them because the
municipality of Balabagan is a de facto corporation, having been created under the color of
statute before it was declared unconstitutional, and as a de facto corporation, its existence
cannot be collaterally attacked. H: Balabagan is neither a de facto nor a de jure corporation.
The true basis for denying to a corporation de facto status is the absence of any legislative
act giving life to its creation. An unconstitutional act is not a law; it confers no rights, it
imposes no duties, it affords no protection, it creates no office. EO 386 thus created no
office, although acts done by the office are not exactly a nullity. The EO is as inoperative
legally as though it were never passed, an operative fact which cannot justly be ignored.
But a corporation created under a statute declared void it is given life by other valid acts or in
the constitution itself. The color of authority requisite to the organization of a de facto
municipal corporation may be: (1) an unconstitutional law, upheld for a time or not yet
declared void, provided a warrant for its creation is found in some other valid law or
recognition of its existence by the general laws or the constitution. (2) there can be no de
facto municipal corporation unless either directly or potentially such a de jure corporation is
authorized by some legislative fiat (3) there can be no color of authority in an unconstitutional
statute alone, the invalidity of which is apparent on its face (4) there can be no de facto
corporation created to take the place of an existing de jure corporation.
3. Substantial or colorable compliance
— Difficult to ascertain when compliance with the legal requirements is
substantial or only colorable or less than colorable
— In Hall v Piccio, unless certificate of incorporation has been issued, there can
be no de facto corporation
— While in the process of incorporation, there can be no substantial nor
colorable compliance, and thus no de facto corporation (Cagayan Fishing v
Sandiko)
Harrill v Davis. Davis, Mann, R. Davis, and Knight agreed to take specified shares in a
$10000 enterprise for the purpose of building a cotton gin and carrying on the business of
buying, ginning, and selling cotton and to organize a corporation for this purpose. They did
business with Harrill, buying material and procure labor and build their cotton gin. They
purchased lumber and other materials from Harrill after the gin was completed and after they
commence operations. As a result, they incurred indebtedness of over $5000, $4700 of
which were incurred before they had filed their articles of incorporation. During all this time,
the four treated themselves as a corporation, and so did Harrill.
H: They did not become a corporation de jure just because they failed to file their articles of
incorporation. Nor did they become a corporation de facto before they filed the articles to
such an extent as to exempt them from individual liability because they did not before that
time secure any color of legal organization as a corporation under an charter or enabling act;
they were liable individually as partners for that part of the claim falling prior to the filing of
the articles.
Hall v Piccio. The Halls, Browns, Chapman and Abella signed and acknowledged articles of
incorporation of the Far Eastern Lumber and Commercial Co Inc. Pending action on the
articles, the Browns, Chapman, and Abella sued the Halls in the TC to dissolve what they
call “an unregistered partnership” because of bitter dissension, mismanagement, and fraud.
Hall questions the jurisdiction of the TC over their dispute. Judge Piccio then ordered the
dissolution of the partnership and appointed a receiver. The Halls filed a counterbond to
discharge the receiver which was denied by Piccio. I: W/N the TC had jurisdiction over the
case, considering Far Eastern Lumber was a de facto corporation which can only be
dissolved in a quo warranto proceeding in accordance with the Corpo Law. W/N the Browns,
upon signing the articles of inc, are estopped from claiming that it is not a corporation. H: (1)
the rule on de facto corps are not applicable to the case. Not having obtained the certificate
of incorporation, Far Eastern Lumber and even it stockholders cannot claim in GF to be a
corporation. It is the issuance of the certificate of incorporation that calls a corporation into
being. The immunity of collateral attack is granted to corps claiming in GF to be a
corporation. Furthermore, the corporation is not a party to the suit, it being a litigation bet
stockholders of the alleged corporation for the purpose of obtaining its dissolution. Even the
existence of a de jure corp may be terminated in a private suit between the stockholders
without need for interference by the State. The petitioners also have their remedy by
appealing the order of dissolution at the proper time. (2) Far Eastern not being a de facto
22
corp, the principle of corporation by estoppel doesn’t also apply. The complaining partners
have not represented themselves that they were incorporated, and nobody was led to
believe anything to his prejudice and damage.
Corporation by Estoppel
— In corporation by estoppel, a party is precluded or estopped from denying
corporate existence
— May apply to a third party or the alleged corporation
Section 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation. (n)
— When a 3rd person entered into a contract with an association which
represented itself a corporation, the association will be estopped from denying
its corporate personality if sued by the 3rd party
— When a 3rd person who dealt with an unincorporated association as a
corporation may be precluded from denying its corporate existence if sued by
the alleged corporation, even if he did not know about the defective
incorporation
— When business associates fraudulently misrepresent the existence of a
corporation, and a 3rd party contracts without knowledge of the defective
incorporation, the 3rd person may sue the associates as general partners
o If the business associates and the 3rd person in the above example had
no knowledge of the defective incorporation, then the 3rd person cannot
hold the associates liable as partners (i.e. personally liable)
— Estoppel also applies even in a case where the alleged corporation did not
deal with the plaintiff suing on a tort
— Difference bet de facto and estoppel:
o where all requisites of a de facto corporation are present, it will have the
status of de jure
o But if any of the requisites is absent, then estoppel may be applied only if
any of the parties is estopped from defending
ABC v Standard Products. Asia Bank is the creditor of Standard Products Co. It seeks to
recover the balance due on a promissory note issued by the latter iao P24736.47. TC ruled
IFO Asia Bank. Standard appeals, contending that ABC failed to prove affirmatively the
corporate existence of Standard.
H: GR—in the absence of fraud, a person who contracted with an association in such a way
as to recognize and admit its legal existence as a corporate body is thereby estopped to
deny its corporate existence in any action leading out of such contract or dealing, unless its
existence is attacked for causes arising since making the contract or other dealings.
Standard already recognized the corporate existence of Asia Bank by making a promissory
note in its favor and making partial payments, and is thus estopped from denying its
corporate existence.
Cranson v Int’l Business Machines. Cranson invested in a new business corp to be
created. He purchased and received stock certificates. The business was conducted as if it
were a corporation through corporate bank accounts, corporate books etc. Cranson was also
elected President of the corporation and all transactions made by him was for the account
and as officer of the corporation. However, the articles of incorporation which had been
acknowledged and signed prior to May 1 1964 were only filed on Nov 24 1961. During that
time, the Bureau purchased 8 typewriters from IBM, and partials payments had already been
made. On the theory that the Real Estate Service Bureau was neither a de jure nor a de
facto corporation and that Albion Cranson was a partner in the business and thus personally
liable for the debts, IBM sued Cranson for the balance due on electric typewriters purchased
by the Bureau. I: W/N an officer of a defectively incorporated corporation may be subjected
to personal liability under the circumstances of the case. H: No. The doctrine of de facto
corporations applies only on (1) existence of a law authorizing incorporation (2) effort in GF
to incorporate (3) actual user or exercise of corporate powers. The doctrine of estoppel to
deny corporate existence is generally employed where the person seeking to hold the officer
personally liable has contracted or otherwise dealt with the association in such a manner as
to recognize and in effect admit its existence as a corporate body. It has been generally held
that where there had been a failure to comply with a requirement which the law declared to
be a condition precedent to the existence of a corporation, the corporation was not a legal
entity and was therefore precluded from suing or being sued as such. Substantial
compliance with the formalities of corporation law, which are condition precedent to
corporate existence, was not only necessary for the creation of a corporation de jure, but
was also a prerequisite to the existence of a de facto corporation or a corporation by
estoppel. The doctrine of estoppel cannot be successfully invoked unless the corporation
has at least a de facto existence, and a de facto corporation cannot be recognized in
violation of a positive law. There is a broad distinction between those acts made necessary
by statute as a prerequisite to the exercise of corporate powers and those acts required of
individuals seeking incorporation. On the other hand, where the corporation has obtained
legal existence but has failed to comply with a condition subsequent to corporate existence,
the Court has held that such nonperformance afforded the State the right to institute
proceedings for the forfeiture of the charter, but that such neglect or omission could never be
set up by the corporation itself, or by its members and stockholders, as a defense to an
action to enforce their liabilities. It is clear that when a defect in the incorporation process
resulted from a failure to comply with a condition subsequent, the doctrine of estoppel may
be applied for the benefit of a creditor to estop the corporation, or the members or
stockholders thereof, from denying its corporate existence. Where the parties had assumed
corporate existence and dealt with each other on that basis, the Court will apply the estoppel
doctrine on the theory that the parties by recognizing the organization as a corporation were
thereafter prevented from raising a question as to its corporate existence. Where there is a
23
concurrence of the three elements necessary for the application of the de facto corporation
doctrine there exists an entity which is a corporation de jure against all persons but the
State. On the other hand, the estoppel theory is applied only to the facts of each particular
case and may be invoked even where there is no corporation de facto. Thus in the case, IBM
dealt with the Bureau as if it were a corporation and relied on its credit rather than that of
Cranson, it is thus estopped from asserting that the Bureau was not incorporated at the time
the typewriters were purchased. Cranson is therefore not personally liable for the balance of
the purchase price of the typewriters.
Salvatierra v Garlitos, et. al. Salvatierra entered into a lease contract with the Phil. Fibers
Producers Co. Inc, allegedly a corporation duly organized and registered under the laws of
RP, with Refuerzo as its president. Among the obligations in the contract were: period of
lease is 10 years; land would be planted with kenaf, ramie, or other crops; the lessor would
be entitled to 30% of net income and lessee should declare at the earliest possible time the
income derived therefrom. PFP failed to fulfill the obligations and Salvatierra sued the corp
and Refuerzo in the RTC for an accounting, rescission and damages. TC granted her
petition, but Refuerzo countered that decision was void with respect to him, there being no
allegation as to his personal liability and that while he was a signatory to the contract, he did
so in his capacity as president. TC granted his motion and released all properties levied by
its earlier judgment. Salvatierra appealed, claiming that her failure to allege his personal
liability was because all this time she was under the impression that the PFP represented by
Refuerzo was a duly registered corporation, but a subsequent inquiry with the SEC revealed
otherwise. H: GR—a person who contracted or dealt with an association in such a way as to
recognize its existence as a corporate body is estopped from denying the same in an action
arising out of such dealing… but this doctrine may not be held to be applicable where fraud
takes a part in the transaction. A stockholder cannot be held liable for any financial obligation
by the corporation in excess of his unpaid subscription. But this rule is understood to refer
merely to registered corporations and cannot be made applicable to the liability of members
of an unincorporated association. This is because such unincorporated association is
incompetent to act and appropriate for itself the powers and attributes of a corporation and
cannot create agents or confer authority. Thus those who act or purport to act as its
representatives or agents do so without authority and at their own risk. Considering that
Refuerzo was the moving spirit behind the consummation of the lease agreement by acting
as the representative of PFP, his liability cannot be limited or restricted to that imposed upon
corporate shareholders. In acting in behalf of a corporation he knew to be unregistered, he
assumed the risk of reaping the consequential damages or resultant rights if any arising out
of the transaction.
Chaing Kai Shek School v CA (172 S 389). Elementary schoolteacher Fausto Oh, a
teaching in the Chiang Kai Shek School in Sorsogon for 33 years, was summarily dismissed
from the school. In her suit against the school she demanded separation pay, SSS benefits,
and damages. She impleaded the other officials of the school. TC dismissed the complaint
but was reversed by the CA which held the school liable, but not the school officials. I: W/N a
school that has not been incorporated may be sued by reason alone of its long continued
existence. H: School may be sued. The school is governed by Act 2706 as amended by CA
180. Having recognized by the government, it was under obligation to incorporate under the
Corporation Law within 90 days from recognition. Although in existence since 1932, it had
never made any attempt to incorporate, and thus cannot invoke its own noncompliance with
the law to immunize it from Oh’s complaint. Having contracted with Oh for 32 years while
representing itself as possessed of juridical personality, the school is now estopped from
denying such personality.
LBC Express, Inc. v CA (236 S 602). Carloto, President of Rural Bank of Labason, was
instructed to fly to Manila to meet with BSP officials on the payment plan for rediscounting of
its obligations. He requested his sister to send P1000 as pocket money for the trip and
include some rediscounting papers through the petitioner LBC’s Dipolog Office. The
documents however, arrived at Carloto’s residence but without the cash. Despite follow-up,
the cash was only received after a month and after his scheduled trip to Manila. LBC claims
Carloto was not at home upon delivery and as a result the money was returned to LBC
Dipolog. Carloto claims that because of the delay in sending the money he failed to submit
the required papers and his bank was made to pay a P32000 fine. He then sued LBC for
damages, in his personal capacity, with the Rural Bank as one of the plaintiffs. TC ruled ifo
Carloto and the Rural Bank. I: W/N the Rural Bank of Labason should be awarded moral
damages. H: No. Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation. A corporation, being an artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no sense; therefore, it cannot experience
physical suffering and mental aguish. Mental suffering can only be experienced by one
having a nervous system and it flows from real ills, sorrows, and all griefs of life—all of which
cannot be suffered by the corporation.
Lozano v delos Santos (274 S452). Case involves a dispute between two leaders of
jeepney associations. Lozano is president of Kapatirang Mabalacat-Angeles JDA or
KAMAJDA while Anda is president of the Samahang Angeles-Mabalacat JODA or
SAMAJODA. The two organizations merged to form the Unified Angeles-Mabalacat JODA or
UMJODA. Lozano and Anda ran for president of the new organization and Lozano won.
Anda protested, alleging fraud and refused to recognize the results of the election. Anda also
continued collecting dues from the members of the SAMAJODA despite several demands to
desist. Lozano sues Anda in the TC, but Anda claims TC has no jurisdiction, only the SEC.
MCTC rules ifo of Lozano, but was reversed upon appeal by the RTC, which held the dispute
to be intracorporate. I: W/N the SEC or the TC has jurisdiction over the dispute. H: Not
intracorporate; SEC has no jurisdiction. The jurisdiction of the SEC is determined by two
elements: (1) status or relationship of the parties, which must arise out of intracorporate or
partnership relations between the parties (2) nature of the question which is the subject of
the controversy, which requires that the dispute be intrinsically connected with the regulation
of the corporation/association or deal with the internal affairs of the corporation. There is no
intracorporate dispute between the parties in this case, because it arose out of their plan to
consolidate their associations, which is still a proposal and has not yet been approved by the
SEC nor has the articles been submitted. Consolidation only becomes effective not upon
mere agreement of the members but only upon issuance of the certificate of consolidation by
the SEC. Thus the KAMAJDA and the SAMAJODA are two separate entities, and the
dispute of the parties in the case is not within any of the associations mentioned. It is
between members of separate and distinct associations. The doctrine of incorporation by
estoppel advance by Anda is also not applicable, which is founded on principles of equity
24
and is designed to prevent injustice and unfairness. It applies when persons assume to form
corporations and exercise corporate functions and enter into business relations with third
persons. Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation and who have knowledge that it is not incorporated, there
is no corporation by estoppel.
Lim Tong Lim v Phil. Fishing Gear Industries, Inc (317 S 728). In behalf of Ocean Quest
Fishing Corporation, Chua and Yao entered into a contract for the purchase of fishing nets
from Phil Fishing Gear Industries Inc. Lim Tong Lim was their joint venture partner but was
not a signatory to the agreement. Chua and Yao failed to pay for the nets; and PFGI sued
them and included Lim Tong Lim in their capacities as general partners, on the allegation
that Ocean Quest was a nonexistent corporation upon inquiry with the SEC, and moved to
attach their properties. Lim filed a counterclaim and crossclaim and moved for the lifting of
the writ. TC ruled ifo PFGI, holding that a partnership existed between the three. CA affirmed
the TC ruling and held that Lim is a partner of Chua and Yao and is liable as such for the
payment of the nets. Lim appeals, claiming he did directly participate in the negotiations and
was not even a signatory to the agreement, and was merely a lessor and not a partner. I: Is
Lim a partner? H: Yes. It is clear that Chua Yao and Lim together set up the fishing business,
buying boats and financed by a loan from Lim’s brother. The compromise agreement reveals
the intention to divide the excess/loss from proceeds of the sale of the boats. The boats,
financed by borrowed money, fell under the common fund which indicates the existence of a
partnership relation between the three. I: Is Ocean Quest a corporation by estoppel,
exonerating Lim from liability? H: No. The doctrine of estoppel applies only to the alleged
corporation and to the third party. As to the alleged corporation, if it represents itself to be a
corporation, will be estopped from denying it corporate capacity in a suit against it by a third
person who relied in GF on such representation. As to the third party who, having an
association to be incorporated, nonetheless treated it as a corporation and received benefits
from it, may be barred from denying its corporate existence in a suit brought against the
alleged corporation. Lim definitely benefited from the use of the nets inside the FB Lourdes,
which was found to be an asset of the partnership. Although it was never legally formed for
unknown reasons, under the law on corporation by estoppel, those acting in behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held to be
liable as general partners. Although it is also true that Lim did not directly act in behalf of the
corporation, since he reaped the benefits of the contract entered into by Chua and Yao with
whom he had an existing relationship, he is covered by the doctrine of corporation by
estoppel.
Int’l Express Travel v CA (343 S 674). Kahn is the president of the Phil Football
Federation. He contracted with the International Express Travel for the travel arrangements
for the football team to compete in the SEA Games in KL, including matches in China and
Australia. Amount due to the travel agent reached P449654.83, of which P176467.50 were
paid. Kahn also paid P50000 from his personal funds. The remaining balance being
unsatisfied, the travel agent sued Kahn both in his personal and official capacity as well as
the Federation in the RTC. Kahn claims he merely acted as agent for the Federation, and
that the Federation being a corporation, he should not be liable. CA overrules TC and
exonerates Kahn, while recognizing the corporate existence of the Federation. I: Is the
Federation a corporation? If not, is it at least a corporation by estoppel? H: No. Although the
Federation derives its existence from RA 3135 or the Charter of the Phil Amatuer Athletic
Assoc and PD 604 which recognized the juridical existence of national sports associations,
such corporate status does not automatically take effect by the mere passage of the laws.
This is because before the corporation may acquire juridical personality, the State must give
its consent either in a special law or a general enabling act. The laws cited merely
recognized the existence of the associations and provided the manner by which they acquire
juridical personality. Such entity must first be recognized by the accrediting organization
(PAAF and the Dept of Youth and Sports Devt. The bylaws presented by Kahn does not
prove that the Federation has indeed been recognized and accredited. Thus, Kahn, falling
under a person acting or purporting to act in behalf of the corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable for
contracts entered into as its agent. It also does not fall under a corporation by estoppel,
which was mistakenly applied by Kahn. It applies only to a third party when he tries to
escape liability on a contract from which he had benefited on the irrelevant ground of
defective incorporation.
Loyola Grand Villas Homeowners south Assoc Inc (South Assoc) v CA (276 S 681).
LGVHAI is the association of homeowners and residents of the Loyola Grand Villas, duly
registered with the HIGC as the sole homeowners assoc in the LGV, but did not file its
corporate by-laws promptly. When it did attempt to file, 2 other assoc were already in
existence—the North Assoc and the South Assoc—each with 5 registered homeowners who
were also incorporators and officers thereof. HIGC claims the LGVHAI has been
automatically dissolved for its failure to file its corporate by-laws and non-user of the
corporate charter. LGVHAI files a complaint with the HIGC, which the latter recognizes in its
ruling and revokes the certificates of registration of the North and South Assoc. South
appeals to Appeals Board of HIGC, and upon dismissal, appeals with CA. CA dismisses
appeal, holding that although the Corpo Code does not provide for automatic dissolution of
the corporation as a result of delay in filing of by-laws, the SEC has the power to suspend or
revoke certificates of registration, one of the grounds of which is failure to file by-laws. But
since there was no showing the LGVHAI’s registration was validly revoked, it continued to be
the recognized assoc in LGV. I: W/N LGVHAI’s failure to file its by-laws within the period
prescribed by the Corpo Code had the effect of automatically dissolving the corporation? H:
No. Sec 46 requiring filing of bylaws reveals the legislative intent to attach a directory, not a
mandatory, meaning of the word “must.” By-laws may be necessary for the government of
the corporation but these are merely subordinate to the articles of incorporation as well as to
the Corpo Code and related statutes. In some cases, the by laws were considered
unnecessary to corporate existence or to the valid exercise of corporate powers. The failure
to exercise the power will be ascribed to mere non-action and will no render void any acts of
the corporation which are otherwise valid. There can also be no automatic dissolution
without notice and compliance with the requirements of due process. The Court also
stressed that substantial compliance are mere conditions subsequent and not prerequisites
for acquisition of corporate responsibility.
Internal Organization of Corporation
25
1. By-laws
Contractual significance
— By-laws are the product of the agreement of the SH or members and establish
the rules for the internal government of the corporation
— By-laws are subordinate to the AOI, Corpo code and the related statutes
— If by-laws are inconsistent with any of these, it has no binding effect
— Power to adopt and amend by-laws is an inherent power of every corporation
(Gokongwei case)
— Unlike AOI, are meant to be an intramural document to govern the relationship
between and among members of a corporate family
— Intended for the protection of the corporation and prescribes regulations, not
restrictions
— GR: although the power to adopt by-laws is an inherent right, the by-laws
cannot contravene the law (El Hogar case)
o Validity or reasonableness of the by-laws is a question of law (Gokongwei
case)
— Provisions of AOI prevail over the by-laws
— Board of Liquidators vs. Kalaw: it is possible for an express provision of the
by-law to be violated and the board may, in certain corporate actions, bind the
corporation despite it being contrary to the by-laws
o Whether through board action or authorization or through ratificatory act
of the SHs, so long as there is corporate approval through the board, be it
implied or express, it is valid to bind the corporation
— GR: 3rd persons are not bound by the by-aws
o Exception: where they have actual or constructive knowledge
Section 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
-- x X x --
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code
-- x X x --
TITLE V - BY LAWS
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)
Requisites of by-laws:
(1) By-law provisions cannot contravene law
(2) By-law provisions cannot contravene the AOI
(3) By-laws must be reasonable and cannot discriminate
Procedure for Adoption of by-laws (Sec. 46):
— Within one (1) month after receipt of official notice of issuance of certificate of
incorporation
o Loyola Grand villas case: Sec 46 is merely directory, and thus failure to
file by-laws within the period does not imply the demise of the
corporation, but is a mere ground for the SEC to revoke the certificate
— It may also de adopted and filed prior to incorporation…
o …must be approved, signed by all incorporators and filed with the SEC
together with the articles
— vote required to adopt: at least majority of outstanding capital stock or
members of non-stock corp
— signed by SHs and kept in principal office
— certified copy filed with SEC attached to AOI
— becomes effective only upon issuance of the SEC certification
26
— Code allows adoption and filing of by-laws even prior to incorporation, but
must be approved by ALL incorporators and submitted to the SEC together
with the AOI
— By-laws may be submitted within one (1) month after receipt of notice of
issuance of the certificate of incorporation
o Failure to do so may result in suspension or revocation of certificate
— SEC may disapprove by-laws which are inconsistent with law
— Sec 46 provides clearly that in ALL cases, the by-laws shall be effective only
upon issuance by the SEC of a certification that these are not inconsistent
with law
— Once approved by the SEC, by-laws will bind the corporation, and all SHs
and members including those who voted against the adoption
—
Basic Contents of By-Laws:
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
Matters that must appear in BOTH AOI and BLs:
(a) restrictions on right to transfer shares in close corporations (98)
10. Such other matters as may be necessary for the proper or convenient transaction of its
corporate business and affairs. (21a) Matters that CANNOT be in the by-laws:
(a) classification of shares and preferences to preferred shares
— Sec 47 enumerates matters which may be included in the by-laws (b) founders shares
— By-laws may provide for the time, place and manner of directors meetings (c) redeemable shares
— By-laws may provide for time and manner of SH meetings (place of SH (d) purposes of the corporation
meeting is fixed by law at the principal office of the corporation (e) corporate term of existence
— Code requires the by-laws provide for at least three (3) officers: (f) capitalization of stock corporations
o President (g) corporate name
o Secretary (h) denial of pre-emptive rights
o Treasurer
o Additional officers Amendments to By-Laws

Other matters that may be included in by-laws:

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
(a) designation of time when voting rights may be exercised by SH
majority of the members of a non-stock corporation, at a regular or special meeting duly
of record (24) called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners
(b) providing for additional officers (25) of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a
(c) provisions for compensation of directors (30) non-stock corporation may delegate to the board of directors or trustees the power to amend
(d) creation of an executive committee (35) or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the
(e) date of annual meeting or provisions for a special meeting of board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be
SHs/members (50 & 53) considered as revoked whenever stockholders owning or representing a majority of the
(f) quorum on meetings of SHs/members (52) outstanding capital stock or a majority of the members in non-stock corporations, shall so
(g) providing for presiding officer at meetings of directors/trustees vote at a regular or special meeting.
and of SHs/members (54)
(h) procedure for issuance of stock certificates (63)
(i) providing for interest on unpaid subscriptions (66) Whenever any amendment or new by-laws are adopted, such amendment or new by-laws
(j) entries to be made in stock and transfer book (74) shall be attached to the original by-laws in the office of the corporation, and a copy thereof,
(k) providing for meetings of members outside the principal office duly certified under oath by the corporate secretary and a majority of the directors or
(24) 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.
Other matters that may be included in either the AOI or the by-laws:
The amended or new by-laws shall only be effective upon the issuance by the Securities and
(a) cumulative voting in non-stock corporations Exchange Commission of a certification that the same are not inconsistent with this Code.
(b) higher quorum for valid board meeting (22a and 23a)
(c) limiting, broadening or denial of right to vote and voting by
proxy, for non-stock corporations — who can amend by-laws:
(d) transferability of membership in non-stock corps o owners of at least a majority of outstanding capital stock or members of
(e) termination of membership in non-stock corps non-stock corp
(f) manner of election and term of office of trustees and officers in — 2/3 of outstanding capital stock or members may delegate to the board the
non-stock corps power to amend or repeal by-laws
(g) manner of distribution of assets in non-stock corps upon o only then can the board amend by majority vote
dissolution — In the Kalaw case, the SC held that contract entered into without strict
(h) staggered board in educational institutions compliance with the by-laws may, due to long acquiescence and usage, be

27
 binding on the corporation, which may be deemed to have waived such
compliance.
— In the Fleischer, since by-laws operate merely as internal rules among SHs,
they cannot affect or prejudice 3rd persons who deal with the corporation,
unless they have knowledge of the same
Fleischer v Botica Nolasco. Fleischer was the owner and transferee, for valuable
consideration, of 5 shares of stock of the Botica Nolasco Corp, transferred to him by the
original owner. The Corporation however invokes Article 12 of its corporate by-laws, which
effectively gives the corporation a preferential right of the shares in question. It claims it has
a preferential right to buy the shares from the original owner. When Fleischer requested
Botica to register his shares, the latter refused, and Fleischer sues in the TC. TC ruled ifo
Fleischer, holding that the questioned Art 12 is in direct conflict with Sec 13 of Act 1459. I:
W/N Art 12 of the by-laws of the corporation is in direct conflict with the Corporation Law? H:
Yes. The Corpo Law at the time provides in Sec 13 that every corporation has the power to
make their own by-laws, provided they are not inconsistent with any existing law, governing
among others the transfer of its stock. This section does not contemplate any restriction on
how and to whom the shares may be transferred or sold, nor does it suggest any
discrimination ifo or against a certain purchaser. The holder of these shares, as owner of
personal property, is at liberty to dispose of them to anyone he pleases, without any
limitation other than in the general law. Every owner of corporate shares has the same
uncontrollable right to alienate them which attaches to the ownership of any other species of
property. Furthermore the SC says Sec 13 should be harmonized with Sec 35 of the same
law, which requires that shares of capital stock are personal property transferable by delivery
of the certificate indorsed by the transferor-owner. For a transfer to be valid, it should be
entered into the books of the corporation. GR is that bylaws of a corporation are valid if they
are reasonable and calculate to carry into effect the objectives of the corporation, and always
within the limits of the charter. They must be subordinate to the Constitution and the laws of
the land, must not infringe public policy or be hostile to public welfare, must not disturb
vested rights or impair obligations of contracts. It cannot take away or abridge the substantial
rights of a stockholder. Under the statute authorizing by-laws for the transfer of stock, a
corporation can do no more than prescribe a general mode of transfer on the corporate
books and cannot justify an unreasonable restriction upon the right of sale. The right of
unrestrained transfer of shares inheres in the very nature of a corporation. The right to
impose restrictions on transfer of shares must be conferred upon the corporation be the
governing statute or by the articles of incorporation. It cannot be done by a by-law without
statutory or charter authority. Therefore by-laws or other regulations restraining such
transfers, unless derived from statutory authority, would be regarded as impositions in
restraint of trade.
The by-law in question cannot also have any effect on Fleischer, since he had no knowledge
of the by-law when the shares were transferred to him and obtained the same in GF and for
value. When no restriction is placed by law on the transfer of corporate stock, a purchaser is
not affected by any contractual restriction of which he had no notice or wasn’t aware. A by-
law of a corporation which provides that transfer of stock shall not be valid unless approved
by the board for instance, or any other restriction imposed, while it may be enforced as a
reasonable regulation for the protection of the corporation against worthless stockholders,
28
cannot be made available to defeat the rights of third persons. Mandamus will lie in favor of
Fleischer to compel the Treasurer of Botica to register his shares.
Gov’t of Phils. V El Hogar. (for the facts, goto corporate powers section) I: W/n the by-laws
of el Hogar, which empowers the board to cancel shares and return to the owner the balance
resulting from the liquidation, by a vote of absolute majority of the members.
H: The by-law provision is an absolute nullity, since it is in direct conflict with the Code which
declares that the board shall not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation of the corporation or forfeiture of stock. While it
is a nullity, it is insufficient to necessitate the involuntary dissolution of the corporation
through a quo warranto proceeding. It cannot be enforced even if the directors were to
attempt to do so.
I: W/n a by-law provision which allows directors to fill vacancies in the directorate by
choosing suitable persons from among the SHs to avert a failure of a quorum in SH meetings
is valid
H: The practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to the personality of individuals chosen
by the directors to fill the vacancies in the body.
I: W/n a by-law provision which authorizes the distribution to the directors of el Hogar 5% net
profit in proportion to their attendance at board meetings is valid
H: The Corporation Law does not undertake to prescribe the rate of compensation for the
directors of the corporation. The power to fix compensation is left to the corporation itself, to
be determined in its by-laws. Pursuant to this statutory authority, el Hogar has fixed the
compensation for its directors in its by-laws. If a mistake has been made, or the rule adopted
in the byaws has been found to work harmful results, the remedy is in the hands of the SHs
who have the power at any lawful meeting to change the rule.
I: W/n 2 by-law provisions which require (1) persons elected to the board be holders of
shares with a paid-up value of P5K and (2) that directors who loan from the association
waive their right as SHs are valid
H: the Code specifically gives power to the corporation to provide in its by-laws for the
qualifications of directors, and the requirement of security from them for the proper discharge
of the duties of their office, is highly prudent and in conformity with good practice. The code
also has safeguards on directors from making loans to themselves, designed to prevent the
possibility of looting of the corporation. The by-law provision is consistent with the code on
this one. Valid.
2. Election of directors and officers; commencement of business
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.
— “formally organize” includes not only adoption of by-laws but also the
establishment of the Board of Directors which will administer the affairs of the
corporation and exercise its powers
— the AOI names the initial members of the Board who are to act until the 1st set
of directors are duly elected and qualified
o this interim board can perform the functions of a regular board until the
date of the election of directors
o once elected, the directors must complete the organization of the
corporation by electing the officers
Section 25. Corporate officers, quorum. - Immediately after their election, the directors of a
corporation must formally organize by the election of a president, who shall be a director, a
treasurer who may or may not be a director, a secretary who shall be a resident and citizen
of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2)
or more positions may be held concurrently by the same person, except that no one shall act
as president and secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them
by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or trustees present at a meeting at
which there is a quorum shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
— after approval of by-laws, and the directors and offices elected, the
corporation is ready to commence business
— it must do so within 2 years from date of incorporation;
o otherwise, its corporate powers will cease and will be deemed dissolved
3. Annual financial statements
— Once organized, a corporation is required to keep proper accounting records
and to file financial statements with the SEC annually
29
Chapter IV – The Corporate Entity
Theory of Corporate Entity: Its effects
— A corporation has a juridical personality separate and distinct from the SHs or members
who compose it
— Issuance of certificate of incorporation marks beginning of the corporation’s existence
as a legal entity
Section 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical personality
and is deemed incorporated from the date the Securities and Exchange Commission issues
a certificate of incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic and corporate
under the name stated in the articles of incorporation for the period of time mentioned
therein, unless said period is extended or the corporation is sooner dissolved in accordance
with law. (n)
— Not affected by personal rights, obligations, and transactions
— Stockholders have no claim on corporate property as owners—they only have an
inchoate right to it
— A corporation has no interest in the individual property of its stockholders, unless
transferred to the corporation
— A corporation, as a juridical person, is entitled to immunity against unreasonable search
and seizure
— A corporation is civilly liable for torts in the same manner
Stockholders of F Guanzon v Register of Deeds. 5 stockholders of F Guanzon executed
a certificate of liquidation of the assets of the corporation. By virtue of a resolution dissolving
the corporation, they wish to distribute as liquidated dividends among themselves and in
proportion to their shareholdings, the assets of the corporation, which includes real estate
properties in Manila. The Register of Deeds however, upon presentment of the certificate of
liquidation by the 5 stockholders, denied registration of the properties to be distributed on 7
grounds, 3 of which were questioned by the stockholders: (1) no statement of the # of
parcels of land to be distributed (2) registration fees iao P430.50 (3) doc stamp tax iao
P940.45 (4) court judgment approving the dissolution and directing disposition of the assets.
The stockholders claim that the certificate of liquidation merely partitions/distributes the
corporate assets among them because the corporation has already been dissolved. Hence
they need not comply with the requirements imposed by the Register of Deeds and the Land
Registration Authority. The LRA counters that the distribution of the corporate assets upon
dissolution of the corporation, is ultimately a transfer/conveyance of property to the
stockholders: W/N the certificate of liquidation involves a mere distribution of corporate
assets or a transfer or conveyance of property.
H: It is a transfer/conveyance of property. A corporation is a juridical person separate and
distinct from the stockholders. Properties registered in the name of the corporation are
owned by it as a separate entity. The shares held by stockholders are their personal property
and not the corporation, and it only typifies an aliquot part of the corporation’s property or the
right to share in the proceeds. The holder of such share is not the owner of any part of the
capital of the corporation, nor is he entitled to possession of any definite portion of its assets,
neither is he a co-owner. Liquidation by stockholders after a corporation’s dissolution is not
mere partitioning of community property, but already a conveyance or transfer of title to them
from the corporation.
— The distribution of the corporate properties to the SHs was deemed not in the nature of
a partition among co-owners, but rather a disposition by the corporation to the SHs as
opposite parties to a contract
— Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members;
— shares of stock are personal property, and NOT corporate property
— share of stock typifies an aliquot part of the corporation’s property, or the right to share
in the proceeds to that extent when distributed
— holder of shares is not the owner of any part of the capital of the corporation, nor is he
entitled to the possession of any definite portion of its property or assets
Caram v CA. A certain Barretto and Garcia contracted the services of respondent Arellano
for his technical services to undertake a project study for the formation of a corporation, the
Filipinas Orient Airways. The study was then presented to Caram, who wanted to invest in
the corporation. The airline was eventually organized on the basis of the project study with
Caram spouses as major stockholders, and Barretto and Garcia as corporate officers.
Arellano sued for compensation due to him for his services in undertaking the study. TC
ruled that Caram spouses are liable jointly and severally with Barretto and Garcia for P50K
due to Arellano. Caram spouses claim they were mere investors in the fledgling airline and
were not involved in its formation nor in the project study, which was merely presented to
them to induce them to invest.
I: W/N Caram spouses are solidarily liable with Barretto and Garcia for the compensation to
Arellano.
H: No. Filipinas Orient is a bona fide corporation, the principal stockholders of which are the
Carams. As such, the corporation, should alone be liable for its corporate acts as duly
authorized by its officers. It has a separate juridical personality and its principal stockholders
should not be liable for the acts thereof. The Carams did not contract the services of
Arellano; it was only the results of the study made by Arellano that was presented to them to
induce them to invest.
Palay Inc v Clave. Palay Inc. through its President Onstott executed ifo Dumpit a contract to
sell a parcel of land in Crestview Heights Subd in Antipolo for P23300, with 9% interest,
payable with a downpayment and monthly installments. The contract contains a provision
that should Dumpit default in payment of any monthly installment after the lapse of 90 days
from the expiration of the 1 month grace period, Palay Inc will automatically rescind the
contract without need of notice and will forfeit all payments made. Dumpit paid the
downpayment and made several payments, but soon defaulted. 6 years after the last
payment, Dumpit wanted to update all his overdue accounts, but was told by Palay Inc that
the contract had already been rescinded in accordance with the contract and the land had
already been sold. Dumpit filed a complaint with the NHA which held the contract void for
absence of judicial or notarial demand and instructed Palay Inc and Onstott to return to
30
Dumpit all he has paid plus 12% interest from filing of complaint. Palay appealed to OP
which affirmed the NHA resolution.
I: W/N Onstott should be held solidarily liable with Palay Inc
H: No. GR—a corporation may not be made to answer for acts and liabilities of its
stockholders or those of the legal entities to which it may be connected and vise-versa.
Exception—the veil of corporate fiction may be pierced when:
1. it is used as a shield to further an end subversive of justice
2. it is used for purposes not intended by the law that created it
3. it is used to defeat public convenience, or:
4. justify a wrong
5. protect fraud
6. defend crime
7. perpetuate frad or confuse legitimate issues
8. circumvent the law or perpetuate deception
9. use as an alter-ego, adjunct or business conduit for the sole benefit of the
stockholders
the SC did not find any badges of fraud on the part of Palay and Onstott. They had literally
and mistakenly relied on paragraph 6 of the contract when it rescinded the same, and which
was held to be void by the NHA and OP. Onstott was made liable because he was then the
President and appeared to be the controlling stockholder of Palay Inc. No proof was found
that Onstott used the corporation to defraud Dumpit. Unless sufficient proof appears on
record that an officer has used the corporation to defraud a third party, he cannot be made
personally liable just because he appeared to be the major stockholder. Mere ownership by
a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate
personality.
JG Summit Holdings Inc v CA. The National Investment and Development Corporation
(NIDC), a government corporation, entered into a Joint Venture Agreement (JVA) with
Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation
and management of the Subic National Shipyard, Inc. (SNS) which subsequently became
the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC
and KAWASAKI will contribute P330 million for the capitalization of PHILSECO in the
proportion of 60%-40% respectively. It also contains a proviso whereby neither party to the
JVA shall sell transfer or assign all or any part of its interest in SNS to any third party without
giving the other under the same terms the right of first refusal. NIDC transferred all its rights,
title and interest in PHILSECO to the Philippine National Bank (PNB). Such interests were
subsequently transferred to the National Government pursuant to Administrative Order No.
14. On December 8, 1986, President Corazon C. Aquino issued Proclamation No. 50
establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to
take title to, and possession of, conserve, manage and dispose of non-performing assets of
the National Government. Thereafter, on February 27, 1987, a trust agreement was entered
into between the National Government and the APT wherein the latter was named the
trustee of the National Government's share in PHILSECO. In 1989, as a result of a quasi-
reorganization of PHILSECO to settle its huge obligations to PNB, the National
Government's shareholdings in PHILSECO increased to 97.41% thereby reducing
KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the COP and the APT deemed it
best to sell the National Government's share in PHILSECO to private entities. After a series
of negotiations between the APT and KAWASAKI, they agreed that the latter's right of first
refusal under the JVA be "exchanged" for the right to top by five percent (5%) the highest bid
for the said shares. They further agreed that KAWASAKI would be entitled to name a
company in which it was a stockholder, which could exercise the right to top. On September
7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI) 1 would exercise its
right to top. The Asset Specific Bidding Rules provide among others that the subject of the
sale is the NG's 87.67% equity in PHILSECO, that the highest bid shall be subject to the final
approval of the APT Board of Trustees and COP, and that the indicative price is P1.3B.
At the public bidding, JG Summit submitted a bid of P2.03B with an acknowledgement of
Kawasaki's right to top. JG Summit then informed APT that it was protesting the offer of PHI
to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of
KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the
ASBR because the last four (4) companies were the losing bidders thereby circumventing
the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the
right to top; (c) giving the same option to top to PHI constituted unwarranted benefit to a third
party; (d) no right of first refusal can be exercised in a public bidding or auction sale; and (e)
the JG Summit consortium was not estopped from questioning the proceedings.
H: The SC upheld the validity of the mutual rights of first refusal under the JVA between
KAWASAKI and NIDC. First of all, the right of first refusal is a property right of PHILSECO
shareholders, KAWASAKI and NIDC, under the terms of their JVA. This right allows them to
purchase the shares of their co-shareholder before they are offered to a third party. The
agreement of co-shareholders to mutually grant this right to each other, by itself, does not
constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos
and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the
right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain
the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy
Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee
or such other party which the holder of the right of first refusal feels it can comfortably do
business with. Alternatively, PHILSECO may divest of its landholdings, in which case
KAWASAKI, in exercising its right of first refusal, can exceed 40% of PHILSECO's equity. In
fact, it can even be said that if the foreign shareholdings of a landholding corporation
exceeds 40%, it is not the foreign stockholders' ownership of the shares which is adversely
affected but the capacity of the corporation to own land — that is, the corporation becomes
disqualified to own land. This finds support under the basic corporate law principle that the
corporation and its stockholders are separate juridical entities. In this vein, the right of first
refusal over shares pertains to the shareholders whereas the capacity to own land pertains
to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of
their right of first refusal. No law disqualifies a person from purchasing shares in a
landholding corporation even if the latter will exceed the allowed foreign equity, what the law
disqualifies is the corporation from owning land. This is the clear import of the Constitution.
Tramat Mercantile Inc v CA. On 09 April 1984, Melchor de la Cuesta, doing business under
the name and style of "Farmers Machineries," sold to Tramat Mercantile, Inc. (Tramat), one
31
(1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel engine. In
payment, David Ong, Tramat's president and manager, issued a check for P33,500.00
(apparently replacing an earlier postdated check for P33,080.00). Tramat, in turn, sold the
tractor, together with an attached lawn mower fabricated by it, to the Metropolitan
Waterworks and Sewerage System ("NAWASA") for P67,000.00. David Ong caused a stop
payment of the check when NAWASA refused to pay the tractor and lawn mower after
discovering that, aside from some stated defects of the attached lawn mower, the engine
(sold by de la Cuesta) was a reconditioned unit. On 28 May 1985, de la Cuesta filed an
action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the
costs of suit. Ong, in his answer, averred, among other things, that de la Cuesta had no
cause of action; that the questioned transaction was between plaintiff and Tramat Mercantile,
Inc., and not with Ong in his personal capacity; and that the payment of the check was
stopped because the subject tractor had been priced as a brand new, not as a reconditioned
unit. TC ordered Ong to pay the plaintiff the sum of P33,500.00 with legal interest thereon at
the rate of 12% per annum from July 7, 1984 until fully paid.
H: It was an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta
under the questioned transaction. Ong had there so acted, not in his personal capacity, but
as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it
should only be the corporation, not the person acting for and on its behalf, that properly
could be made liable thereon. Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may so validly attach, as a rule, only
when —
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or (c) for
conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; 6 or
4. He is made, by a specific provision of law, to personally answer for his corporate action.
In the case at bench, there is no indication that petitioner David Ong could be held
personally accountable under any of the abovementioned cases.
Magsaysay-Labrador v CA. On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow
and special Administratrix of the estate of the late Senator Genaro Magsaysay, brought an
action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas
Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her
complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a
parcel of land with improvements, known as "Pequeña Island"; that after the death of her
husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was
acquired by her husband from his separate capital;" [b] the registration of a Deed of
Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of
SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the
name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the
amount of P2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the foregoing
acts were void and done in an attempt to defraud the conjugal partnership considering that
the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not
obtained, the change made by the Register of Deeds of the title holders was effected without
the approval of the Commissioner of Land Registration and that the late Senator did not
execute the purported Deed of Assignment or his consent thereto, if obtained, was secured
by mistake, violence and intimidation. She further alleged that the assignment in favor of
SUBIC was without consideration and consequently null and void. She prayed that the Deed
of Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be
ordered to cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for
intervention on the ground that on June 20, 1978, their brother conveyed to them one-half
(1/2) of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of
around 41% of the total outstanding shares of such stocks of SUBIC, they have a substantial
and legal interest in the subject matter of litigation and that they have a legal interest in the
success of the suit with respect to SUBIC.
On July 26, 1979, the TC denied the motion for intervention, and ruled that petitioners have
no legal interest whatsoever in the matter in litigation and their being alleged assignees or
transferees of certain shares in SUBIC cannot legally entitle them to intervene because
SUBIC has a personality separate and distinct from its stockholders. The CA upheld the TC
and further stated that whatever claims the petitioners have against the late Senator or
against SUBIC for that matter can be ventilated in a separate proceeding, such that with the
denial of the motion for intervention, they are not left without any remedy or judicial relief
under existing law.
H: Attempts by stockholders to intervene in suits against their corporations as in this present
case were struck down by the SC. A party may intervene under remedial provisions if the
stockholder has a legal interest in the matter in litigation; but stockholders’ right in corporate
property is purely inchoate and will not entitle them to intervene in a litigation involving
corporate property. A majority stockholder’s interest in the corporate property, if at all, is
indirect, contingent, remote, conjectural, consequential, and collateral. At the very least, their
interest is purely inchoate, or in sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in the properties and assets thereof upon
dissolution, after payment of corporate debts and obligations. While a stock represents a
proportionate or aliquot interest in the property of the corporation, it does not vest the owner
with any legal right or title to any of the property, his interest in the corporation being
equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate
property, which is owned by the corporation as a distinct person.
Disregarding Corporate Entity/Piercing the Veil of Corporate Entity
— the privilege of being treated as an entity distinct and separate from the stockholders is
confined to legitimate uses and is subject to equitable limitations to prevent its being
exercised for fraudulent, unfair or illegal purposes
— in piercing cases, it is always important to consider that the aim is not to use the
piercing doctrine as “a ram to break down the ramparts of the main doctrine of separate
juridical personality, but more properly for the ancillary piercing doctrine to act as a
regulating valve by which to preserve the powerful engine that is the main doctrine of
separate juridical personality
32
— the main effect of disregarding the corporate fiction is that stockholders will be held
personally liable for the acts and contracts of the corporation whose existence, at least
for the purpose of the particular situation involved, is ignored
— not to be confused with the de facto doctrine, where it may be presumed that the
corporation is de jure or even de facto and therefore not subject to collateral attack
— when the court disregards the corporate entity in a proper case, it is not denying
corporate existence for all purposes, but merely refuses to allow the corporation to use
the corporate property
— Piercing is to prevent fraud or a wrong, and not for any other purpose
— where no fraud or injustice would be prevented as to make directors and officers
liable personally, doctrine does not apply
— Boyer-Roxas: piercing cannot be used or resorted to merely establish a right or
interest, and the SC denied piercing when it was employed to justify under a theory
of co-ownership the continued use and possession by SHs of corporate properties
— In all piercing cases, the effect has always been to make the active or intervening SH or
officer liable for corporate debts and obligations
Classification of piercing cases:
(1) To commit FRAUD or justify a wrong, or defend a crime (Villa Rey, Palay, Concept
Builders)
a. There must be a fraud or evil motive in the affected transaction; mere
proof of control of the corporation—by itself—would not justify piercing
b. Main action should seek for the enforcement of pecuniary claims
c. Corporate entity was used in the perpetration of the fraud or in the
justification of wrong or to escape personal liability
(2) as an ALTER EGO, business conduit of another person or entity, or mere farce to
defeat public convenience (La Campana, Marvel, Liddell, Koppel, Indophil)
a. use of corporation as an alter ego is in direct violation of the separate
juridical entity doctrine
b. by not respecting the separate personality, others who deal with the
corporation are not also expected to be bound by the separate
personality of the corporation, and may treat the interests of the
controlling SH/officer/director and the corporation as the same
c. piercing alter ego may prevail even when no pecuniary claims are sought
to be enforced
d. since only the medium by which the business enterprise is changed, then
the veil may be pierced to allow the business creditors to recover from
whoever has actual control
(3) necessary to achieve EQUITY or justice
Cases where veil was pierced:
Marvel Bldg v David (corporate entity used to evade war profits taxes). On the strength of a
report by a special committee in the DoF tasked to study the war profits tax case of Mrs
Maria Castro, President of Marvel Building Corporation, who is allegedly the single owner of
all the capital stock of the Corporation, the SoF recommended the collection of around P3.6
million as war profits tax due to the government and instructed the CIR to collect the same.
The CIR then seized various properties of Marvel, including 3 properties (Wise Bldg,
Aguinaldo Bldg, Dewey Mansion). Marvel sued CIR, and TC ruled ifo of Marvel, ordering the
release of the seized properties and enjoined the auction of the same. CIR appeals. I: W/N
Maria Castro the owner of all shares of stock of Marvel Building Corp and the other
stockholders mere dummies.
H: Yes. The following findings of the SC proved that Castro was the sole and exclusive
owner and that the other persons name in the articles of incorporation are mere dummies:
(1) Castro endorsed in blank the shares of stock in the name of the other incorporators
and maintained it in her possession. Upon examination of the books the CIR
discovered that 11 stock certificates endorsed in blank by the subscribers except
that of Ms Castro. She admitted however, signing 25 certificates of stock, which
indicates that 2 sets of certificates was prepared by the company bookkeeper
Llamado, with out only the 11 mentioned were actually issued.
(2) The dummy stockholders did not have incomes in such amounts in the certificates
during the time of the organization of the corporation or after in order to enable
them to pay in full for their subscriptions. It appears that all of the dummies have
incomes which are insufficient to pay for the subscribed share of the stock. On the
other hand, Maria Castro had been found to have made enormous profits in the
business such that the taxes assessed amounted to more than P3 million.
(3) The subscriptions were not receipted for and were deposited in the corporation
name but kept in Castro’s possession
(4) The stockholders or directors never appeared to have met to discuss the business
of the corporation
(5) Castro had advance large sums of money to the corporation without any
accounting and that the books were kept as if they belonged to Castro alone
(6) The supposed subscribers did not appear in court to support their claim, nor did
they present any documentary evidence such as receipts and testify on the
payments made on the subscriptions.
Jacinto v CA. F: The case involves an appeal by Roberto Jacinto from the ruling of the CA
affirming the ruling of the TC in finding him liable to pay the outstanding obligation to
Metrobank as evidenced by trust receipts signed by Jacinto in behalf of Inland Industries.
The TC said that “[a]s to [the] liability of [the] defendant Roberto A. Jacinto, it would appear
that he is in fact, the corporation itself known as Inland Industries, Inc.” Aside from the fact
that he is admittedly the President and General Manager of the corporation and a substantial
stockholders (sic) thereof, it was defendant Roberto A. Jacinto who dealt entirely with the
plaintiff in those transactions. In the Trust Receipts that he signed supposedly in behalf of
Inland Industries, Inc., it is not even mentioned that he did so in this official capacity. Roberto
Jacinto, tried to escape liability and shift the entire blame under the trust receipts solely and
exclusively on Inland Industries, asserting that he cannot be held solidarily liable with Inland
Industries because he just signed said instruments in his official capacity as president of
Inland Industries, Inc. and it has a juridical personality distinct and separate from its officers
and stockholders. Furthermore, a cursory perusal of the stipulation of facts clearly shows
that Roberto Jacinto acted in his capacity as President and General Manager of Inland
33
Industries, Inc. when he signed said trust receipts. The conflicting statements by Jacinto
place in extreme doubt his credibility anent his alleged participation in said transactions and
the CA was persuaded to agree with the findings of the lower court that the Jacinto was
practically the corporation itself. Indeed, a painstaking examination of the records show that
there is no clear-cut delimitation between the personality of Roberto Jacinto as an individual
and the personality of Inland Industries, Inc. as a corporation.
The circumstances aforestated led the CA to conclude that the corporate veil that en-
shrouds defendant Inland Industries, Inc. could be validly pierced, and a host of cases
decided by our High Court is supportive of this view. When the veil of corporate fiction is
made as a shield to perpetuate fraud and or confuse legitimate issues, the same should be
pierced. The CA ruled that Roberto Jacinto even admitted that he and his wife own 52% of
the stocks of Inland Industries, and it cannot accept as true the assertion of Jacinto that he
only acted in his official capacity as President and General Manager of Inland Industries, Inc.
when he signed the aforesaid trust receipts. Jacinto’s ploy is just a clever ruse and a
convenient ploy to thwart his personal liability therefor by taking refuge under the protective
mantle of the separate corporate personality of Inland Industries. His appeal now faults the
TC for piercing the veil of corporate fiction despite the absence of any allegation in the
complaint questioning the separate identity and existence of Inland Industries, Inc.
H: While on the face of the complaint there is no specific allegation that the corporation is a
mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the
presentation of evidence and the examination of witnesses, unequivocably show that
respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the
corporation are one or that he is the corporation. No serious objection was heard from
petitioner.
(It was held that the piercing doctrine may be applied by the courts even when the complaint
does not seek its enforcement, so long as evidence is adduced during trial as the basis for
its application can be had. In other words, there must be evidentiary basis for application of
the piercing doctrine during trial on the merits.)
Concept Builders v NLRC. Petitioner Concept Builders, Inc., a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the
construction business. Private respondents were employed by said company as laborers,
carpenters and riggers.
On November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981. It was stated in
the individual notices that their contracts of employment had expired and the project in which
they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of
private respondent's employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice
and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
petitioner.
H: SC summarized the probative factors considered when the corporate mask may be lifted
and the corporate veil may be pierced, when a corporation is but the alter ego of a person or
of another corporation:
(1) stock ownership by one or common ownership of both corporations
(2) identity of directors and officers
(3) manner of keeping corporate books and records
(4) methods of conducting the business.
The Court held that the conditions under which the juridical entity may be disregarded very
according to the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly there are some probative factors of identity that will justify
the application of the piercing doctrine.
The Court also applied the following tests in determining the applicability of the piercing
doctrine:
(1) control, not mere majority of complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked
(2) such control must have been used to commit fraud or wrong, to perpetuate the
violation of statutory or other positive legal duty, or dishonest and unjust act in
contravention of legal rights
(3) the aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of
The absence of any of these elements prevents the piercing doctrine. In applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant’s relationship to that operation. In
this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange
Commission on May 15, 1987, stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on
the same day, a similar information sheet stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila. Furthermore, the NLRC stated that: "Both information
sheets were filed by the same Virgilio 0. Casiño as the corporate Secretary of both
corporations. It would also not be amiss to note that both corporations had the same
president, the same board of directors, the same corporate officers, and substantially the
same subscribers. From the foregoing, it appears that, among other things, the respondent
(herein petitioner-) and the third-party claimant shared the same address an/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the sheriff
were not of respondents." Clearly, petitioner ceased its business operations in order to
evade the payment to private respondents of back wages and to bar their reinstatement to
34
their former positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached to
petitioner corporation.
Claparols v CIR. Allied Workers Assoc, Garlitos and 10 workers filed a complaint for ULP
against Claparols Steel and Nail Plant owned by Mr Eduardo Claparols. The Court of
Industrial Relations found Mr Claparols guilty of union busting and ordered, among other
things, the reinstatement of the complainants to their former or equivalent jobs with back
wages and the examination of the company payrolls to compute the backwages due. The
CIR Chief examiner submitted a report on the computation of the periods for the backwages:
first computation covers the period Feb 1 1957- Oct 31 1964. The second is up to and
including 7 Dec 1962, when the company stopped operations, and the third is only up to 30
June 1957 when the Claparols Steel and Nail Plant ceased to operate. This is based on the
record that the Claparols Steel Corp—established on 1 July 1957 and ceased operations in
Dec 7 1962—had succeeded the Claparols Steel and Nail Plant which ceased operations on
30 June 1957. Claparols opposed the ruling, contending that the computation of the
backwages should only be limited to 3 months pursuant to the court ruling in Sta. Cecilia
Sawmills v CIR. The workers claim that the Claparols Steel and Nail Plant and the Claparols
Steel Corporation are one and the same corporation controlled by petitioner Claparols. The
CIR approves the report of the CIR examiner concerning the computation, and Claparols
appeals to the SC.
H: It is very clear that the Claparols Corp which succeeded Claparols Steel and Nail is the
continuation and successor of the first entity and its emergence was skillfully timed to avoid
the financial liability that already attached to its predecessor, Claparols Steel and Nail. Both
corporations were owned and controlled by Eduardo Claparols and there was no break in the
succession and continuity of the same business. This avoiding-the-liability scheme is very
patent, considering that 90% of the subscribed shares of Claparols Steel was owned by
Eduardo Claparols himself, and all assets of the dissolved Claparols Steel and Nail were
turned over to Claparols Steel Corp. It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in the present case could, and should be
pierced as it was deliberately and maliciously designed to evade the financial obligation to its
employees. When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association of
persons, or in the case of two corporations, will merge them into one.
Villa Rey Transit v Ferrer. Jose Villarama was an operator of a bus transportation under
the business name of Villa Rey Transit, a single proprietorship. Two certificates of public
convenience issued to Villarama authorized to operate 32 units in various routes or lines
from Pangasinan to Manila, and vice-versa. In 1959, he sold the CPCs to Pantranco for
P350K, under the proviso that Villarama shall not apply for any TPU service competing with
or identical to Pantranco for 10 years from date of sale.
3 months later Villa Rey Transit Inc was organized and registered with the SEC, having a
capital stock worth P500K (5000 shares at par P100), 200K of which was subscribed, of
which Natividad (wife of Jose Villarama and Treasurer) has subscribed for P1000.
Villa Rey Corp then bought 5 CPCs, 49 buses, and tools from Valentin Fernando for P249K.
The two parties then applied to the Public Service Commission for a provisional permit to
operate the transport service, which was granted. Before PSC could take final approval on
the application, 2 of the 5 CPCs were levied in an execution issued by the TC ifo the creditor
of Fernando, Eusebio Ferrer, who also was the winning bidder in the subsequent public sale.
Ferrer then sold the 2 CPCs to Pantranco, and sought the approval of the sale with the PSC,
with a prayer for provisional authority to operate the service. The PSC order that during the
pendency of the application Pantranco shall be authorized to operate the service under the 2
CPCs. Villa Rey elevated the matter to the SC which ruled in its favor and allowed it
operated provisionally instead of Pantranco. Villa Rey then filed an action to annul the sheriff
sale of the 2 CPCs and the sale to Pantranco of the same, and to annul the orders of the
PSC related to the sale. Ferrer and Pantranco averred that Villa Rey had no valid title to the
CPCs because of a suspensive condition—the approval of the PSC—had not yet been
fulfilled, and thus they had a superior right to the CPCs. Pantranco filed a 3rd party suit
against Jose Villarama, alleging that Villarama and Villa Rey are one and the same, and that
both are disqualified from operating the 2 CPCs by virtue of the agreement between
Villarama and Pantranco in the original sale of the CPCs. TC rules that Villa Rey Corp is a
separate and distinct entity from Jose Villarama, and that the restriction clause is void, which
thus makes the sheriff’s sale void as well.
H: IT would appear that Villarama supplied the organization expenses and the assets of Villa
Rey such as trucks and equipment, and that there was no actual payment by the original
subscribers of the amounts of P95K and P100K as first and second installments of the paid-
up capital. The finances of the corporation was manipulated and disbursed by Jose as they
were his private funds, in such a way that he appeared to be the actual owner-treasurer and
not the wife. The initial cash capitalization of P105K was also mostly financed by Jose V,
mostly covered by the check iao P85K drawn by Jose. It was also made to appear, as
testified by the accountant, that the P95K second installment of the paid-up capital was
delivered to Jose in payment of the equipment purchased and that the P100K first
installment were loaned as advances to stockholders, when in fact the only money of the
corporation was the P105K, which was Jose’s money. Villarama made use of the money of
the corporation and deposited it to his private accounts, and the corporation paid for his
expenses. He admitted that he mingled corporate with his personal funds. All these are
strong evidence that Villarama had been much too involved in the affairs of Villa Rey and
show that Villa Rey is his alter ego. Thus the restrictive clause in the contract of sale of
CPCs worth P350K is also binding on the Villa Rey Corp as it is on Jose.
The fiction of legal entity is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or a crime,
the veil with which the law covers and isolates the corporation from its members or
stockholders who compose it will be lifted to allow for its consideration merely as a
aggregation of individuals. The Court pierced the veil to enforce a non-competition clause
entered into by its controlling stockholder in his personal capacity.
Liddel v CIR (corporate entity was used to evade the payment of higher taxes). Liddell &
Co was engaged in importing and retailing cars and trucks. Frank Liddell owned 98% of the
stocks. Later Liddell Motors Inc was organized to do retailing for Liddell & Co. Frank’s wife
owned almost all of that corporation’s stocks. Since then, Liddell & Co paid sales tax on the
35
basis of its sales to Liddell Motors. But the CIR considered the sales by Liddell Motors to the
public as the basis for the original sales tax.
H: The Court, agreeing with the CIR, held that Frank Liddell owned both corporations as his
wife could not have had the money to pay her subscriptions. Such fact alone though not
sufficient to warrant piercing, but under the proven facts alone, Liddel Motors was the
medium created by Liddel & Co to reduce its tax liability. A taxpayer has the legal right to
decrease, by means which the law permits, the amount of what otherwise would be his taxes
or altogether avoid them; but a dummy corporation serving no business purposes other than
as a blind, will be disregarded. A taxpayer may gain advantage of doing business thru a
corporation if he pleases, but the revenue officers in the proper cases may disregard the
separate corporate entity where it serves but as a shield for tax evasion and treat the person
who actually may take the benefits of the transaction as the person accordingly taxable.
Mere ownership by a single stockholder or by another corporation of all or nearly all capital
stocks of the corporation is not by itself a sufficient ground for disregarding the separate
corporate personality. Substantial ownership in the capital stock of a corporation entitling the
shareholder a significant vote in the corporate affairs allows them no standing or claims
pertaining to corporate affairs. Where a corporation is a dummy and serves no business
purpose and is intended only as a blind, the corporate fiction may be ignored.
Substantial ownership in the capital stock of a corporation entitling the SH to a significant
vote in corporate affairs allows then no standing or claims pertaining to corporate affairs.
Mere ownership by a single SH or by another corporation of all or nearly all capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate
personality
La Campana Coffee Factory v Kaisahan. Tan Tong and family owned and controlled 2
corporations: one engaged in the sale of coffee and the other in starch. Both corporations
had one office, one management, and one payroll, and the laborers of both corporations
were interchangeable. The 60 members of the labor association in the coffee and starch
factories demanded higher wages addressed to La Campania Starch and Coffee Factory. La
Campania Coffee sought dismissal on the ground that the starch and coffee factory are two
distinct juridical persons.
I: W/N the Court of Industrial Relations had jurisdiction over the case
H: the Court disregarded the fiction of corporate existence and treated the two companies as
one. In alter ego cases, no pecuniary claim need be involved to allow the courts to apply the
piercing doctrine.
Cases where veil was NOT pierced:
IndoPhil Textile Mill Workers Union v Calica. Petitioner Indophil Textile Mill Workers
Union-PTGWO is a legitimate labor organization and the exclusive bargaining agent of all
the rank-and-file employees of Indophil Textile Mills, Incorporated. Respondent Teodorico P.
Calica is impleaded in his official capacity as the Voluntary Arbitrator of the National
Conciliation and Mediation Board of the Department of Labor and Employment, while private
respondent Indophil Textile Mills, Inc. is a corporation engaged in the manufacture, sale and
export of yarns of various counts and kinds and of materials of kindred character and has its
plants at Barrio Lambakin, Marilao, Bulacan.
In April, 1987, Indophil Textile Mill Workers Union-PTGWO and private respondent Indophil
Textile Mills, Inc. executed a collective bargaining agreement effective from April 1, 1987 to
March 31, 1990. On November 3, 1987, Indophil Acrylic Manufacturing Corporation was
formed and registered with the Securities and Exchange Commission. Subsequently, Acrylic
applied for registration with the Board of Investments for incentives under the 1987 Omnibus
Investments Code. The application was approved on a preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers according to its own criteria and
standards. Sometime in July, 1989, the workers of Acrylic unionized and a duly certified
collective bargaining agreement was executed. In 1990 or a year after the workers of Acrylic
have been unionized and a CBA executed, the petitioner union claimed that the plant
facilities built and set up by Acrylic should be considered as an extension or expansion of the
facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA. In
other words, it is the Union's contention that Acrylic is part of the Indophil bargaining unit.
Indophil Union's contention was opposed by private respondent which submits that it is a
juridical entity separate and distinct from Acrylic. The existing impasse led the petitioner and
private respondent to enter into a submission agreement on September 6, 1990. The parties
jointly requested the public respondent to act as voluntary arbitrator in the resolution of the
pending labor dispute pertaining to the proper interpretation of the CBA provision. The
Voluntary Arbitrator rendered its award, ruling that the proper interpretation and application
of Sec. 1, (c), Art. I of the 1987 CBA does not extend to the employees of Acrylic as an
extension or expansion of Indophil Textile Mills, Inc.
I: Whether or not the operations in Indophil Acrylic Corporation are an extension or
expansion of private respondent Company
H: Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore
exist, the legal fiction that a corporation is an entity with a juridical personality separate and
distinct from its members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons. The members or
stockholders or the corporation will be considered as the corporation, that is liability will
attach directly to the officers and stockholders. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or
when it is made as a shield to confuse the legitimate issues, or where a corporation is the
mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation. I
n the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging
that the creation of the corporation is a devise to evade the application of the CBA between
petitioner Union and private respondent Company. While we do not discount the possibility
of the similarities of the businesses of private respondent and Acrylic, neither are we inclined
to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the
businesses of private respondent and Acrylic are related, that some of the employees of the
private respondent are the same persons manning and providing for auxiliary services to the
units of Acrylic, and that the physical plants, offices and facilities are situated in the same
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compound, it is our considered opinion that these facts are not sufficient to justify the
piercing of the corporate veil of Acrylic.
Although it was shown that the two corporations’ businesses are related, that some of the
employees of the two corps are interchanged, and that the physical plants, offices, and
facilities, are situated in the same compound, were not considered sufficient bases to pierce
the veil in order to treat the two corporations as one bargaining unit. The legal corporate
entity is disregarded only if it is sought to hold the officers and stockholders directly liable for
a corporate debt or obligation.
Secosa et al v Heirs of Erwin Suarez Franscisco. On June 27, 1996, at around 4:00 p.m.,
Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the
Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran
Shipyard Gate in the City of Manila. At the same time, petitioner, Raymundo Odani Secosa,
was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck
was owned by petitioner, Dassad Warehousing and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in
turn was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing
the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel
truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu
truck then ran over Francisco, which resulted in his instantaneous death. Fearing for his life,
petitioner Secosa left his truck and fled the scene of the collision. Respondents, the parents
of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa,
Dassad Warehousing and Port Services, Inc. and Dassad’s president, El Buenasucenso Sy.
H: It is a settled precept in this jurisdiction that a corporation is invested by law with a
personality separate from that of its stockholders or members. It has a personality separate
and distinct from those of the persons composing it as well as from that of any other entity to
which it may be related. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not in itself sufficient ground for
disregarding the separate corporate personality. A corporation’s authority to act and its
liability for its actions are separate and apart from the individuals who own it.
The so-called veil of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation will be looked
upon as a legal entity, unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such cases as fraud that may
work inequities among members of the corporation internally, involving no rights of the public
or third persons. In both instances, there must have been fraud and proof of it. For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be
clearly and convincingly established. It cannot be presumed.
The records of this case are bereft of any evidence tending to show the presence of any
grounds enumerated above that will justify the piercing of the veil of corporate fiction such as
to hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad
Warehousing and Port Services, Inc., and not in the name of El Buenasenso Sy. Raymundo
Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El
Buenasenso Sy. All these things, when taken collectively, point toward El Buenasenso Sy’s
exclusion from liability for damages arising from the death of Erwin Francisco.
Yu v NLRC. Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque
Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay Distillery,
Inc. (TDI). 22 employees of TDI, including private respondents employees, received a
memorandum from TDI terminating their services, for reason of retrenchment, effective 30
days from receipt thereof or not later than the close of business hours on April 28, 1988. On
April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary
restraining order against their retrenchment. The labor arbiter issued the restraining order
the following day. However, due to the 20-day lifetime of the temporary restraining order, and
because of the on-going negotiations for the sale of TDI to the First Pacific Metro
Corporation, the retrenchment pushed through. The instant petition involves only the 4
individual respondents herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce,
and Rodrigo Santos. On June 1, 1988, or after respondents-employees had ceased as such
employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the business.
Twin Ace assumed the business name Tanduay Distillers.
The employees filed a motion to implead herein petitioners James Yu and Wilson Young,
doing business under the name and style of Tanduay Distillers, as party respondents in said
cases. Petitioners filed an opposition thereto, asserting that they are representatives of
Tanduay Distillers an entity distinct and separate from DTI, the previous owner, and that
there is no employer-employee relationship between Tanduay Distillers and private
respondents. Respondents-employees filed a reply to the opposition stating that petitioner of
TDI labor union of Tanduay Distillers' decision to hire everybody with a clean slate on a
probation basis.
H: The order of execution and the writ of execution ordering petitioners and Tanduay
Distillers to reinstate private respondents employees are, therefore, null and void. Neither
may be said that petitioners and Tanduay Distillers are one and the same as TDI, as seems
to be the impression of respondents when they impleaded petitioners as party respondents
in their complaint for unfair labor practice, illegal lay off, and separation benefits.
Such a stance is not supported by the facts. The name of the company for whom the
petitioners are working is Twin Ace Holdings Corporation. As stated by the Solicitor General,
Twin Ace is part of the Allied Bank Group although it conducts the rum business under the
name of Tanduay Distillers. The use of a similar sounding or almost identical name is an
obvious device to capitalize on the goodwill which Tanduay Rum has built over the years.
Twin Ace or Tanduay Distillers, on one hand, and Tanduay Distillery, Inc. (TDI), on the other,
are distinct and separate corporations. There is nothing to suggest that the owners of DTI,
have any common relationship as to identify it with Allied Bank Group which runs Tanduay
Distillers.
37
We hold that the director of Labor relations acted with grave abuse of discretion in treating
the two companies as a single bargaining unit. That ruling is arbitrary and untenable
because the two companies are indubitably distinct with separate juridical personalities.
The fact that their businesses are related and that the 236 employees of Georgia Pacific
International Corporation were originally employees of Lianga Bay Logging Co., Inc. is not a
justification for disregarding their separate personalities. Hence, the 236 employees, who are
now attached to Georgia Pacific International Corporation, should not be allowed to vote in
the certification election at the Lianga Bay Logging Co. ,Inc. They should vote at a separate
certification election to determine the collective bargaining representative of the employees
of Georgia Pacific International Corporation.
It is basic that a corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity to which it
may be related (Palay, Inc vs. Clave)
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin Ace was only
a subsequent interested buyer. At the time when termination notices were sent to its
employees, TDI was negotiating with the First Pacific Metro Corporations for the sale of its
assets. Only after First Pacific gave up its efforts to acquire the assets did Twin Ace or
Tanduay Distillers come into the picture. Respondents-employees have not presented any
proof as to communality of ownership and management to support their contention that the
two companies are one firm or closely related. The doctrine of piercing the veil of corporate
entity applies when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime or where a corporation is the mere alter ego or business
conduit of a person (Indophil Textile Mill Workers Union vs. Calica) To disregard the
separate juridical personality of a corporation, the wrong-doing must be clearly and
convincingly established. It cannot be presumed.
The complaint for unfair labor practice, illegal lay off, and separation benefits was filed
against TDI. Only later when the manufacture and sale of Tanduay products was taken over
by Twin Ace or Tanduay Distillers were James Yu and Wilson young impleaded. The
corporation itself — Twin Ace or Tanduay Distillers — was never made a party to the case.
Another factor to consider is that TDI as a corporation or its shares of stock were not
purchased by Twin Ace. The buyer limited itself to purchasing most of the assets,
equipment, and machinery of TDI. Thus, Twin Ace or Tanduay Distillers did not take
over the corporate personality of TDI although they manufacture the same product at
the same plant with the same equipment and machinery. Obviously, the trade name
"Tanduay" went with the sale because the new firm does business as Tanduay
Distillers and its main product of rum is sold as Tanduay Rum. There is no showing,
however, that TDI itself was absorbed by Twin Ace or that it ceased to exist as a
separate corporation. In point of fact TDI is now herein a party respondent
represented by its own counsel.
Significantly, TDI in the petition at hand has taken the side of its former employees and
argues against Tanduay Distillers. In its memorandum filed on January 9, 1995, TDI argues
that it was not alone its liability which the arbiter recognized "but also of James Yu and
Wilson Young, representatives of Twin Ace and/or the Allied Bank Group doing business
under the name 'TANDUAY DISTILLERS,' to whom the business and assets of DTI were
sold." If DTI and Tanduay Distillers are one and the same group or one is a continuation of
the other, the two would not be fighting each other in this case. TDI would not argue strongly
"that the petition for certiorari filed by James Yu and Wilson Young be dismissed for lack for
merit." It is thus obvious that the second corporation, Twin Ace or Tanduay Distillers, is an
entity separate and distinct, from the first corporation, TDI. The circumstances of this case
are different from the earlier decisions of the Court in Labor cases where the veil of
corporate fiction was pierced.
In La Campana Coffee Factory, Inc. vs. Kaisahan ng Manggagawa sa La Campana
(KKM), (93 Phil. 160 [1953], La Campana Coffee Factory, Inc. and La Campana Gaugau
Packing were substantially owned by the same person. They had one office, one
management, and a single payroll for both business. The laborers of the gaugau factory and
the coffee factory were also interchangeable, the workers in one factory worked also in the
other factory.
In Claparols vs. Court of Industrial Relations (65 SCRA 613 [1975], the Claparols Steel
and Nail Plant, which was ordered to pay its workers backwages, ceased operations on June
30, 1956 and was succeeded on the very next day, July 1, 1957, by the Clarapols Steel
Corporation. Both corporations were substantially owned and controlled by the same person
and there was no break or cessation in operations. Moreover, all the assets of the steel and
nail plant were transferred to the new corporation.
In fine, the fiction of separate and distinct corporate entities cannot, in the instant case, be
disregarded and brushed aside, there being not the least indication that the second
corporation is a dummy or serves as a client of the first corporate entity. In the case at
bench, since TDI and Twin Ace or Tanduay Distillers are two separate and distinct entities,
the order for Tanduay Distillers (and petitioners) to reinstate respondents-employees is
obviously without legal and factual basis.
— Yu: when a transferee purchases only the assets of the transferor, the transferee
cannot be held liable for the labor claims and obligation for reinstatement adjudged
against the transferor
— there must be continuity of the identity of the owners in the business;
— the doctrine of business-enterprise transfer as to make the transferee liable for the
business obligations of the transferor is really a species of piercing doctrine and would
require a certain degree of continuity of the same business by the same owners using
the corporate fiction as a shield
Cease v CA. Forrest Cease and 5 other kanos organized the Tiaong Milling and Plantation
Company. The original incorporators were then bought out by Forrest and his children
(Ernest, Cecilia, Teresita, Benjamin, and Florence). The charter of the company then lapsed
without any effort to liquidate it; but when Forrest died the company was partitioned
38
extrajudicially among his children. Benjamin and Florence desired an actual division, but
Ernest, Cecilia, and Teresita preferred reincorporation. The latter group of siblings then
proceeded to incorporate themselves into the FL Cease Plantation Company and registered
with the SEC, while Benjamin and Florence commenced proceedings for the settlement of
the estate of Forrest and filed a action to declare the Tiaong Corp to be identical with the FL
Cease Corp and its properties divided among the children. The Board of Liquidators of
Tiaong Milling then assigned and transferred the properties of the corp to FL Cease as
trustee. TC ruled that the Tiaong Corp is also part of the estate of Forrest and should be
divided share and share alike to all children, cancelled the conveyance ifo FL Cease and
removed the latter as trustee and ordered it to deliver to the appointed receiver all its
properties. Ernesto et al contend that no evidence has been found to support the conclusion
that the properties of Tiaong Milling are also properties of the estate of Forrest Cease.
H: In sustaining the theory that the estate of Forrest and Tiaong Milling are merged as one
personality and that the company is only the business conduit and alter ego of Forrest, the
TC correctly ruled that the company developed into a close family corporation, with the
Board and stockholders belonging to one family, the head of which was Forrest who always
retained the majority stocks and thus control and management of its affairs.
Generally, a corporation is invested by law with a personality separate and distinct from that
of the persons composing it as well as from that of any other legal entity to which it may be
related. The notion of corporate entity will be pierced or disregarded and the corporation will
be treated as an association of persons or where there are two corporations, they will be
merged into one, the one being merely regarded as part or instrumentality of the other. The
business of the corporation in question is largely the personal venture of Forrest. The
children were neither subscribers or purchasers of the stocks they own. Their participation
as nominal shareholders emanated solely from Forrest’s gratuitous dole out of his own
shares to the benefit of his children.
Delpher Trade v CA. Siblings Deflin and Pelagia Pacheco co-owned Lot No 1095 which
they leased to Construction Components. The lease contract had a right of first refusal
provision ifo the lessee. CCI then assigned its rights to Hydro Pipes, which included the
RFR, with the consent of the Pachecos. The Pachecos then executed a deed of exchange of
the property with Delpher Trades Corp for 2,500 shares, or a total value of P1,500,000.
Delpher is a family corporation organized by the children of the Pachecos in order to
perpetuate their control over the property and avoid taxes. The transfer of shares in
exchange for the land are equivalent to a 55% majority stake in Delpher, with the remaining
45% also in the hands of the Pacheco family (they call it estate planning). Hydro argues that
Delpher is a corporate entity separate from the Pachecos and is not their alter ego or
business conduit, and that the transfer was in the nature of a sale which prejudiced their
RFR and supports their claim to exercise the right under the terms granted to Delpher.
Delpher claims there was no transfer of ownership in the nature of a sale prejudicing the
RFR of Hydro, because the corporation is a mere alter ego or conduit of the Pachecos,
hence Delpher and Pachecos should be deemed one and the same. Thus there was no sale
and that the Pachecos merely exchanged the land for shares of stock in their own
corporation. Hydro sues for reconveyance exercising its RFR under the same terms of the
transfer to Delpher. TC rules ifo Hydro, and the CA affirms.
I: W/N the DoE made by the Pachecos ifo Delpher was meant to be a contract of sale thus
prejudicing Hydro’s RFR over the property.
H: No. The DoE between Pachecos and Delpher cannot be considered a contract of sale.
There was no transfer of actual ownership. The Pacheco family merely changed their
ownership from one form to another, and it remained in the same hands. After incorporation,
one becomes a stockholder by subscription or purchasing stock directly from the corporation
or from the individual owners thereof. In this case, the Pachecos became owners of the
corporation by subscription, which is an agreement to take and pay for original unissued
shares of a corporation formed or to be formed. It is significant in this case that the Pachecos
took no par value shares in exchange for the properties. A no-par value share does not
purport to represent any stated proportionate interest in the capital stock measured by value,
but only an aliquot part of the whole number of shares of the issuing corporation. The capital
stock of a corporation issuing only no-par shares is not set forth by a stated amount of
money, but is expressed to be divided into a stated number of shares. This indicates that a
shareholder of say 100 shares is an aliquot sharer in the assets of the corporation, no matter
what the value of the shares are. By ownership of 2500 shares, the Pachecos have control
over Delpher, which makes it a business conduit of the Pachecos. What they really did was
to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher to take control of the properties and save on
inheritance taxes. The records do no point to anything objectionable about this estate
planning scheme. The legal right of a taxpayer to decrease the amount of what otherwise
could be his taxes or avoid them cannot be doubted. As they are still the owners, Hydro has
no basis for its claim of RFR under the lease contract.
Parent-Subsidiary Relationship
— The general principles outlined in the preceding section apply to parent-subsidiary
corporations
— Taken alone, mere fact of ownership by the mother of all or substantially all the stocks
of another corporation is not sufficient to justify their being treated as on entity
— If used to perform legitimate functions, the subsidiary’s existence may be respected,
and liability will be confined to that which arises from their respective businesses
— The courts however, in the exercise of its equity jurisdiction, will step in to prevent
abuses and pierce the veil
— Liddell: mere fact that one or more corporations are owned and controlled by a single
SH is not of itself sufficient ground for piercing, but…
— … in Koppel: control of shareholdings of the corporation necessarily means by itself
control of the operations of the corporation!
— Although ownership of the controlling capital stock of the corporation by itself would not
authorize piercing, however, when existing together with other factors, the courts have
given much weight to such control feature to pierce
Garnett v Southern Railway. Garrett is a wheel molder employed by Lenoir Car Works who
claims and sues for Workmen’s Compensation under the Federal Employer’s Liability Act
because of injuries contracted from silica dust which permeated the foundry. He contends
that since Southern Railway acquired the entire capital stock of Lenoir and so completely
dominated it that it was merely an instrumentality or subsidiary of Southern, he is considered
an employee of Southern and thus entitled under the Act mentioned for recovery. He cites
the ff facts:
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— All directors and officers of Lenoir are employees of southern
— Southern owns all stock of Lenoir except 5 shares
— All profits of Lenoir went to Southern
— Claims of Lenoir employees for accidents are handled by Southern
— Litigation against Lenoir is handled by Southern
— General accounting of Lenoir is handled by Southern
— Lenoir sold to Southern $30M of its products compared to $4.5M to other
buyers
Southern, countered with the ff facts in support of its contention that it is not the parent of
Lenoir:
— Management of Lenoir is vested in its manager, Henry Marius, who is in the
payroll of Lenoir and has no other connection with Southern except holding
and proxy voting for Southern
— Marius establishes the pricing of Lenoir products and all Lenoir sales are the
result of his business judgment
— Lenoir does not sell to Southern exclusively, and Southern does not buy from
Lenoir exclusively or substantially, and that it buys from Lenoir just as it buys
from other sellers
— Lenoir’s corporate and accounting offices are in Washington DC in a building
owned by Southern; but it is still based in Tennessee
— Lenoir is a specialty business and Southern has not in any way been in a
position to direct or supervise the operations of Lenoir
— Lenoir is a duly qualified employer under the Tennessee Workmen’s
Compensation Act and suits and claims similar to Garretts have been
covered by that law
— Lenoir maintains a separate bank account and has never intermingled its
funds with Southern
— Lenoir and Southern keep separate books and pay their own taxes
— Lenoir’s general accounting and legal is handled by its own departments in
Lenoir City
H: The Court finds the existence of two distinct companies. There is no evidence that
Southern dictated the management of Lenoir. In fact, Marius the manager was in full control
of its operations. He established prices, handled all negotiations in CBAs. It paid local taxes,
had local legal counsel, maintained Workmen’s Compensation.
Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions and pricing
remained in the hands of Marius and was not dictated by Southern. Marius operated the
business as a going concern. The facts do not reveal the intimacy and inseparability of
control which would lead one to believe that Southern and Lenoir are one and the same. It
was also not an agent of Southern because it was not a common carrier by railroad to make
it liable under the Federal Act. It was not an operator of a terminal, performed no switching or
transportation functions at all. It was a manufacturer and Garrett was one of its employees.
There are certain circumstances which if present in the proper combination, would render the
subsidiary an instrumentality:
 (1) parent owns all or most of the capital stock
(2) parent and subsidiary have common directors or officers
(3) parent finances the subsidiary
(4) parent subscribes to all capital stock of the subsidiary or causes its incorporation
(5) subsidiary has grossly inadequate capital
(6) parent pays salaries and other expenses or losses of subsidiary
(7) subsidiary has substantially no business except with the parent or no assets except
those conveyed to the parent
(8) the subsidiary is described as a department in the books of the parent
(9) parent uses the property of the subsidiary
(10) directors of the subsidiary do not act independently but take orders from the parent
(11) formal legal requirements of the subsidiary are not met
Since only two of the 11 indicia occur—the ownership of most of capital stock and
subscription by Southern to capital stock of Lenoir—Lenoir is not a subsidiary and is a
separate corporation. Thus there is no basis for the claim of Garrett with Southern under the
Federal Act
Jardine Davies Inc v JRB Realty Inc. In 1979-1980, respondent JRB Realty, Inc. built a
nine-storey building, named Blanco Center, on its parcel of land located at 119 Alfaro St.,
Salcedo Village, Makati City. An air conditioning system was needed for the Blanco Law
Firm housed at the second floor of the building. On March 13, 1980, the respondent's
Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G.
Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of
Fedders Adaptomatic 30,000 kcal air conditioning equipment with a net total selling price of
P99,586.00. Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity
each to deliver 30,000 kcal or 120,000 BTUH were installed by Aircon. When the units with
rotary compressors were installed, they could not deliver the desired cooling temperature.
Despite several adjustments and corrective measures, the respondent conceded that
Fedders Air Conditioning USA's technology for rotary compressors for big capacity
conditioners like those installed at the Blanco Center had not yet been perfected. The parties
thereby agreed to replace the units with reciprocating/semi-hermetic compressors instead. In
a Letter dated March 26, 1981, Aircon stated that it would be replacing the units currently
installed with new ones using rotary compressors, at the earliest possible time. Regrettably,
however, it could not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of
the units, inclusive of parts and services. In October 1987, the respondent learned, through
newspaper ads, that Maxim Industrial and Merchandising Corporation (Maxim, for short) was
the new and exclusive licensee of Fedders Air Conditioning USA in the Philippines for the
manufacture, distribution, sale, installation and maintenance of Fedders air conditioners. The
respondent requested that Maxim honor the obligation of Aircon, but the latter refused.
Considering that the ten-year period of prescription was fast approaching, to expire on March
13, 1990, the respondent then instituted, on January 29, 1990, an action for specific
performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air
Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine
Davies, Inc. The latter was impleaded as defendant, considering that Aircon was a
40
subsidiary of the petitioner. The trial court ruled that Aircon was a subsidiary of the petitioner,
and concluded that:
at the time it contracted with Aircon on March 13, 1980 and on the date the revised
agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The phrase
"A subsidiary of Jardine Davies, Inc." was printed on Aircon's letterhead of its March 13,
1980 contract with plaintiff as well as the Aircon's letterhead of Jardine's Director and Senior
Vice-President A.G. Morrison and Aircon's President in his March 26, 1981 letter to plaintiff
confirming the revised agreement. Aircon's newspaper ads of April 12 and 26, 1981 and a
press release on August 30, 1982 also show that defendant Jardine publicly represented
Aircon to be its subsidiary. Records from the Securities and Exchange Commission (SEC)
also reveal that as per Jardine's December 31, 1986 and 1985 Financial Statements that
"The company acts as general manager of its subsidiaries". Jardine's Consolidated Balance
Sheet as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning
94.35% of Aircon. Also, Aircon's reportorial General Information Sheet as of April 1980 and
April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon and that out of
seven members of the Board of Directors of Aircon, four (4) are also of Jardine. Jardine's
witness, Atty. Fe delos Santos-Quiaoit admitted that defendant Aircon, renamed Aircon &
Refrigeration Industries, Inc. "is one of the subsidiaries of Jardine Davies" and that Jardine
nominated, elected, and appointed the controlling majority of the Board of Directors and the
highest officers of Aircon.
H: It is an elementary and fundamental principle of corporation law that a corporation is an
artificial being invested by law with a personality separate and distinct from its stockholders
and from other corporations to which it may be connected. While a corporation is allowed to
exist solely for a lawful purpose, the law will regard it as an association of persons or in case
of two corporations, merge them into one, when this corporate legal entity is used as a cloak
for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction which applies
only when such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime. The rationale behind piercing a corporation's identity is to remove the
barrier between the corporation from 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.
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircon's corporate legal existence can just be disregarded. The Court categorically held in
another case that a subsidiary has an independent and separate juridical personality, distinct
from that of its parent company; hence, any claim or suit against the latter does not bind the
former, and vice versa. In applying the doctrine, the following requisites must be established:
(1) control, not merely majority or complete stock control; (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 acts in contravention of plaintiff's legal rights; and (3)
the aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. The records bear out that Aircon is a subsidiary of the petitioner only because
the latter acquired Aircon's majority of capital stock. It, however, does not exercise complete
control over Aircon; nowhere can it be gathered that the petitioner manages the business
affairs of Aircon. Indeed, no management agreement exists between the petitioner and
Aircon, and the latter is an entirely different entity from the petitioner. In the instant case, — Koppel Phils was fully empowered to instruct banks it deals with, if purchasers
there is no evidence that Aircon was formed or utilized with the intention of defrauding its were not able to pay the bank drafts to the bank as payment for the purchases
creditors or evading its contracts and obligations. There was nothing fraudulent in the acts of — Koppel Phils makes good any deficiencies by deliveries from its own stock
Aircon in this case. Aircon, as a manufacturing firm of air conditioners, complied with its
obligation of providing two air conditioning units for the second floor of the Blanco Center in The application of the piercing doctrine is not a contravention of the principle that the
good faith, pursuant to its contract with the respondent. Unfortunately, the performance of corporate personality of a corporation cannot be collaterally attacked. When the piercing
the air conditioning units did not satisfy the respondent despite several adjustments and doctrine is applied against a corporation in a particular case, the court does not deny legal
corrective measures. personality… for any and all purposes. The application of the piercing doctrine is therefore
within the ambit of the principle of res judicata that binds only the parties to the case and
only to the matters actually resolved therein.
Koppel v Yatco (the subsidiary was so controlled by the parent that its separate identity was
hardly discernible, and became a mere alter ego of the parent and was used to evade
taxes). Koppel Industrial and Car Company is a corporation organized and existing under the
laws of the State of Pennsylvania. They are not licensed to do business in the RP, but do
business through Koppel Phils, Inc, owning 995 out of 1000 shares of stock of the said
company (the remaining 5 were owned by the 5 officers of Koppel Phils). Koppel Phils
cabled Koppel Industrial for quotation desired by a prospective client. Koppel Phils however
quoted a higher price for the buyer than that quoted by Koppel Industrial. Koppel Phils then — GR: separate personality
cabled to ship the merchandise to Manila. Koppel Phils received a %age of the profits — Exception: cases where veil may be pierced
realized or its share of the losses on the transactions. Koppel also returned a sum allotted as o There was a violation of rights or injury in all these cases where
payment of commercial broker’s tax of 4%. Koppel Industrial demanded from Koppel Phils veil was pierced
the sum of P64,122.51 as merchant’s sales tax of 1 ½% of the share of Koppel Phils in the o Elements of ownership, control, mgt in the corporate entity
profits.
§ Inevitable that these will exist
H: The Court said that the virtual control of the shareholdings of a corporation would lead to
§ All elements have to be satisfied so the corporate veil
certain legal conclusions. It could not overlook the fact that in the practical working of can be pierced
corporate organizations of the class to which the two entities belonged, the holder or holders o What determines pierceability?
of the controlling part of the capital stock of the corporation, particularly where the control is § Motive/intention
determined by the virtual ownership of the totality of the shares, dominate not only the § Liability arising
selection of the board of directors but more often than not, also the action of that board. § Injury or damage or loss
— Estate planning:
It held that applying this to the case, it cannot be conceived how the Koppel Phils could o No impediment to use corporate as vehicle for estate planning
effectively go against the policies, decisions, and desires of the American corporation…
o Corporation can be put up by a single person
Neither can it be conceived how the Phil corporation could avoid following the directions of
the American corporation in every other transaction where they had both to intervene, in o Nothing prevents an individual from funding a corporation
view of the fact that the American corporation held 99.5% of the capital stock of the Phil o To meet requirements of code, assign nominal shares to
corporation… In so far as the sales are concerned, Koppel Phils and Koppel Industrial are persons
for all intents and purposes one and the same, and the former is a mere branch, subsidiary, o If it is money, can be used to acquire assets; still corporate-
or agency of the latter. The ff are facts which led to the Court to conclude the above: owned
— share in the profits of Koppel Phils was left to the sole, unbridled control of o Even a 99.9% owner cannot distribute the property, only the
Koppel Industrial shares
— shares of stock of Koppel Phils are all owned by Koppel Industrial
— Cease: ideal, but there was a dispute
(overwhelming majority)
— Koppel Phils acted as agent and representative of Koppel Industrial
— Marvel had no compulsory heirs
— Koppel Phils alone bore the incidental expenses for transactions, such as — Delpher ruling on transfer is obiter
cable expenses — Just defer: use corporate as a vehicle to distribute what appears to
be the estate
o But: you still have to distribute the shares (dispose or donate)
41 o Mechanism to ensure that once you die, corporation is dissolved
§ Otherwise: Cease case
§ Exit mechanism for those who want out

Chapter V – Promoter’s Contracts
— Promoter: a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration therefor
— Promoter’s contracts refer to contracts entered into with the parties knowing fully well
that a corporation does not yet legally exist
— GR: promoter’s contracts are not necessarily binding on the corporation once formed
— Exception: When the corporation received benefits from the contract at the time of its
constitution
Types:
— A pre-incorporation subscription contract is a special contract, and a type of promoter’s
contract, and although these are contracts between the subscriber and the corporation,
they are at the same time deemed to be contracts among the SHs of the corporation
— Contracts entered into in the name of the intended corporation by the promoters or
organizers of the corporation
Liability of corporation for promoter’s contracts.
— Promoter’s contracts are entered into prior to the corporation’s existence, and the
question that oftentimes comes up after its incorporation is the liability of the corporation
on these contracts.
— 60: any contract for the acquisition of unissued stock in an existing corporation or one
still to be formed shall be deemed a subscription even if the parties say otherwise
— 61: GR: subscription for shares in a corporation still to be formed shall be irrevocable for
at least 6 mos from date of subscription
— exceptions:
— all other subscribers consent to the revocation
— incorporation fails to materialize within 6 mos or within a longer period as
stated in the subscription contract
— before submission of the AOI
— pre-incorporation agreement is a type of promoters contract
— The corporation may make these contracts its own and may become bound on such
contracts if after incorporation, it adopts or ratifies the same or accepts the benefits with
knowledge of the terms.
— Adoption need not be express and may even be implied by the acts of its officers.
— Contract must also be one within the powers of the corporation to enter (Builder’s
Duntile case)
— Upon adoption or ratification, the corporation becomes liable
McArthur v Times Printing. CA Nimocks and others were engaged as promoters in
procuring the organization of the Times Printing Company. Nimocks, in behalf of the
contemplated company, entered into a contract with McArthur for the latter’s services as
advertising solicitor for the period of 1 year from 1 Oct—the date when the company was to
be formed. Times commenced operations on 1 Oct, but had only formed on 16 Oct.
McArthur began performing his duties on 1 Oct, continuing in his work until discharged the ff
42
April. The corporation (officers, stockholders, directors) knew of the contract but never took
any formal action thereto; neither did they object to or repudiate the same, but kept McArthur
in its employ.
H: Where a contract is made in behalf of and for the benefit of a proposed corporation, the
corporation after is organization cannot become a party to the contract either by adoption or
ratification. While a corporation is not bound by engagements made in its behalf by
promoters before its organization, it may thereafter make such engagements its own
contracts, through formal action of the board. It is not necessary that such adoption or
acceptance be expressed, but it may even be inferred from acts or acquiescence on the part
of the corporation or by its own agents. The right of agents to adopt an agreement originally
made by the promoters depends on the purposes of the corporation and the nature of the
agreement. Times also claims that the promoter’s contract violates the SoF, because by its
terms it is not to be performed within one year from making thereof. SC ruled that it cannot
be a ratification because at the time of the making of the promoter’s contract between
Nimocks and McArthur, there was no corporation yet, and it could not have ratified it if it
were not a party thereto. There cannot be in law, a ratification of a contract which could not
have been made binding on the ratifier at the time it was made, because the ratifier was not
yet in existence. It is adopted by the corporation as its own as of the date of adoption and not
as of the date of the making.
Cagayan Fishing v Sandiko. Tabora owned 4 parcels of land in Aparri. He sold the 4
parcels to the Cagayan Fishing Development Company, (of which he is a promoter) then
under the process of incorporation, for one peso, subject to the REM ifo PNB, and under the
condition that title shall not pass until Cagayan pays Tabora’s debt to PNB. Cagayan Fishing
was then formed, and the Board adopted a resolution authorizing the president to sell the
lands to Sandiko for P42000. Cagayan executed a deed of sale transferring and ceding all
rights titles and interests to the land to Sandiko. Sandiko failed to make good on the PN.
Cagayan Fishing sues Sandiko. TC dismisses suit on the ground that the deed of sale is
void.
H: Cagayan Fishing was not yet in existence when Tabora sold to it his lands. It was not
even a de facto corp at the time, thus not being in legal existence it does not yet possess
juridical capacity to enter into contracts. The Tabora contract was entered into not only
between him and a non-existent corporation, but between him as owner and the same
Tabora, his wife and others, as mere promoters of the corporation. They could not have
acted as agents for a projected corporation since that which had no legal existence could
have no agent. A corporation, until organized, has no life and therefore no faculties. The SC
refused to extend the doctrine of ratification which would result in the commission of injustice
or fraud to third parties. Tabora owned a majority of the shares subscribed and paid. Tabor
was also one of the directors, and title remained under Tabora’s name. Sandiko the buyer
dealt with Tabora directly and considered him as the owner. Even PNB treated Tabora as
the owner, not the corporation. Thus Cagayan Fishing never really purchased the lands, and
thus it did not have the right to dispose by sale to Sandiko.
— There are circumstances where the acts of promoters may be ratified by the
corporation, but in Cagayan the SC declined to extend the doctrine of ratification which
would result in the commission of injustice or fraud, because the object of the contracts
were treated as personal assets and not corporate assets
— Ratification is the key element in upholding the validity and enforceability of promoter’s
contracts
Corporate rights under promoter’s contracts
— If the other party fails to perform under the pre-incorporation contract, the corporation
which adopts or ratifies it may sue for specific performance or damages for breach of
contract
— Bringing an action to enforce the contract has been held to be sufficient adoption or
ratification
Builders Duntile v Dunn. WE Dunn Company manufactures machinery for making duntile,
a hollow building tile. Samuels told Gaston the agent of Dunn that he was organizing a
company to manufacture the duntiles. Samuels preferred to organize the corporation and
then make the contract for the machinery. Gaston wanted to make the contract first, then
form the corporation after. Samuels then made the contract ordering the machinery from WE
Dunn, which also provided for the free services of an experienced serviceman (Aaron) for 5
years to insure proper installation. WE Dunn accepted the contract, and the machinery was
shipped to Samuels. Aaron the serviceman began setting up the machinery. Meantime, the
articles of the Builder’s Duntile (Samuels’ company) was filed. Operations for the
manufacture of the duntiles then started. It turns out that the duntiles made were so inferior
in quality and practically value-less for building purposes, because the machinery had been
installed improperly by Aaron the service guy, and had even used the wrong formula for the
mixing. Builders (not Samuels) sues WE Dunn Co. to recover on the contract made before
the corporation formed.
I: Can a corporation enforce or sue upon a contract made by its promoters in its behalf and
before its incorporation?
H: the case turns on the right of a corporation to sue upon a contract made in its behalf by
one of its promoters before it was organized. A corporation has the power to adopt a contract
of its promoters, and one of the effects of this adoption is that the contract becomes that of
the corporation. But the power to adopt must only be limited to such contracts as the
corporation itself can make or is authorized to make. In this case it was clear that the
contract was made by Samuels in behalf of the projected corporation, and after it was
formed, the incorporators took over the whole thing and ratified all that had been done in its
behalf. To deny the corporation the right to sue for damages for breach of contract and the
loss it sustained by reason of the first agent’s negligence and improper acts would be to
deny it all remedy for the breach of contract, for Samuels did not make the contract for
himself, and he personally did not sustain any damages. It was the corporation that
sustained the damages resulting from the breach. The corporation was the real party in
interest, and brought suit in its own name. The contract, though made in the name of
Samuels was, as all parties knew, made in his name for the benefit of the corporation to be
organized. He was one of the promoters but had no intention of buying it for himself. Though
there was no formal assignment of the contract to the corporation, its action to bring suit
were an adoption of the contract.
Rizal Light v PSC and Morong Electric. Case involves two (2) petitions of the Rizal Light &
Ice Co., Inc., (1) to review and set aside the orders of respondent Public Service
43
Commission cancelling and revoking the certificate of public convenience and necessity and
forfeiting the franchise of Rizal, and (2) to review and set aside the decision of the
Commission granting a certificate of public convenience and necessity to respondent
Morong Electric Co., Inc to operate an electric light, heat and power service in the
municipality of Morong, Rizal. Petitioner opposed in writing the application of Morong
Electric, alleging among other things, that it is a holder of a certificate of public convenience
to operate an electric light, heat and power service in the same municipality of Morong,
Rizal, and that the approval of said application would not promote public convenience, but
would only cause ruinous and wasteful competition. The Commission, in its decision dated
March 13, 1963, found that there was an absence of electric service in the municipality of
Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and
existing under the laws of the Philippines, has the financial capacity to maintain said service.
The Commission found that Morong Electric is a corporation duly organized and existing
under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is
financially capable of operating an electric light, heat and power service, and that at the time
the decision was rendered there was absence of electric service in Morong, Rizal. While the
petitioner does not dispute the need of an electric service in Morong, Rizal, it claims, in
effect, that Morong Electric should not have been granted the certificate of public
convenience and necessity because (1) it did not have a corporate personality at the time it
was granted a franchise and when it applied for said certificate; (2) it is not financially
capable of undertaking an electric service, and (3) petitioner was rendering efficient service
before its electric plant was burned, and therefore, being a prior operator its investment
should be protected and no new party should be granted a franchise and certificate of public
convenience and necessity to operate an electric service in the same locality.
H: The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on
the proposition that since a franchise is a contract, at least two competent parties are
necessary to the execution thereof, and parties are not competent except when they are in
being. Hence, it is contended that until a corporation has come into being, in this jurisdiction,
by the issuance of a certificate of incorporation by the Securities and Exchange Commission
(SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of
the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not
before, did it acquire juridical personality and legal existence. Petitioner concludes that the
franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and
void and cannot be the subject of the Commission's consideration. On the other hand,
Morong Electric argues, and to which argument the Commission agrees, that it was a de
facto corporation at the time the franchise was granted and, as such, it was not incapacitated
to enter into any contract or to apply for and accept a franchise. Not having been
incapacitated, Morong Electric maintains that the franchise granted to it is valid and the
approval or disapproval thereof can be properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality on
May 6, 1962 when a municipal franchise was granted to it is correct. The juridical
personality and legal existence of Morong Electric began only on October 17, 1962 when its
certificate of incorporation was issued by the SEC. Before that date, or pending the issuance
of said certificate of incorporation, the incorporators cannot be considered as de facto
corporation. But the fact that Morong Electric had no corporate existence on the day the
franchise was granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the franchise in
accordance with the terms and conditions thereof.
— “The fact that a company is not completely incorporated at the time the grant is made to
it by a municipality to use the streets does not, in most jurisdictions, affect the validity of
the grant. But such grant cannot take effect until the corporation is organized.”
— “While a franchise cannot take effect until the grantee corporation is organized, the
franchise may, nevertheless, be applied for before the company is fully organized.”
— “An ordinance granting a privilege to a corporation is not void because the beneficiary of
the ordinance is not fully organized at the time of the introduction of the ordinance. It is
enough that organization is complete prior to the passage and acceptance of the
ordinance. The reason is that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms and conditions.”
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the
franchise as shown by its action in prosecuting the application filed with the Commission for
the approval of said franchise, not only perfected a contract between the respondent
municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in
the application of Morong EIectric. Thus, the Commission did not err in denying petitioner's
motion to dismiss said application and in proceeding to hear the same. The efficacy of the
franchise, however, arose only upon its approval by the Commission on March 13, 1963.
The conclusion herein reached regarding the validity of the franchise granted to Morong
Electric is not incompatible with the holding of this Court in Cagayan Fishing Development
Co., Inc. vs. Teodoro Sandiko, where it was held that a corporation should have a full and
complete organization and existence as an entity before it can enter into any kind of a
contract or transact any business. It should be pointed out, however, that this Court did not
say in that case that the rule is absolute or that under no circumstances may the acts of
promoters of a corporation be ratified or accepted by the corporation if and when
subsequently organized. Of course, there are exceptions. It will be noted that American
courts generally hold that a contract made by the promoters of a corporation on its behalf
may be adopted, accepted or ratified by the corporation when organized.
— Although a franchise may be treated as a contract, the eventual incorporation after the
grant of the franchise and its acceptance thereof, as well as the efforts made to
prosecute the application not only perfected a contract but cured the deficiency
— Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or accept a
contract made by promoters in behalf of the corporation before its incorporation
Personal liability of promoter on pre-incorporate contracts.
3 possible situations between the promoter and the other party to a pre-incorporation
contract:
1. promoter makes a continuing offer in behalf of corp. If accepted, contract perfected
a. promoter no personal liability
2. promoter makes contract binding himself. If accepted or adopted, he is relieved of
liability
3. promoter binds himself personally, but seeks reimbursement from corporation.
44
GR: promoter is personally liable for contracts made by him in behalf of the proposed
corporation.
Exception: express or implied agreement to the contrary
Adoption or ratification of the contract does not release him from responsibility, unless a
novation was intended.
Quaker Hill v Parr. Parr et al while in the course of negotiations with Quaker Hill Inc, a NY
corporation, for the former to purchase nursery stock, undertook to organize a separate
corporation to be known as the Denver Memorial Nursery Inc. 2 orders for nursery stock
were signed by Parr in behalf of Denver Memorial which to the knowledge of Quaker was not
yet formed. The nursery stock was then delivered to Parr and was planted with the help of
Quaker. A substitute order was then made, with the name Mountain View Nurseries instead
of Denver Memorial, which never actually came into being. Because of name confusion, it
was subsequently called Mountain View Nurseries. Its articles were filed but the companies
never functioned as going concerns. After Mountain View was formed, a new note and
contract was submitted to Parr et al, containing the name Mountain View as contracting
party. Quaker then referred to the company as Mountain View. Mountain View became
financially troubled, and Quaker sues Parr et al on the ground that the corporation was not
yet formed at the time the sales contract was made and that Parr et al as promoters should
be personally liable.
H: GR—promoters are personally liable on their contracts, though made in behalf of a
corporation to be formed. Exception—if the contract is made in behalf of the corporation and
the other party agrees to look to the corporation and not to the promoters for payment. In this
case, Quaker was well aware that the corporation was not yet formed and even urged that
the contract be made in the name of the to-be formed corporation. The entire transaction
contemplated the corporation as the contracting party. Thus personal liability does not
attach. There was clearly an intent on the part of Quaker to contract with the corporation and
not with the promoters.
Compensation of promoters.
— Promoters take so much risk in forming a corporation not only because of the possibility
of sharing in the corporate earnings as future SHs, but also the expectancy of
compensation for their services
— GR: the corporation is NOT liable to pay such compensation because this would be an
imposition on innocent investors
— Exception: corporation may become liable after it is formed if:
o it expressly promises to do so
o it takes/receives the benefits of services rendered by the promoter partly performed
before and after incorporation
— note: Corpo Code silent on compensation of promoters
o but Securities Act authorizes a promotion fee (cf Villanueva on updates)
o may be in cash or shares. If shares, fair value of services=par or issued value of
shares
Fiduciary relationship between corporation and promoter.
— Promoters have the duty to exercise GF and fairness in all their acts and transactions
— Promoters should not, in passing title to the corporation, later make secret profits at the
expense of the corporation
o They will make an accounting of all profits to the corporation when formed
Old Dominion Copper Mining and Smelting Co v Bigelow. Action to recover secret profits
made by Bigelow and Lewisohn, promoters of the Old Dominion Copper. Bigelow and
Lewisohn framed a scheme for the capitalization of Old Dominion for $3,750,000, then sell to
the corporation for $3,250,000 their property worth $1M but having a market value of not
over $2M, and then sale to the general public at par for cash of the remaining $500,000 of
stock, and all this without providing Old Dominion with any independent board of officers
while making a huge secret profit. The court has decided that such a transaction creates a
liability on the part of the promoters to account for the secret profits to Old Dominion. The
corporation seeks to recover a secret profit made by the promoters in the sale of their own
property to the corporation, basing its claim on the general rule that a promoter cannot
lawfully take a secret profit and will be held to account for it if he does. Fundamentally the
action is to recover profits obtained by a breach of trust, as promoters have duties as
fiduciaries to the company. A promoter includes those who undertake to form a corporation
and to procure for it the rights, instrumentalities and capital by which it is to carry out the
purposes set forth in its charter and to establish it as fully able to do its business. It is now
established without exception that a promoter stands in a fiduciary relation to the corporation
which he is interested in, and that he is charged with all the duties of GF which attach to
other trusts.
I: W/N the rule that a promoter is in a fiduciary capacity with respect to the corporation he
helped in forming is applicable in this case, and w/n the corporation is in a position to assert
his claim for secret profits.
I: W/N the promoters, who owned all of the issued stock at the time of incorporation, with the
intention to immediately issue the same to the public without disclosure, would be liable to
the corporation if a substantial portion of the stock remains unissued, and w/n a vote of
ratification of this breach would exonerate them.
H: Notwithstanding this fiduciary relation, the promoter may sell property to the company
which he is promoting. In order that the contract may be absolutely binding, the promoter
must pursue one of 4 courses of action:
(1) provide an independent board of officers and make a full disclosure to the
corporation through the board;
(2) make a full disclosure of all material facts to each original subscriber of shares
(3) procure a ratification of the contract by vote of the SHs of the established
corporation
(4) subscribe himself in all the shares of the capital stock contemplated as part of the
promotion scheme
In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares. They held
all the shares issued at the time of ratification, but not all which it was proposed to issue as
part of their promotion scheme. There is a liability of the promoter to the corporation when
45
further original subscribers to capital stock contemplated as an essential part of the scheme
of promotion came in after the transaction complained of, even though that transaction is
known to all the then SHs at the time—which are the promoters themselves and their
representatives. In the present case, the whole purchase price was paid in stock, issued
before any stock was issued to the public although after a substantial public subscription. In
other words, it is the order in which the transaction is carried out, and not its substantial
nature, which makes the difference between liability and immunity of the promoter. It is of
know consequence whether in fact the dummy directors know of the terms of sale and the
breach of trust of the promoters. The point is that the directors were selected with the
purpose that they should be the mere instruments of the promoter and they carried out the
will of their masters. If the assent of all SHs is good in one case, by the same token it should
be equally good in the other, and the breach of trust in one is equally a breach of trust in the
other. The starting point is that promoters stand in a fiduciary position toward the
corporation, as well as when as part of the scheme of promotion, uninformed SHs are
expected to come in after the wrong has been perpetrated, as when at the time there are
SHs to whom no disclosure was made. Promoters have in their hands the creation and
molding of the company, like clay in the hands of a potter. It is not necessary to inquire how
far he may be trustee also for shareholders and associates. In the present case the inquiry
relates wholly to his obligation to the corporation. The fiduciary relation must continue until
the promoter has completely established according to his plan the being which he has
undertaken to create. The principle that one cannot rightfully sell property, belonging to him
in his private capacity, to himself in a trust capacity is universal.
The theory upon which corporations are founded is that they are entities, separate and
distinct from officers and SHs. Looking through the form of the corporation to the SHs and
treating them as the corporation is an exception to the rule that the corporation is a separate
legal entity for all purposes, even though all its stock be held by a single interest and it be to
all practical intents merely the instrument of the SH. The wrong which the promoters did in
this case was in selling property worth $1M and in the market at most $2M for $3.25 without
revealing that they were making a secret profit. The wrong was done to the corporation. It
affected all its SHs, present and future alike. It is done directly to the corporation as an
independent entity, and thus indirectly the rights of those who are or will become SHs are
affected. In buying the promoter’ property, the directors of the corporation acted for the
corporation, as such, without reard to who were the then SHs. The wrong is not done when
the innocent public subscribes but when the sale was made to the corporation at a grossly
exaggerated price with secret profit. The occasion for complaining of this wrong comes when
the promoters issue to the public the balance of stock in order to provide the money
necessary to set the corporation on its feet.
— What is a promoter? Chapter VI – Corporate Powers
o Takes initiative in founding and organizing a business or
enterprise of an issuer Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
o Receives, directly or indirectly, consideration for corporate powers of all corporations formed under this Code shall be exercised, all business
services/property 10% or more of shares or proceeds of conducted and all property of such corporations controlled and held by the board of directors
sale thereof or trustees to be elected from among the holders of stocks, or where there is no stock, from
§ Except: consideration solely as underwriting among the members of the corporation, who shall hold office for one (1) year until their
commissions or solely as property successors are elected and qualified. (28a)
— Promoters: principal-agent relationship
o Must directly or indirectly assume liability for services of Every director must own at least one (1) share of the capital stock of the corporation of which
promoters he is a director, which share shall stand in his name on the books of the corporation. Any
— Elements: director who ceases to be the owner of at least one (1) share of the capital stock of the
o Party engaging services corporation of which he is a director shall thereby cease to be a director. Trustees of non-
o Nature of services stock corporations must be members thereof. A majority of the directors or trustees of all
o before, after or during incorporation corporations organized under this Code must be residents of the Philippines.
o consideration for services rendered
— questions: — Primary rule: all corporate powers shall be exercised and all corporate
o who engaged the services? businesses shall be conducted by the board of directors of the corporation
o For what? — Exception: specific instances where the Code requires the consent and
o When? Does it apply to pre-incorp or post-incorp? ratification of the SHs, particularly those where the underlying contractual
o Who benefited? relationship between the parties: the corporation, the SHs/members, and the
o State, is being amended or altered
— Bigelow is an exception! From prior to post, promoters — How is consent expressed by the parties?
benefited!! o Corporation= through the Board
o State= through act of the regulatory body
— Sandiko: adoption by SHs does not retroact! Adoption is not
o SHs= through majority or 2/3 vote where applicable
ratification
§ But dissenting SHs in certain instances are given the option to
— Rizal Light: subject to suspensive condition withdraw from the relationship through the exercise of his
— Builders Duntile: the filing of suit is the act of adoption! appraisal right

Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess
or exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers
so conferred. (n)

1. A corporation has only three (3) types of power:

a. Express (Sec 36)
b. Implied or Necessary
c. Incidental

General Powers of Corporations

a. Express Powers

General

46
 — Other express powers are in its AOI
Section 36. Corporate powers and capacity. - Every corporation incorporated under this — These are exercised by the Board
Code has the power and capacity: — In the absence of authority from the Board, no person, not even the officers, can validly
bind the corporation in the exercise of express powers
— Code laws down two (2) general restrictions on the power of any corporation to
1. To sue and be sued in its corporate name;
purchase and hold properties
o (1) property must be reasonable and necessarily required by the transaction of its
2. Of succession by its corporate name for the period of time stated in the articles lawful business
of incorporation and the certificate of incorporation; § depends on the nature of the business
o (2) must be subject to limitations prescribed by law and the Constitution
3. To adopt and use a corporate seal; § cannot acquire available public lands except by lease of not more than
1000 hectares (consti Art XII Sec 3)
§ exploration, development, exploitation, etc, of natural resources= 60%
4. To amend its articles of incorporation in accordance with the provisions of this Filipino-owned, and only in JV with the state
Code; — General powers in Sec 36 are to be exercised by the Board of Directors in accordance
with Sec 23 (except where otherwise provided)
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code; Specific Powers

1. To extend or shorten the corporate term (37)

6. In case of stock corporations, to issue or sell stocks to subscribers and to sell
stocks to subscribers and to sell treasury stocks in accordance with the provisions
of this Code; and to admit members to the corporation if it be a non-stock
corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and
bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this
Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation. (13a)
— Sources of express powers are provided for by law and those enumerated in its charter
Section 37. Power to extend or shorten corporate term. - A private corporation may extend
or shorten its term as stated in the articles of incorporation when approved by a majority vote
of the board of directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock corporations. Written notice of the proposed action
and of the time and place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally: Provided, That in
case of extension of corporate term, any dissenting stockholder may exercise his appraisal
right under the conditions provided in this code. (n)
— Sec 37: extension or shortening of term of existence
o Vote required: majority of board
o Ratification: vote of at least 2/3 of OCS or members
o Amendment to AOI: YES
o Appraisal rights? YES (37 & 81)
2. To increase or decrease capital stock (38)
o Vote required: majority of board
o Ratification: vote of at least 2/3 of OCS or members
o Prior approval of SEC required to take effect
o Amendment to AOI: YES
o Appraisal rights? NO
§ Dissenting SH can simply sell his shares

47
 § A grant of appraisal rights would defeat the purpose—to raise
funds
3. To incur, create, or increase bonded indebtedness (38)
Section 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities and
residences of the persons subscribing, the amount of capital stock or number of
no-par stock subscribed by each, and the amount paid by each on his subscription
in cash or property, or the amount of capital stock or number of shares of no-par
stock allotted to each stock-holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of any
48
bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the
original articles of incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That the
Securities and Exchange Commission shall not accept for filing any certificate of increase of
capital stock unless accompanied by the sworn statement of the treasurer of the corporation
lawfully holding office at the time of the filing of the certificate, showing that at least twenty-
five (25%) percent of such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if its effect shall prejudice
the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the same,
with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of
the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
(17a)
— Sec 38: incur, create, or increase bonded indebtedness
o Bonded indebtedness: covers indebtedness of the corporation which are
secured by mortgage on real or personal property (does not include
debentures)
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Prior approval of SEC required
o Appraisal rights? NONE
4. To deny preemptive right (39)
Section 39. Power to deny pre-emptive right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously contracted debt.
5. To sell or otherwise dispose of substantially all its assets (40)
Section 40. Sale or other disposition of assets. - Subject to the provisions of existing laws
on illegal combinations and monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property
and assets if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors
or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange,
mortgage, pledge or other disposition of property and assets, subject to the rights of third
parties under any contract relating thereto, without further action or approval by the
stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if the same is necessary in the usual and
regular course of business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
— Sec 40: power to sell, dispose, lease, or encumber all or substantially all
assets
o Vote required: majority vote of the board
o Ratification: vote of at least 2/3 OCS or members
o Nature of transactions covered: onerous contracts
49
o Transactions no covered by SH vote: (does not involve the corporate
purpose, but the corporate business)
§ Necessary in the usual and regular course of business, or…
§ … proceeds of disposition is appropriate for the conduct of
remaining business
o “substantially all” property/assets:
§ if disposition renders corporation incapable of doing business
§ if disposition renders corporation incapable of accomplishing its
purpose in the AOI
§ appraisal right? YES
6. To acquire its own shares (41)
Section 41. Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code. (a)
— Sec 41: power to purchase own shares
o Corporation must first have unrestricted retained earnings
o But redeemable shares may be acquired even without unrestricted
retained earnings (Sec 8)
7. To invest in another corporation or business (42)
Section 42. Power to invest corporate funds in another corporation or business or for any
other purpose. - Subject to the provisions of this Code, a private corporation may invest its
funds in any other corporation or business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of the board of directors or trustees
and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for the purpose. Written
notice of the proposed investment and the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall have appraisal right as provided
in this Code: Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of incorporation, the
approval of the stockholders or members shall not be necessary. (17 1/2a)
— Sec 42: power to invest in another corporation
o Vote required: majority of the board
o Ratification: vote of at least 2/3 OCS or members
§ EXCEPT: where the investment is reasonably necessary to
accomplish its PRIMARY PURPOSE
§ If secondary purpose, ratificatory vote is required
o Effect of ratification: corporation can now legally invest its funds
OUTSIDE of its primary purpose, but LIMITED to its secondary purpose
o Coverage of “funds”—any corporate property to be used to further its
business
o No ratificatory vote: ULTRA VIRES
8. To declare dividends (43)
Section 43. Power to declare dividends. - The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of stockholders
representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate
expansion projects or programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies. (n)
— Sec 43: power to declare dividends out of restricted retained earnings
o Payable in cash, property, or stock
o Cash dividends due on unpaid stock shall be applied to the unpaid
balance on the subscription plus costs and expenses
o Primary of SHs to DEMAND dividends
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members
o Cannot retain surplus profits in excess of 100% of paid up capital stock
o Exception:
50
§ When justified by definite corporate expansion projects
approved by the board
§ When prohibited under any loan agreement
§ When it is clear that the retention is necessary under special
circumstances
o Surplus profits in excess of 100%= distribute as dividends
9. To enter into management contracts (44)
Section 44. Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations own or control more than one-
third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation;
or (2) where a majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock
entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a period longer than five
years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be provided by the pertinent laws or
regulations. (n)
— Sec 44: power to enter into a management contract
o Vote required: majority of the board
o Ratification: vote of at least 2/3 of OCS or members, but…
o Special rule: vote of SH of MANAGED corporation owning at least 2/3 of
TOTAL outstanding stock or members entitled to vote, iff:
§ SH(s) representing the same interest in both managed and
managing corporations own or control more than 1/3 of TOTAL
outstanding capital stock, or…
§ … majority of Board of directors of the MANAGING corporation
also constitute a MAJORITY of the board in the MANAGED
o rationale for the special rule: entering into a management contract is a
deviation from the GR that the board manages the corporation and that
 the board of the managing company should devote its affairs to its own c. Incidental Powers
corporation
o Not covered by Sec 44: — Sec 2: powers, attributes, and properties expressly authorized by law or
§ if managing other corporations is the primary purpose, incident to its existence
ratificatory vote is not required! — Incidental powers: those that attach to a corporation at the moment of its
§ If managing a partnership or individual not a corporation, not creation without regard to its express powers or particular primary
covered! purpose, and is inherent in it as a legal entity
— Examples:
10. To buy the shares of another corporation (36) provided: i. To sue and be sued
a. Reasonably necessary for its lawful business ii. To grant and receive in the corporate name
b. The other corporation must be engaged in an allied business or not alien iii. To purchase hold and convey real and personal property for its
to the purposes of the purchasing corporation (42) purposes
— This means a corporation can enter into a joint venture with another iv. To have a corporate seal
person, partnership or another corporation v. To adopt and amend by-laws for its government
— But a corporation cannot enter into a partnership contract vi. To disenfranchise or remove members
— Powers that go into the very nature and extent of a corporation’s juridical
entity cannot be presumed to be incidental or inherent powers
11. Power to enter into a partnership

— GR: corporation cannot enter into partnerships with other corporations or with
individuals The Ultra Vires Doctrine
— Exception: expressly allowed by statute or charter
o Joint ventures Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess
o Limited partnerships (US Law) or exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers
b. Implied or Necessary Powers so conferred. (n)

— Sec 45 embodies the ultra vires doctrine

GR: all acts other than those specified in Sec 36-44 and in other special provisions would be
— Based on two (2) principles:
ultra vires
1. Corporation is a creature of law and has only such powers and privileges as are
granted by the State
Exception: those which are:
2. The doctrine upholds the duty of trust and obedience owed by the corporation’s
— necessary or incidental to the exercise of the powers so conferred (45), or
directors and officers to the SHs
— essential or necessary to carry out its purpose or purposes as stated in the
a. Defense of ultra vires rests on the violation of trust or duty towards SHs,
AOI. (38)
and should not be entertained where its allowance will do greater wrong to
innocent 3rd parties
Presumption that a corporation can act within its powers and when a contract is not on its
face necessarily beyond its authority, it will, in the absence of proof to the contrary,
Three (3) types of ultra vires acts:
presumed to be valid.
(1) acts beyond the powers of the corporation as stipulated in the law or AOI. The
TEST: logical relation of the act to the corporate purpose:
— Sec 36(11): corporations have the power and capacity to exercise such other
a. W/N the act is in direct and immediate furtherance of the corporation’s
powers as may be essential or necessary to carry out its purpose(s) as
business
provided for in the AOI
b. W/N the act is fairly incident to the express powers and reasonably
o Restated: the management of a corporation has discretionary authority, in
necessary for its exercise
the absence of explicit restrictions, to enter into contracts or transactions
(2) acts or contracts entered in behalf of the corporation by persons without corporate
deemed reasonably necessary or incidental to its business purposes.
authority

51
 a. GR: only acts of corporate officers within the scope of their authority are
binding on the corporation; acts beyond the authority cannot bind the
corporation
b. Exception: ratification by the Board or estoppel
c. Primary rule: In the absence of an authority from the board, no person,
not even the officers, can validly bind the corporation
d. Exception:
i. Doctrine of apparent authority: in dealing with corporations, the
public at large is bound to rely upon outward appearances, and
relying on such, if it be found that the directors permitted the
agent to hold himself out as having authority to bind or
acquiesced in the contract and accepted the benefits therefrom,
the corporation will be bound. (Ramirez v Orientalist)
1. Public is not expected to know what goes on inside
the boardroom, or cannot be required to look beyond
the officers acting for a corporation
2. If the corporation desires to set up the defense of lack
of authority, it must plead and prove it…
3. …but once it discharges that duty, then the burden of
proof shifts to the agent to proof that by previous acts
of the corporation he had been clothed with apparent
authority
(3) acts or contracts which are per se illegal
a. cannot be given effect and are void
i. but in Harden, the Court upheld a patently void contract as
between the contracting parties; a narrow exception is made in
that since the violation of the particular law pertains to public
policy concerns and may only be proceeded through a quo
warranto, not by any of the parties
ii. thus if no civil wrong was committed, the courts will leave the
parties as they were (Harden)
b. ultra vires acts which are NOT per se illegal are merely voidable can be
ratified by the SHs (Pirovano)
i. it cures the infirmity and makes it perfectly valid and
enforceable, provided that it prejudices no creditors and if it has
been partially executed and not merely executory
1. ratification may be by express act of the SH (if the act
is by the Board) or the Board (if the act is by the
officers)…
2. …or impliedly through acceptance of benefits…
3. …or through estoppel on the part of the Board or the
officers
Corporations are now more of a product of the agreement of the incorporating parties rather
than a mere “creature of the State:”
52
— Sec 10 allows 5 or more persons to form a private corporation for any lawful
purpose/s
— Sec 36 par 11 allows every corporation the power to exercise such other
powers as may be essential or necessary to carry out the purpose/s in the AOI
— The corporation’s powers depends on its purpose in the AOI
— Since parties are entirely free to insert any number of purposes in its AOI, it
follows that the extent of the corporation’s powers depends largely on their
agreement, and not merely on a direct grant from the State, unless of course
the purposes are illegal.
— Instances where an act can or cannot be reasonably implied from the
purposes due to poor draftsmanship or lack of foresight of the drafters, the
purpose clause may be reasonably stretched to accommodate the new and
unexpected situations, otherwise, a proper amendment of the AOI would be
necessary.
Legal consequences of acts clearly beyond the powers of the corporation or ultra vires?
— On the corporation:
o if the act is illegal, involuntary dissolution under a quo warranto
proceeding by the SolGen
o revocation or suspension of the certificate of registration by the SEC
— On the parties to the ultra vires contract:
o Parties are “left as they are” and no rescission would lie.
o Where there has been partial performance by one party, and the other
has not, the latter, having benefited from the performance, is estopped
from claiming ultra vires
— On the rights of stockholders:
o A stockholder can file an individual or derivative suit to enjoin a
threatened ultra vires act or contract or a derivative suit for damages if
the contract has been performed
o Liability would depend on whether the contracting parties acted in GF and
with reasonable diligence; an honest mistake would not give rise to
liability
— If action is based on tort, the stockholders cannot set up the defense of ultra
vires against the injured party who had no knowledge that the corporation was
engaging in an act not included expressly or impliedly in its purpose clause.
RP v Acoje Mining. F: Acoje Mining requested the opening of a post office at its mining
camp in Zambales to service employees living in the camp. The Director of Posts agreed to
set up the office, provided that in the meantime that funds are not available, the company
would provide for all essential equipment and assign a responsible employee to perform the
duties of a postmaster. He also added that the company shall assume direct responsibility
for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of the
dishonesty or negligence of the employee assigned. A Resolution by the Acoje Board of
Directors was passed. The postmaster assigned, Hilario Sanchez, went on leave and never
returned. It was soon discovered that a shortage was incurred iao P13,867.24, apparently
embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its liability
contending that the resolution issued by the board was ultra vires, and its liability if any
would only be that of a guarantor.
H: It should be noted that it was Acoje itself that requested for the setting up of a post office
for the convenience of its employees, which the SC held to cover a subject which is “a
reasonable and proper adjunct to the conduct of the business of Acoje Mining.” An ultra vires
act is one committed outside the object for which a corporation is created, but there are
certain corporate acts that may be performed outside the scope of the powers expressly
conferred if they are necessary to promote the interest and welfare of the corporation.”
Even in the case of ultra vires acts which are not illegal per se, a corporation cannot be
heard to complain that it is not liable for the acts of its board, because of estoppel by
representation. The term ultra vires should be distinguished from an illegal act for the former
is merely voidable which may be enforced by performance, ratification, or estoppel, while the
latter is void and cannot be invalidated. It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for taking such action. In this case, it is
fair that the resolution be upheld at least on the ground of estoppel.
The defense of ultra vires rests on violation of trust or duty towards the stockholders, and
should not be entertained where its allowance will do greater wrong to innocent parties
dealing with the corporation. The acceptance of benefits arising from the performance of the
other party gives rise to an estoppel precluding the repudiation of the contract.
Napocor v Vera. Sea Lion is a port and arrastre operator with a contract for stevedoring
services with NPC which had already expired. Its PPA permit for cargo handling services at
the NPC Calaca pier had expired as well. Napocor did not renew Sea Lion’s contract for
Stevedoring Services for Coal-Handling Operations at Calaca plant, and took over its
stevedoring services pursuant to a provision in its charter, “[t[o exercise such powers and do
such things as may be reasonably necessary to carry out the business and purposes for
which it was organized, or which, from time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to accomplish said purpose.” Sea Lion sues,
alleging that NPC had acted in bad faith and with grave abuse of discretion in not renewing
its Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant, and
in taking over its stevedoring services. Judge Vera, acting on Sea Lion’s suit, issued a writ of
preliminary injunction enjoining NPC from further undertaking stevedoring and arrastre
services in its pier located at the Batangas Coal-Fired Thermal Power Plant at Calaca,
Batangas and directing it either to enter into a contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Sea Lion was also allowed to continue stevedoring
and arrastre services at the pier.
H: In determining whether or not the act of NPC falls within the purview of the charter which
creates it, the Court must decide whether or not a logical and necessary relation exists
between the act questioned and the corporate purpose expressed in the NPC charter. For if
that act is one which is lawful in itself and not otherwise prohibited, and is done for the
purpose of serving corporate ends, and reasonably contributes to the promotion of those
53
ends in a substantial and not in a remote and fanciful sense, it may be fairly considered
within the corporation's charter powers. A pier located at Calaca, Batangas, which is owned
by NPC, receives the various shipments of coal which is used exclusively to fuel the
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric power.
The stevedoring services which involve the unloading of the coal shipments into the NPC
pier for its eventual conveyance to the power plant are incidental and indispensable to the
operation of the plant. The Court holds that NPC is empowered under its Charter to
undertake such services, it being reasonably necessary to the operation and maintenance of
the power plant. This Court is, guided by the case of Republic of the Philippines v. Acoje
Mining Company, Inc., where the Court affirmed the rule that a corporation is not restricted to
the exercise of powers expressly conferred upon it by its charter, but has the power to do
what is reasonably necessary or proper to promote the interest or welfare of the corporation.
Whether NPC will enter into a contract for stevedoring and arrastre services to handle its
coal shipments to its pier, or undertake the services itself, is entirely and exclusively within
its corporate discretion. It does not involve a duty the performance of which is enjoined by
law. Thus, the courts cannot direct the NPC in the exercise of this prerogative.
Madrigal & Co v Zamora. Madrigal & Co was engaged in the management of Rizal Cement
Co., Inc. and is also its sister company, both being owned by the same or practically the
same stockholders. The Madrigal Central Office Employees Union sought for the renewal of
its collective bargaining agreement and proposed a wage increase of P200.00 a month, an
allowance of P100.00 a month, and other economic benefits. Madrigal requested for a
deferment in the negotiations.
Thereafter, Madrigal on two occasions reduced its capital stock from 765,000 shares to
267,366 shares and from 267,366 shares to 110,085 shares by virtue of two alleged
resolutions of its stockholders, which was effected through the distribution of the marketable
securities owned by the petitioner to its stockholders in exchange for their shares in an
equivalent amount in the corporation.
The Union filed a case for ULP with the NLRC. Madrigal answered citing operational losses.
Madrigal then informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it
derives income as the General Manager or Agent" had "ceased operating temporarily. In
addition, because of the desire of the stockholders to phase out the operations of the
Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to
prevent further losses," it had to reduce its capital stock on two occasions. The labor arbiter,
having found that the petitioner "had been making substantial profits in its operation" since
1972 through 1975, granted the wage increase, and was affirmed by NLRC. Meanwhile
Madrigal tried to terminate the services of Union members citing retrenchment but its
application was declared illegal by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the
decision of DOLE.
H: What clearly emerges from the recorded facts is that the petitioner, awash with profits
from its business operations but confronted with the demand of the union for wage
increases, decided to evade its responsibility towards the employees by a devised capital
reduction. While the reduction in capital stock created an apparent need for retrenchment, it
was, by all indications, just a mask for the purge of union members, who, by then, had
agitated for wage increases. In the face of the petitioner company's piling profits, the
unionists had the right to demand for such salary adjustments. That the petitioner made quite
handsome profits is clear from the records. We agree with the National Labor Relations
Commission that "[t]he dividends received by the company are corporate earnings arising
from corporate investment." 42 Indeed, as found by the Commission, the petitioner had
entered such earnings in its financial statements as profits, which it would not have done if
they were not in fact profits. 43
Moreover, it is incorrect to say that such profits — in the form of dividends — are beyond the
reach of the petitioner's creditors since the petitioner had received them as compensation for
its management services in favor of the companies it managed as a shareholder thereof. As
such shareholder, the dividends paid to it were its own money, which may then be available
for wage increments. It is not a case of a corporation distributing dividends in favor of its
stockholders, in which case, such dividends would be the absolute property of the
stockholders and hence, out of reach by creditors of the corporation. Here, the petitioner was
acting as stockholder itself, and in that case, the right to a share in such dividends, by way of
salary increases, may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to
begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been
making profits, and consequently, to justify the mass layoff in its employee ranks, especially
of union members. They were nothing but a premature and plain distribution of corporate
assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with
capital through the years. Surely, we can neither countenance nor condone this. It is an
unfair labor practice.
Gov’t of Philippines v El Hogar. This is a quo warranto proceeding, alleging 17 causes of
action, instituted originally in this court by the Government of the Philippine Islands on the
relation of the Attorney-General against the building and loan association known as El Hogar
Filipino, for the purpose of depriving it of its corporate franchise, excluding it from all
corporate rights and privileges, and effecting a final dissolution of said corporation. The
respondent, El Hogar Filipino, was apparently the first corporation organized in the Philippine
Islands under the provisions cited, and the association has been favored with extraordinary
success. The articles of incorporation bear the date of December 28, 1910, at which time
capital stock in the association had been subscribed to the amount of P150,000 of which the
sum of P10,620 had been paid in. Under the law as it then stood, the capital of the
Association was not permitted to exceed P3,000,000, but by Act No. 2092, passed
December 23, 1911, the statute was so amended as to permit the capitalization of building
and loan associations to the amount of ten millions. Soon thereafter the association took
advantage of this enactment by amending its articles so as to provide that the capital should
be in an amount not exceeding the then lawful limit. From the time of its first organization the
number of shareholders has constantly increased, with the result that on December 31,
1925, the association had 5,826 shareholders holding 125,750 shares, with a total paid-up
value of P8,703,602.25. During the period of its existence prior to the date last above-
54
mentioned the association paid to withdrawing stockholders the amount of P7,618,257,.72;
and in the same period it distributed in the form of dividends among its stockholders the sum
of P7,621,565.81.
I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in violation of the
law that while corporations may loan funds upon real estate security, they shall dispose of
the same within 5 years after receiving title
H: the corporation has not been shown to have offended against the law in a manner which
would entail forfeiture of its charter. The evident purpose behind the law restricting the rights
of corporations with respect to the tenure of land was to prevent the revival of the entail or
other similar institution by which land could be fettered and its alienation hampered. In the
case, El Hogar had in GF disposed of the property at the expiration of the period fixed by
law. Under the circumstances the destruction of the corporation would bring irreparable loss
upon thousands of innocent shareholders of the corporation without any corresponding
benefit to the public.
I: W/N el Hogar is illegally owning and holding a business lot in excess of the reasonable
requirements and in contravention of the Corpo law that every corporation has the power to
purchase hold lease real property as reasonable and necessary required for the transaction
of the lawful business
H: The law expressly declares that corporations may acquire such real estate as is
reasonably necessary to enable them to carry out the purposes for which they were created;
and we are of the opinion that the owning of a business lot upon which to construct and
maintain its offices is reasonably necessary to a building and loan association such as the
respondent was at the time this property was acquired. A different ruling on this point would
compel important enterprises to conduct their business exclusively in leased offices — a
result which could serve no useful end but would retard industrial growth and be inimical to
the best interests of society. We are furthermore of the opinion that, inasmuch as the lot
referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use
thereof. No legitimate principle can discovered which would deny to one owner the right to
enjoy his (or its) property to the same extent that is conceded to any other owner.
I: W/N el Hogar has engaged in activities foreign to the purposes for which the corporation
was created and not reasonably necessary to its legitimate ends, specifically: (1) the
administration of the offices in the El Hogar building not used by the respondent itself and
the renting of such offices to the public; (2) the administration and management of properties
belonging to delinquent shareholders of the association; (3) the management of some
parcels of improved real estate situated in Manila not under mortgage to it, but owned by
shareholders, and has held itself out by advertisement as prepared to do so
H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent,
as shown in what we have said above relative to the second cause of action. This matter will
therefore no longer detain us. If the respondent had the power to acquire the lot, construct
the edifice and hold it beneficially, as there decided, the beneficial administration by it of
such parts of the building as are let to others must necessarily be lawful.
(2) The case for the government supposes that the only remedy which the respondent has in
case of default on the part of its shareholders is to proceed to enforce collection of the whole
loan in the manner contemplated in section 185 of the Corporation Law. It will be noted,
however, that, according to said section, the association may treat the whole indebtedness
as due, "at the option of the board of directors," and this remedy is not made exclusive. We
see no reason to doubt the validity of the clause giving the association the right to take over
the property which constitutes the security for the delinquent debt and to manage it with a
view to the satisfaction of the obligations due to the debtor than the immediate enforcement
of the entire obligation, and the validity of the clause allowing this course to be taken
appears to us to be not open to doubt.
(3) The practice described in the passage above quoted from the agreed facts is in our
opinion unauthorized by law. The administration of property in the manner described is more
befitting to the business of a real estate agent or trust company than to the business of a
building and loan association. The practice to which this criticism is directed relates of course
solely to the management and administration of properties which are not mortgaged to the
association. The circumstance that the owner of the property may have been required to
subscribe to one or more shares of the association with a view to qualifying him to receive
this service is of no significance. It is a general rule of law that corporations possess only
such express powers. The management and administration of the property of the
shareholders of the corporation is not expressly authorized by law, and we are unable to see
that, upon any fair construction of the law, these activities are necessary to the exercise of
any of the granted powers. The corporation, upon the point now under the criticism, has
clearly extended itself beyond the legitimate range of its powers. But it does not result that
the dissolution of the corporation is in order, and it will merely be enjoined from further
activities of this sort.
I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation for his
services rendered by him during the early stages of the organization of the corporation, is
unconscionable, excessive, and thus necessitates dissolution
H: No possible doubt exists as to the power of a corporation to contract for services rendered
and to be rendered by a promoter in connection with organizing and maintaining the
corporation. It is true that contracts with promoters must be characterized by good faith; but
could it be said with certainty, in the light of facts existing at the time this contract was made,
that the compensation therein provided was excessive? If the amount of the compensation
now appears to be a subject of legitimate criticism, this must be due to the extraordinary
development of the association in recent years. If the Melian contract had been clearly ultra
vires — which is not charged and is certainly untrue — its continued performance might
conceivably be enjoined in such a proceeding as this; but if the defect from which it suffers is
mere matter for an action because Melian is not a party. It is rudimentary in law that an
action to annul a contract cannot be maintained without joining both the contracting parties
as defendants. Moreover, the proper party to bring such an action is either the corporation
itself, or some shareholder who has an interest to protect.
I: W/N el Hogar had abused its franchise in issuing special shares, which is alleged to be
illegal and inconsistent with the plan and purposes of building and loan associations,and that
these are held by well-to-do people purely for investment purposes and not by wage-earners
for savings
H: The ground for supposing the issuance of the "special" shares to be unlawful is that
special shares are not mentioned in the Corporation Law as one of the forms of security
which may be issued by the association. Upon examination of the nature of the special
55
shares in the light of American usage, it will be found that said shares are precisely the same
kind of shares that, in some American jurisdictions, are generally known as advance
payment shares; in if close attention be paid to the language used in the last sentence of
section 178 of the Corporation Law, it will be found that special shares where evidently
created for the purpose of meeting the condition cause by the prepayment of dues that is
there permitted. The language of this provision is as follow "payment of dues or interest may
be made in advance, but the corporation shall not allow interest on such advance payment at
a greater rate than six per centum per annum nor for a longer period than one year." In one
sort of special shares the dues are prepaid to the extent of P160 per share; in the other sort
prepayment is made in the amount of P10 per share, and the subscribers assume the
obligation to pay P10 monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest shall not be allowed on the
advance payments at a greater rate than six per centum per annum nor for a longer period
than one year. The word "interest " as there used must be taken in its true sense of
compensation for the used of money loaned, and it not must not be confused with the dues
upon which it is contemplated that the interest may be paid. Now, in the absence of any
showing to the contrary, we infer that no interest is ever paid by the association in any
amount for the advance payments made on these shares; and the reason is to be found in
the fact that the participation of the special shares in the earnings of the corporation, in
accordance with section 188 of the Corporation Law, sufficiently compensates the
shareholder for the advance payments made by him; and no other incentive is necessary to
induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of each special share is not
paid for by the shareholder with funds out of the pocket. The amount is satisfied by applying
a portion of the shareholder's participation in the annual earnings. But as the right of every
shareholder to such participation in the earnings is undeniable, the portion thus annually
applied is as much the property of the shareholder as if it were in fact taken out of his pocket.
It follows that the mission of the special shares does not involve any violation of the principle
that the shares must be sold at par.
From what has been said it will be seen that there is express authority, even in the very letter
of the law, for the emission of advance-payment or "special" shares, and the argument that
these shares are invalid is seen to be baseless. In addition to this it is satisfactorily
demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute
has not expressly authorized such shares, yet the association has implied authority to issue
them. The complaint consequently fails also as regards the stated in the ninth cause of
action.
I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at the
discretion of its Board, the value of real properties acquired by it at its sales, thereby
frustrating the right of SHs to participate annually and equally in the earnings.
H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as to
what a court may do in determining the internal policy of a business corporation. If the
criticism contained in the brief of the Attorney-General upon the practice of the respondent
association with respect to depreciation be well founded, the Legislature should supply the
remedy by defining the extent to which depreciation may be allowed by building and loan
associations. Certainly this court cannot undertake to control the discretion of the board of
directors of the association about an administrative matter as to which they have legitimate
power of action. The tenth cause of action is therefore not well founded.
I: W/n el Hogar’s charter should be revoked because it illegally maintains excessive reserve
funds and because it pursues a policy, allegedly unlawful, of paying a straight annual
dividend of 10% regardless of losses suffered and profits made by the corporation and in
violation of the requirement s of the corpo code.
H: It is insisted in the brief of the Attorney-General that the maintenance of reserve funds is
unnecessary in the case of building and loan associations, and at any rate the keeping of
reserves is inconsistent with section 188 of the Corporation Law. Upon careful consideration
of the questions involved we find no reason to doubt the right of the respondent to maintain
these reserves. It is true that the corporation law does not expressly grant this power, but we
think it is to be implied. It is a fact of common observation that all commercial enterprises
encounter periods when earnings fall below the average, and the prudent manager makes
provision for such contingencies. To regard all surplus as profit is to neglect one of the
primary canons of good business practice. Building and loan associations, though among
the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations
in the dividend rate are highly detrimental to any fiscal institutions, while uniformity in the
payments of dividends, continued over long periods, supplies the surest foundations of
public confidence.
Moreover, it is said that the practice of the association in declaring regularly a 10 per cent
dividend is in effect a guaranty by the association of a fixed dividend which is contrary to the
intention of the statute. The government insists upon an interpretation of section 188 of the
Corporation Law that is altogether too strict and literal. From the fact that the statute provides
that profits and losses shall be annually apportioned among the shareholders it is argued
that all earnings should be distributed without carrying anything to the reserve. But it will be
noted that it is provided in the same section that the profits and losses shall be determined
by the board of directors: and this means that they shall exercise the usual discretion of good
businessmen in allocating a portion of the annual profits to purposes needful to the welfare
of the association. The law contemplates the distribution of earnings and losses after other
legitimate obligations have been met. Our conclusion is that the respondent has the power to
maintain the reserves criticized in the eleventh and twelfth counts of the complaint; and at
any rate, if it be supposed that the reserves referred to have become excessive, the remedy
is in the hands of the Legislature. It is no proper function of the court to arrogate to itself the
control of administrative matters which have been confided to the discretion of the board of
directors. The causes of action under discussion must be pronounced to be without merit.
I: W/n el Hogar illegally departed from its charter because it has made loans which were
intended to be used by the borrowers for other purposes than the building of homes. There is
no statute here expressly declaring that loans may be made by these associations solely for
the purpose of building homes. On the contrary, the building of homes is mentioned in
section 171 of the Corporation Law as only one among several ends which building and loan
associations are designed to promote. Furthermore, section 181 of the Corporation Law
expressly authorities the Board of directors of the association from time to time to fix the
56
premium to be charged. In the brief of the plaintiff a number of excerpts from textbooks and
decisions have been collated in which the idea is developed that the primary design of
building and loan associations should be to help poor people to procure homes of their own.
This beneficent end is undoubtedly served by these associations, and it is not to be denied
that they have been generally fostered with this end in view. But in this jurisdiction at least
the lawmaker has taken care not to limit the activities of building and loan associations in an
exclusive manner, and the exercise of the broader powers must in the end approve itself to
the business community.
I: W/n the el Hogar charter may be revoked because various loans now outstanding have
been made by the respondent to corporations and partnerships, and that these entities have
in some instances subscribed to shares in the respondent for the sole purpose of obtaining
such loans, and that some of these juridical entities became shareholders merely for the
purpose of qualifying themselves to take loans from the association.
H: the Corporation Law declares that "any person" may become a stockholder in building
and loan associations. The word "person" appears to be here used in its general sense, and
there is nothing in the context to indicate that the expression is used in the restricted sense
of both natural and artificial persons, as indicated in section 2 of the Administrative Code.
We would not say that the word "person" or persons," is to be taken in this broad sense in
every part of the Corporation Law. For instance, it would seem reasonable to say that the
incorporators of a corporation ought to be natural persons, although in section 6 it is said that
five or more "persons", although in section 6 it is said that five or more "persons," not
exceeding fifteen, may form a private corporation. But the context there, as well as the
common sense of the situation, suggests that natural persons are meant. When it is said,
however, in section 173, that "any person" may become a stockholder in a building and loan
association, no reason is seen why the phrase may not be taken in its proper broad sense of
either a natural or artificial person. At any rate the question whether these loans and the
attendant subscriptions were properly made involves a consideration of the power of the
subscribing corporations and partnerships to own the stock and take the loans; and it is not
alleged in the complaint that they were without power in the premises. Of course the mere
motive with which subscriptions are made, whether to qualify the stockholders to take a loan
or for some other reason, is of no moment in determining whether the subscribers were
competent to make the contracts. The result is that we find nothing in the allegations of the
sixteenth cause of action, or in the facts developed in connection therewith, that would justify
us in granting the relief.
I: W/n el Hogar, in disposing of real estate purchased in the collection of defaulted loans, on
credit at first and then sold and mortgaged to el Hogar to secure payment of the purchase
price, had incurred several outstanding loans, and that that the persons and entities to which
said properties are sold under the condition charged are not members or shareholders nor
are they made members or shareholders of the defendant.
H: This part of the complaint is based upon a mere technicality of bookkeeping. The central
idea involved in the discussion is the provision of the Corporation Law requiring loans to be
stockholders only and on the security of real estate and shares in the corporation, or of
shares alone. It seems to be supposed that, when the respondent sells property acquired at
its own foreclosure sales and takes a mortgage to secure the deferred payments, the
obligation of the purchaser is a true loan, and hence prohibited. But in requiring the
respondent to sell real estate which it acquires in connection with the collection of its loans
within five years after receiving title to the same, the law does not prescribe that the property
must be sold for cash or that the purchaser shall be a shareholder in the corporation. Such
sales can of course be made upon terms and conditions approved by the parties; and when
the association takes a mortgage to secure the deferred payments, the obligation of the
purchaser cannot be fairly described as arising out of a loan. Nor does the fact that it is
carried as a loan on the books of the respondent make it a loan on the books of the
respondent make it a loan in law. The contention of the Government under this head is
untenable.
Pirovano v Dela Rama. Under the leadership and management of Enrico Pirovano,
president of Del Rama Steamship, the company grew and progressed until it became a
multi-million corporation, the assets of which grew and increased from P240K to around
P15M. He was insured by the company for P1M. Esteban dela Rama, majority stockholder,
distributed his shares among his 5 daughters, including the NDC, to which Dela Rama had
an outstanding bonded indebtedness iao P7.5M, through a debt-equity swap arrangement
which also gave the NDC representation in the Board. Pirovano was killed by the Japanese
during the war, and a Boardres was adopted granting to the Pirovano children the proceeds
of the insurance policies taken on the life of the late president. However, the policy had lapse
because the company was not able to pay the premiums regularly. The BoardRes authorizes
the allocation of P400K convertible into 4000 shares of stock ifo of the Pirovano children, as
well as a waiver of the preemptive rights of the former owners, the Dela Rama siblings. This
was submitted to the stockholders which duly approved the same. It appears, however, that
Don Esteban did not realize that the dole out would actually be giving to the Pirovano
children more than what they intended to give. This was because the value then of the
shares was 3.6 times the par value thereof, thus the donation iao P400K would amount to a
total of P1.44M. Thus the voting strength of the Pirovano children would be twice as much as
that of the dela Rama sisters. The old Resolution having been nullified, the Board adopted a
new BR changing the form of the donation from 4000 shares into a renunciation of the
Company’s right and title to the life insurance policies of Pirovano. It also provides that the
proceeds of the policy be retained by the Company as a loan drawing interest payable to the
Pirovano children whenever the company is in a position to meet this financial obligation and
after the Company settles its bonded indebtedness ifo NDC. This was ratified by the Dela
Rama stockholders. Mrs Pirovano accepted the donation, and buys property in the US. Upon
inquiry with the Sec, it was found that the donation was illegal and thus void on the grounds
that the corporation acted ultra vires and that it could not dispose of its assets through
donation. The stockholders then voted to revoke the donation. Mrs Pirovano sued to demand
the credit owed to them by the Company.
I: w/n the donation by the corporation of the proceeds of the insurance is an ultra vires act
H: Under the AOI of Dela Rama Steamship it is provided under (g) that the company may
invest and deal with moneys of the company not immediately required, in such a manner as
from time to time may be determined, and under (i)… to lend money or to aid in any other
manner any person association, or corporation of which any obligation or in which any
interest is held by the corporation or in the affairs of prosperity of which the corporation has a
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lawful interest. The corporation was thus given broad and almost unlimited powers to carry
out the purposes for which it was organized. The word ”deal” is broad enough to include any
manner of disposition, and thus the donation comes within the scope of this broad power.
The company was in fact very much solvent as it was able to declare and issue dividends to
its stockholders, and shows that the excess funds which were not needed by the company
which was donated to the children was justified under the AOI.
Under the second broad power, the corporation knew well its scope such that noone lifted a
finger to dispute its validity. The company gave the donation not only because it was
indebted to him but also because it was fit and proper to make provisions for the children
and out of a sense of gratitude.
Even assuming that the donation was ultra vires, still it cannot be invalidated or declared
legally ineffective for that reason alone, it appearing that the donation represents not only the
act of the Board but also that of the stockholders themselves since they expressly ratified the
resolution. By this ratification, the infirmity of the corporate act, if any, has been obliterated
thereby making the act perfectly valid and enforceable, especially so if the donation is not
merely executory but consummated. The defense of ultra vires cannot be set up against
completed or consummated transactions.
An ultra vires act may either be an act performed merely outside the scope of the powers
granted to the corporation by its AOI or one which is contrary to law or violative of any
principle which would void any contract. A distinction has to be made with respect to
corporate acts which are illegal and those merely ultra vires. The former are contrary to law,
morals, public order or policy, while the latter are not void ab initio, but merely go beyond the
scope of the powers in the AOI, and which renders the act merely voidable and thus
ratifiable by the stockholders.
Harden v Benguet. Balatoc Mining, engaged in the mining of gold, sorely needed the
infusion of new capital to resuscitate its stalled operations. The officers approached the
Benguet Mining Co, an entity also engaged in gold mining. A contract was executed, which
states that Benguet agrees to construct a milling plant for the Balatoc mine and erect a
power plant, in exchange for Balatoc Mining shares valued at P600K and the excess in cash
to compensate for the cost of the contract. By the time of the complaint, the value of the
stock of Balatoc had soared for a nominal valuation to more than P11 per share. It was
alleged by Harden of Balatoc that the Benguet Mining Co held shares of stock in another
mining corporation, the Balatoc Mining Company, in violation of a prohibition against mining
corporations from owning stock of another mining corporation in the old Corpo law. The
shareholders of Balatoc sued Benguet Mining to annul stock certificates of Balatoc issued ifo
Benguet and to recover money earned from the transaction. TC dismissed complaint.
H: Although the contract between the two mining companies was illegal for contravening the
old Corpo Law, the Legislature, in adopting such a provision had the intention that public
policy should be controlling in the granting of mining rights. The violation in this case was of
such a nature that it can be proceeded upon only by way of a criminal prosecution, or by
action quo warranto, which can be maintained only by the State. Insofar as the parties are
concerned, no civil wrong had been committed between them, and if public wrong had been
committed, then the directors of Balatoc Mining and Harden were the active inducers of that
wrong. The contract has in fact been performed on both sides, and there is no possibility of
undoing what had been done. Thus even where corporate contracts are illegal per se, when
only public or government policy or interests are at stake and no private wrong is committed,
the courts will leave the parties as they are, in accordance with their original contractual
expectations.
— Corporate powers: WYSIWYG
— AOI related to relevant code provisions
— Powers are built-in in the AOI, limited by primary
purpose
— 45: all encompassing powers
— Necessary and incidental rule: necessary is different
from incidental
— Common denominator contained in AOI
— Code sets parameters/requirements (36-44)
— Statute sets parameters (i.e. banks, Gen Banking
Act)
rd
— Specific powers: dealing with SHs and 3 parties
— Cannot divorce exercise of corporate powers from
control and management
— Extent of corporate powers would limit control and
management
— Unlimited discretion cannot be exercised for
furtherance of secondary purposes in AOI
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Chapter VII – Control/Management
Section 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this Code must be residents of
the Philippines.
(FOR VILLANUEVA NOTES ON CORPORATE POWERS SEE: CHAP 4 CORPORATE
POWERS)
Allocation of power and control: three levels of control:
(1) board of directors or trustees= formulate the corporate policies
(2) corporate officers= execute the policies
(3) stockholders or members= have residual powers over fundamental corporate
changes
Rationale of centralized management
— one of the advantageous features of the corporation—acting through centralized
management
— the congruence of authority and responsibility in the same person, committee, or board
always promote efficiency
Who exercises corporate powers?
1. board of directors (for stock corporations) or trustees (for non-stock
corporations)
— governing body
— sole authority to determine the policy and conduct the ordinary business of the
corporation within the scope of the charter
— so long as the board acts honestly, in GF, and not in defraud of creditors or abusive of
the rights of minority SHs
— GR: in the absence of an authority from the board of directors, no person, not even the
officers of the corporation, can validly bind the corporation
— Exception: with respect to 3rd persons, actions of the corporation even without formal
board approval may still bind! (ex. Proof of usage, acquiescence of the board despite
knowledge of the act, receipt of benefits, implied ratification, estoppel
Primary objective of the Board
— primary obligation of directors is to seek the maximum amount of profits for the
corporation, and characterized the position as a position of trust
o in case director’s interest conflict with those of the corporation, he cannot sacrifice
the latter to his own advantage and benefit
o fiduciary or trust relationship is not a matter of statutory or technical law, but
springs from the control and guidance of corporate affairs and property and hence
the property interest of the SHs
— 23: Powers of a corporation shall be exercise, all business conducted, and all property
of such corporation controlled and held by the board of directors or trustees to be
elected from among the holders of stocks or among the members, unless otherwise
provided in the Code.
— 35: Board may delegate to an executive committee or officials or contracted managers,
which must be specific purposes, through the by-laws
o Delegation makes the execom agents of the corporation, and the rules on agency
apply
o Not less than 3 members
o Can act on specific matters except:
§ Action where SHs approval is required
§ Filing of vacancies in the board
§ Amendment of repeal of by-laws or adoption of new by-laws
§ Amendment or repeal of any board resolution which is expressly
unamendable
§ Distribution of cash dividends
— Term of office of directors: 1 year
— stockholders or members elect the members, but once elected they have no right to
interfere with the board’s exercise of powers
— 138: non-stock corps may designate governing boards
Section 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
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capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this Code must be residents of
the Philippines.
Peculiar Agency Role of the board
— in a manner of speaking, the board acts as an agent of the corporation, and is bound by
the rules applying to agency relationship
o although the board is an agent of the corporation, since the principal is a mere
juridical concept, it realistically is not in a position to countermand the decisions of
its agent
o unlike in an ordinary principal-agent relationship, the corporate principal does not
really have its own mind to allow it to decide matters for itself
o the board stands both as an agent of the corporation, and the very personification
of the corporation in the commercial and legal world
— board has sole power to decide whether a corporation could sue, purchase or sell
property, enter into a contract, or perform any other act
— SH resolutions on matters other than the exceptions= not legally effective nor binding on
the board; may be treated as merely advisory (Ramirez case)
— GR: to the SH go the profits, to the board goes the management
— for educational institutions:
Section 108. Board of trustees. - Trustees of educational institutions organized as non-
stock corporations shall not be less than five (5) nor more than fifteen (15): Provided,
however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as soon
as organized, so classify themselves that the term of office of one-fifth (1/5) of their
number shall expire every year. Trustees thereafter elected to fill vacancies, occurring
before the expiration of a particular term, shall hold office only for the unexpired period.
Trustees elected thereafter to fill vacancies caused by expiration of term shall hold
office for five (5) years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be defined in the by-
laws.
For institutions organized as stock corporations, the number and term of directors shall
be governed by the provisions on stock corporations. (169a)
— where the board of directors fails to observe reasonable degree of care and diligence,
the corporation may be held liable on a tort and may be liable to pay damages
Directors; qualifications

— every director must own at least one (1) share of the capital stock of the corporation of
which he is a director
— no person shall be elected as trustee unless he is a member
o ceases to own one share= ceases to be a director
o the fact that a director is only holding the share as nominee of another person does
not qualify him as a director—law merely requires that he has legal title to the
shares
o 23: the share of a director shall stand in his name on the books of the corporation
— majority must be residents of RP
— nominal SHs can be directors; law requires legal title
— Gokongwei v SEC: SH has no vested right to be elected to the board
o SH is considered to have parted with his personal right or privilege to regulate the
disposition of his property which he invested in the capital stock of the corporation
— Rule on Corporate SHs:
o Such entities cannot be qualified to be elected to the board
o Corporate SHs cannot also designate an individual representative to be vote into
the board
o Their representation in the board can be achieved by making their individual
representatives trustees of the shares or membership, which would then make
them SHs of record
(1) board must act as a body in a meeting
Section 25. Corporate officers, quorum. - Immediately after their election, the directors of
a corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be held concurrently by the same person,
except that no one shall act as president and secretary or as president and treasurer at
the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of incorporation or the
by-laws provide for a greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate act, except
for the election of officers which shall require the vote of a majority of all the members of
the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
— directors/trustees must act not individually but as a body in a lawful meeting
— 25: majority of the board shall constitute a quorum
o as fixed in the AOI
60
o a decision of at least majority of directors present at a valid meeting shall be valid
as a corporate act
— grant of corporate power is to the board as a body, and not to the individual members
thereof, and the corporation can be bound only by the collective act of the board
— as a general rule, a third person who acts in GF cannot be prejudiced by the fact that
the directors did not act in accordance with the requirement of law, if such third person
was led to believe or had the right to presume, under the circumstances, that the act
involved was duly authorized by the board, without prejudice to the right of any
stockholder to question the validity of the act
— GR: the corporation can be bound only by the collective act or will of the board
— Exception: can be bound even by the act of its officers, but always because of the act or
default of the board
— An act by the board during the meeting, which was illegal for lack of notice, may be
ratified either expressly by the action of the directors in a subsequent legal meeting, or
impliedly, by the corporation’s subsequent conduct
o Ramirez v Orientalist: the fact that the power to make corporate contracts is vested
in the board does not signify that a formal vote of the board must always be taken
before contractual liability can be fixed upon a corporation; for the board can create
liability, like an individual, by other means than by a formal expression of its will
o In reference to outsiders dealing with the corporation, not all corporate actions
need formal board approval.
o The fact that the directors know of a particular corporate act or contract, and they
stayed silent about it, or worse, allowed the corporation to gain by the transaction
or contract, would already bind the corporation
o If a corporation knowingly permits one of its officers or any other agent, to do acts
within the scope of an apparent authority, and thus holds him out to the public as
possessing power to do those acts, the corporation will, as against any one who
has in GF dealt with the corporation through such agents, be estopped from
denying his authority
— two types of meeting of the board:
o regular meeting held monthly unless the by-laws provide otherwise
o special meeting or those held by the board at any time upon the call of the
president
§ may be held at any time upon call
§ may be held anywhere in and outside the RP unless the by-laws provide
otherwise
— president of the corporation presides at board meetings
Election of the board of directors
— 24: requisites for all elections of directors or trustees
o majority of OCS, either in person or by written proxy
o by ballot if requested
o mandatory cumulative voting—a SH may vote such number of shares for as many
persons as there are directors to be elected or…
o … he may cumulate said shares and give one candidate as many votes as the
number of directors to be elected
Vacancies in the board (for reasons other than removal or expiration of term)
— 29: any vacancy in the board other than by removal by the SHs or expiration may be
filled by the vote of at least a majority of the remaining directors, provided there is a
quorum
o vote of majority of remaining directors or trustees, provided there is a quorum
o no quorum, SHs fill vacancy by vote in a regular or special meeting
o only for the unexpired term
o if vacancy is due to increase in membership: election by SH only!
(2) requirements of meeting
Section 53. Regular and special meetings of directors or trustees. - Regular meetings
of the board of directors or trustees of every corporation shall be held monthly, unless
the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon the
call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of
the Philippines, unless the by-laws provide otherwise. Notice of regular or special
meetings stating the date, time and place of the meeting must be sent to every director
or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided
by the by-laws. A director or trustee may waive this requirement, either expressly or
impliedly. (n)
Section 54. Who shall preside at meetings. - The president shall preside at all meetings
of the directors or trustee as well as of the stockholders or members, unless the by-laws
provide otherwise. (n)
— meetings: regular or special
— requirements for board meetings must be complied with otherwise it will be invalid and
any action taken may be questioned by an objecting director or stockholder
— requisites for a valid board meeting:
o meeting of director/trustees duly assembled as a board
o at a place time and manner provided in the by-laws
o presence of the required quorum
o decision of the majority of the quorum or in some cases majority of the entire board
— directors or trustees cannot validly act by proxy
— directors/trustees cannot delegate their powers or assign duties
— in abstentions:
o GR: abstention is counted in favor of the issue that won the majority vote, since by
their abstaining, the directors are deemed to abide by the rule of the majority
(Lopez v Ericta)
a notice
61
— by-laws can provide for different or additional requirements regarding notice, date, place
— board must meet once a month
— by-laws cannot do away completely with notice requirement
— no notice= a director may question the validity of the meeting and of any matter taken
up therein
b place of meeting
— if by-laws are silent= board may meet anywhere it pleases
c quorum and vote
Section 25. Corporate officers, quorum. - Immediately after their election, the directors of
a corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as may be provided for in
the by-laws. Any two (2) or more positions may be held concurrently by the same person,
except that no one shall act as president and secretary or as president and treasurer at
the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of incorporation or the
by-laws provide for a greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate act, except
for the election of officers which shall require the vote of a majority of all the members of
the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
— abstention? Ifo majority position
For a valid corporate act:
— Quorum: (Sec 25) majority of directors/trustees is required for a quorum in directors
meetings as fixed in the AOI
— Vote: at least a majority of directors present at a meeting where there is a quorum
For the election of officers:
— Quorum: presence of ALL directors/trustees
— Vote: majority of ALL members of the board
— Director must be personally present and cannot be represented by proxy
d Agenda
— Notice of meeting must contain purpose
— Extraordinary matters not mentioned in the notice cannot be validly acted upon against
the objection of a director
— “Other matters”= only that which are routine and ordinary; significant matters must be
expressly stated in the agenda
o Exception: if all directors are present and agree to take extraordinary matters up
e Presiding officer
— President (sec 54)= all directors/trustees meetings and SHs/members meetings
— But the by-laws may provide for a Chairman of the Board who will preside over the
board meeting
(3) close corporations
— stock ownership = management
— composed of a smaller number of persons:
o closely related to each other by blood or other common interests,
o all or most of whom directly participate in the management
— Code allows close corps to do away with the board entirely; the SHs shall be treated as
or shall become the directors
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a
board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
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provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders,
instead of by the board of directors.
Section 101. When board meeting is unnecessary or improperly held. - Unless the by-
laws provide otherwise, any action by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice, an action taken therein within
the corporate powers is deemed ratified by a director who failed to attend, unless he
promptly files his written objection with the secretary of the corporation after having
knowledge thereof.
— Where innocent third persons are concerned, the corporation—close or otherwise—
should be bound in instances where estoppel or ratification is shown (Zamboanga case)
— If SHs as directors in a close corp with no board= provisions on meetings of directors
would apply to SHs
Ramirez v Orientalist Co & Fernandez. Orientalist Co, engaged in the theater business,
desired to be the exclusive agent of Ramirez, who is based in Paris, for two film outfits—
Éclair Films and Milano films. Through the active involvement and negotiations of Ramon “El
Presidente” Fernandez, a director of Orientalist and also its treasurer, with Ramirez,
Orientalist was able to secure an offer, the terms of which were acceptable to the Board as
well as to the stockholders. It appears that this acceptance of the terms of the offer was
decided during an informal meeting of the board, and conveyed to Ramirez in two letters
signed only by Fernandez, both in his individual and his capacity as treasurer of Orientalist.
It turns out that the company was not financially capable to comply with the obligations set
forth in the agency contract, and about this time films had already been delivered to the
company. Two stockholders meetings were organized, the first adopted a resolution
approving the action of the board on the offer, the second raising the contingency of the lack
of funds and the proviso that the four officers involved, including Fernandez would continue
importing the films using their own funds. Ramirez sues Orientalist and Fernandez for what
is due on the contract. TC ruled Oriental as the principal debtor while Fernandez is
subsidiarily liable.
H: (1) it was incumbent upon the corporation if it desired to question the authority of
Fernandez to bind it, to deny the due execution of the contract made by him. In pleading lack
of authority of an officer of a corporation to bind the latter through a contract executed by the
former is a special defense which should be specially pleaded and the answer setting up this
defense must be verified under oath. The denial shall be specific, and a mere attack on the
instrument in general terms is insufficient, even though under oath. In dealing with
corporations the public at large is bound to rely to a large extent upon outward appearances.
If a man is found acting for a corporation with the external indicia of authority, any person not
having notice of want of authority, may usually rely upon those appearances, and if it be
found that the directors had permitted the agent to exercise that authority and thereby held
him out as a competent person to bind the corporation, or had acquiesced in a contract and
retained the benefit supposed to have conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have been granted. The public is not
supposed nor required to know the transactions which happen around the table where the
corporate board of directors or the stockholders are from time to time convoked. It is
therefore reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, is it denies his authority, to state such
defense in his answer. This failure of Orientalist to make any issue in its answer with regard
to the authority of Ramon Fernandez to bind it and its failure to deny specifically under oath
the genuineness of the due execution of the contracts sued upon, have the effect of
eliminating the question of his authority from the case.
(2) Fernandez had no authority to bind the corporation. Corporate powers is exercised by the
board of directors, and is recognized in the bylaws of Orientalist. The fact that the power to
make contracts is thus vested in the borad does not always signify that a formal vote of the
board must always be taken before contractual liability can be fixed; the board can create
liability, like an individual, by other means than by formal expression of its will. It may be
established without reference to official records of the proceedings of the board, by proof of
the usage to which the company had permitted to grow up in the business, and of the
acquiescence of the board charged with the duty of supervising and controlling the
company’s business. Fernandez was the most active in the effort to secure the films. The
negotiations were conducted by him with the knowledge and consent of the other members
of the board. The board, before the financial inability of the corporation was revealed, had
already recognized the contracts as being in existence and had proceeded to take the steps
necessary to utilize the films, particularly the publication of announcements in the papers. In
light of this, the contracts in question were thus inferentially approved by the board and that
the company is bound unless the subsequent failure of the stockholders to approve the
same had the effect of abrogating the liability created.
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(3) the action of the stockholders, whatever its character, must be ignored. Stockholders or
members resolutions dealing with matters other than the exceptions are not legally effective
nor binding on the board, and may be treated as merely advisory or may even be completely
disregarded. The functions of the stockholders of a corporation are, of a limited nature. The
theory is that the stockholders may have all the profits but shall turn over the complete
management of the enterprise to their representatives or agents, called the directors, making
by-laws, and exercising special powers defined by law. Thus contracts between a
corporation and third persons must be made by the directors and not by the stockholders.
The corporation is represented by the directors and not the stockholders. Third persons can
have little or no information as to what occurs in corporate meetings, and must necessarily
rely on external manifestations of corporate consent. The integrity of commercial
transactions can only be maintained by holding the corporation strictly to the liability fixed
upon in by its agents in accordance with law. If a corporation knowingly permits one of its
officers or any other person to do acts within the scope of an apparent authority, and thus
hold him out to the public as possessing the power to do these acts, the corporation will be
estopped from denying such authority as against anyone who has dealt with the corporation
in GF.
Lopez v Ericta. Dr Consuelo Blanco was appointed Dean ad interim of the UP College of
Education. The Board of Regents met on 26 May and UP President Lopez submitted the ad
interim appointment for reconsideration. The minutes of the meeting reveal that the Board
voted to defer action on the matter in view of the objections cited by Regent Kalaw, and to
further study the same. The matter was referred to the Committee on Personnel. It was
extended and made effective 1 May 1970 until 30 April 1971 unless sooner terminated and
subject to the approval of the Board of Regents. At the next Board meeting, it appears in the
minutes that the Personnel Committee recommended that the UP president review his
nomination and that he would discuss with the nominee the possibility of withdrawing her
nomination and appointment as Dean. The Committee then withdrew its recommendation,
but subjected the Blanco appointment to a vote. The vote was 5-3-4, and not having the
necessary number of votes, the Board agreed to expunge the result of the voting from the
records, on the condition that the Board suspend action on the matter, which had the effect
of the termination of the Blanco ad interim appointment. Blanco questions the action of the
Board and the designation of an officer-in-charge of the COE and sues in the TC. Judge
Ericta rules info Dr Blanco.
I: W/N the 4 abstentions had the effect of a negative vote against the ad interim appointment.
H: Based on a reading of the minutes and the records of the meeting, it cannot be said that
the abstentions were affirmative ifo the ad interim appointment. It is clear that (1) the Blanco
appointment was referred for study by the Committee which recommended its rejection; (2)
that it should be done in a diplomatic way to avoid embarrassment; (3) the final decision was
to ask the UP President to talk to Blanco for the appointment to be withdrawn; (4) a vote was
taken which was 5-3-4, and it was unclear what it meant because the rules do not provide for
the treatment of abstentions; (5) the Committee withdrew its recommendation; (6) the Board
identified the issue of w/n to confirm the ad interim appointment; (7) and that while it will
defer action, it considered the appointment to have terminated, and thus a recommendation
for non-confirmation. Thus the votes of abstention can in no way be construed as votes for
confirmation of the appointment. There can be no doubt as to the decision of the Personnel
Committee—it was for rejection of the appointment. Also, the board resolved, without a vote
of dissent to cancel the action taken, including the results of the voting, and to return the
case to its original status. In effect, as announced by the Chairman, the Board has not acted
on the confirmation either adversely or favorably, but that the ad interim appointment has
terminated.
Expertravel & Tours v CA and Korean Airlines. F: Korean Airlines, through Atty.
Aguinaldo, filed a Complaint against Expertravel with the RTC for the collection of the
principal amount of P260,150.00, plus attorney’s fees and exemplary damages. The
verification and certification against forum shopping was signed by Atty. Aguinaldo, who
indicated therein that he was the resident agent and legal counsel of KAL and had caused
the preparation of the complaint. Expertravel filed a motion to dismiss the complaint on the
ground that Atty. Aguinaldo was not authorized to execute the verification and certificate of
non-forum shopping as required by the Rules of Court. KAL opposed the motion, contending
that Atty. Aguinaldo was its resident agent and was registered as such with the Securities
and Exchange Commission (SEC) as required by the CorpoCode, and was further alleged
that Atty. Aguinaldo was also the corporate secretary of KAL. Atty. Aguinaldo also claimed
that he had been authorized to file the complaint through a resolution of the KAL Board of
Directors approved during a special meeting held on June 25, 1999, wherein the board of
directors conducted a special teleconference on June 25, 1999, which he and Atty.
Aguinaldo attended. It was also averred that in that same teleconference, the board of
directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-
forum shopping and to file the complaint. Suk Kyoo Kim also alleged, however, that the
corporation had no written copy of the aforesaid resolution. TC denies MTD, CA affirms.
H: It is settled that the requirement to file a certificate of non-forum shopping is mandatory
and that the failure to comply with this requirement cannot be excused. The certification is a
peculiar and personal responsibility of the party, an assurance given to the court or other
tribunal that there are no other pending cases involving basically the same parties, issues
and causes of action. Hence, the certification must be accomplished by the party himself
because he has actual knowledge of whether or not he has initiated similar actions or
proceedings in different courts or tribunals. Even his counsel may be unaware of such facts.
Hence, the requisite certification executed by the plaintiff’s counsel will not suffice.
In a case where the plaintiff is a private corporation, the certification may be signed, for and
on behalf of the said corporation, by a specifically authorized person, including its retained
counsel, who has personal knowledge of the facts required to be established by the
documents. The corporation, such as the petitioner, has no powers except those expressly
conferred on it by the Corporation Code and those that are implied by or are incidental to its
existence. In turn, a corporation exercises said powers through its board of directors and/or
its duly-authorized officers and agents. Physical acts, like the signing of documents, can be
performed only by natural persons duly-authorized for the purpose by corporate by-laws or
by specific act of the board of directors.
The respondent’s allegation that its board of directors conducted a teleconference on June
25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is incredible,
given the additional fact that no such allegation was made in the complaint. If the resolution
had indeed been approved on June 25, 1999, long before the complaint was filed, the
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respondent should have incorporated it in its complaint, or at least appended a copy thereof.
The respondent failed to do so. It was only on January 28, 2000 that the respondent
claimed, for the first time, that there was such a meeting of the Board of Directors held on
June 25, 1999; it even represented to the Court that a copy of its resolution was with its main
office in Korea, only to allege later that no written copy existed. It was only on March 6, 2000
that the respondent alleged, for the first time, that the meeting of the Board of Directors
where the resolution was approved was held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a
Secretary’s/Resident Agent’s Certificate alleging that the board of directors held a
teleconference on June 25, 1999. No such certificate was appended to the complaint, which
was filed on September 6, 1999. More importantly, the respondent did not explain why the
said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and yet was
notarized one year later (on January 10, 2000); it also did not explain its failure to append
the said certificate to the complaint, as well as to its Compliance dated March 6, 2000. It
was only on January 26, 2001 when the respondent filed its comment in the CA that it
submitted the Secretary’s/Resident Agent’s Certificate[30] dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999
never took place, and that the resolution allegedly approved by the respondent’s Board of
Directors during the said teleconference was a mere concoction purposefully foisted on the
RTC, the CA and this Court, to avert the dismissal of its complaint against the petitioner.
Citibank NA v Chua. Velez deposited his unfunded personal checks with his current
account with the petitioner. But prior to depositing said checks, he would present his
personal checks to a bank officer asking the latter to have his personal checks immediately
credited as if it were a cash deposit and at the same time assuring the bank officer that his
personal checks were fully funded. Having already gained the trust and confidence of the
officers of the bank because of his past transactions, the bank's officer would always
accommodate his request. After his requests are granted which is done by way of the bank
officer affixing his signature on the personal checks, private respondent Cresencio Velez
would then deposit his priorly approved personal checks to his current account and at the
same time withdraw sums of money from said current account by way of petitioner bank's
manager's check. Private respondent would then deposit petitioner bank's manager's check
to his various current accounts in other commercial banks to cover his previously deposited
unfunded personal checks with petitioner bank. Naturally, petitioner bank and its officers
never discovered that his personal check deposits were unfunded. On the contrary, it gave
the petitioner bank the false impression that private respondent's construction business was
doing very well and that he was one big client who could be trusted. This deceptive and
criminal scheme he did every banking day without fail from September 4, 1985 up to March
11, 1986. The amounts that he was depositing and withdrawing during this period
(September 4, 1985 to March 11, 1986) progressively became bigger. It started at
P46,000.00 on September 4, 1985 and on March 11, 1986 the amount of deposit and
withdrawal already reached over P3,000,000.00. At this point in time (March 11, 1986), the
private respondent Cresencio Velez presumably already feeling that sooner or later he would
be caught and that he already wanted to cash in on his evil scheme, decided to run away
with petitioner's money. On March 11, 1986, he deposited various unfunded personal checks
totaling P3,095,000.00 and requested a bank officer that the same be credited as cash and
after securing the approval of said bank officer, deposited his various personal checks in the
amount of P3,095,000.00 with his current account and at the same time withdrew the sum of
P3,244,000.00 in the form of petitioner's manager's check. Instead of using the proceeds of
his withdrawals to cover his unfunded personal checks, he ran away with petitioner bank's
money. Thus, private respondent Cresencio Velez's personal checks deposited with
petitioner bank on March 11, 1986 in the total aggregate amount of P3,095,000.00 bounced.
The checks bounced after said personal checks were made the substantial basis of his
withdrawing the sum of P3,244,000.00 from his current account with petitioner bank. Citibank
sues on the grounds of violation of BP 22. Before pre-trial conference, and in pursuance of
the authority granted to him by petitioner bank's by-laws, its Executing Officer appointed
William W. Ferguson, a resident alien, as its Attorney-in-Fact empowering the latter, among
other things, to represent Citibank in court cases such as the present case. In turn, William
W. Ferguson executed a power of attorney in favor of J.P. Garcia & Associates (petitioner
bank's counsel) to represent petitioner bank in the pre-trial conference before the lower
court.
I: There are thus two issues in this case. First, whether a resolution of the board of directors
of a corporation is always necessary for granting authority to an agent to represent the
corporation in court cases.
H: In the corporate hierarchy, there are three levels of control: (1) the board of directors,
which is responsible for corporate policies and the general management of the business
affairs of the corporation; (2) the officers, who in theory execute the policies laid down by the
board, but in practice often have wide latitude in determining the course of business
operations; and (3) the stockholders who have the residual power over fundamental
corporate changes, like amendments of the articles of incorporation. However, just as a
natural person may authorize another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its functions to individual officers or
agents appointed by it.
It is clear that corporate powers may be directly conferred upon corporate officers or agents
by statute, the articles of incorporation, the by-laws or by resolution or other act of the board
of directors. In addition, an officer who is not a director may also appoint other agents when
so authorized by the by-laws or by the board of directors. Such are referred to as express
powers. There are also powers incidental to express powers conferred. It is a fundamental
principle in the law of agency that every delegation of authority, whether general or special,
carries with it, unless the contrary be express, implied authority to do all of those acts,
naturally and ordinarily done in such cases, which are reasonably necessary and proper to
be done in order to carry into effect the main authority conferred.
Since the by-laws are a source of authority for corporate officers and agents of the
corporation, a resolution of the Board of Directors of Citibank appointing an attorney in fact to
represent and bind it during the pre-trial conference of the case at bar is not necessary
because its by-laws allow its officers, the Executing Officer and the Secretary Pro-Tem, * to
65
execute a power of attorney to a designated bank officer, William W. Ferguson in this case,
clothing him with authority to direct and manage corporate affairs.
Since paragraph XXI (of the by-laws) specifically allows Ferguson to delegate his powers in
whole or in part, there can be no doubt that the special power of attorney in favor, first, of
J.P. Garcia & Associates and later, of the bank's employees, constitutes a valid delegation of
Ferguson's express power (under paragraph XVII above) to represent petitioner bank in the
pre-trial conference in the lower court.
I: The second issue is whether the by-laws of the petitioner foreign corporation which has
previously been granted a license to do business in the Philippines, are effective in this
jurisdiction. If the by-laws are valid and a board resolution is not necessary as petitioner
bank claims, then the declaration of default would have no basis.
H: A careful reading of the Sec 46 of Corpo Code would show that a corporation can submit
its by-laws, prior to incorporation, or within one month after receipt of official notice of the
issuance of its certificate of incorporation by the SEC. When the third paragraph of the above
provision mentions "in all cases", it can only refer to these two options; i.e., whether adopted
prior to incorporation or within one month after incorporation, the by-laws shall be effective
only upon the approval of the SEC. But even more important, said provision starts with the
phrase "Every corporation formed under this Code", which can only refer to corporations
incorporated in the Philippines. Hence, Section 46, in so far as it refers to the effectivity of
corporate by-laws, applies only to domestic corporations and not to foreign corporations. On
the other hand, Section 125 of the same Code requires that a foreign corporation applying
for a license to transact business in the Philippines must submit, among other documents, to
the SEC, a copy of its articles of incorporation and by-laws, certified in accordance with law.
Unless these documents are submitted, the application cannot be acted upon by the SEC.
Since under Sec 126 of Corpo Code the SEC will grant a license only when the foreign
corporation has complied with all the requirements of law, it follows that when it decides to
issue such license, it is satisfied that the applicant's by-laws, among the other documents,
meet the legal requirements. This, in effect, is an approval of the foreign corporation's by-
laws. It may not have been made in express terms, still it is clearly an approval. Therefore,
petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and
effective in the Philippines.
Prime White Cement v IAC. Prime White Cement entered into a dealership agreement with
one of its directors, Alejandro Te, for the latter to be the exclusive distributor of 20,000 bags
of Prime White cement per month @ P9.70 per bag for the entire Mindanao area for 5 years,
and that a letter of credit be opened to secure payment. Te advertised his dealership and
was able to obtain possible clients, and entered into agreements with several hardware
stores for the purchase of the cement. Te then informed Prime White of the orders, but the
latter imposed additional conditions, which effectively delayed the delivery of the cement,
lowered the number of bags to be delivered, and increased the price per bag. It also made
the prices subject to change unilaterally and additional conditions on the manner of payment.
Te refused to comply and Prime White cancelled the dealership agreement. Te sued for
specific performance and damages. TC ruled ifo Te.
I: W/N the dealership agreement is a valid and enforceable contract binding on the
Corporation.
H: No. it is not valid and enforceable. All corporate powers are exercised by the Board. It
may also delegate specific powers to its President or other officers. In the absence of
express delegation, a contract entered into by the President in behalf of the corporation, may
still bind the latter if the board should ratify expressly or impliedly. In the absence of express
or implied ratification, the President may as a general rule bind the corporation through a
contract in the ordinary course of business, provided the same is reasonable under the
circumstances. These rules are applicable where the President or other officer acting for the
corporation is dealing with a third person.
The situation is different where a director or officer is dealing with his own corporation. Te
was not an ordinary stockholder; he was a member of the Board and Auditor of the
corporation. He is what is often called a “self-dealing” director. As a director, he holds a
position of trust and owes a duty of loyalty to his corporation. In case his interests conflict
with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit.
The trust relationship springs from the control and guidance of the corporate affairs and
property interests of the stockholders. A director’s contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the circumstances, it
may be ratified by the stockholders provided a full disclosure of his adverse interest is made.
The contract in this case is neither fair nor reasonable. At the time of the contract, the
corporation had not yet even started producing the cement. Prices of cement, just like any
other commodity, are not stable and expected to rise. Within a period of six years from the
date of dealership agreement the prices were certain to rise, and yet the contract pegged the
rate to P9.70 per bag. This according to the Court was not fair and reasonable at all, and
unduly prejudiced the corporation. The contracts he entered into after the dealership
agreement were such as to completely shield him from any increase in the price of cement.
The contracts were only for two years at a time, even if the dealership was good for 5. He
was attempting to enrich himself at the expense of the corporation. There is no showing that
the stockholders ratified the dealership agreement. Thus the same was not valid and he
cannot be allowed to reap the fruits of his disloyalty.
Boyer-Roxas v CA. (Hidden Valley Apocalypse Now case). The corporation, Heirs of
Eugenia Roxas Inc, was established to engage in agriculture to develop the properties
inherited from Eugenia Roxas and Eufroncio Roxas, which includes the land upon which the
Hidden Valley Springs Resort was put up, including various improvements thereon, using
corporate funds (used as site for filming Apocalypse Now). The AOI of Heirs Inc was
amended for this purpose. Heirs Inc claims that Boyer-Roxas and Guillermo Roxas had been
in possession of the various properties and improvements in the resort and only upon the
tolerance of the corporation. It was alleged that they committed acts that impeded the
corporation’s expansion and normal operation of the resort. They also did not comply with
court and regulatory orders, and thus the corporation adopted a resolution authorizing the
ejectment of the defendants. TC grants. CA affirms. Boyer and Roxas contend that, being
SHs, their possession of the properties of the corporation must be respected in view of their
ownership of an aliquot portion of all properties of the corporation.
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H: Regarding properties owned by the corporation, the SH of Guanzon case says that
“properties registered in the name of the corporation are owned by it as an entity separate
and distinct from its members. While shares of stock constitute personal property, they do
not represent property of the corporation. A share of stock only typifies an aliquot part of the
corporation’s property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of the
corporation, nor is he entitled to the possession of any definite portion of its property or
assets. The SH is not a co-owner or tenant in common of the corporate property.
The corporation has a personality distinct and separate from its members and transacts
business only through its officers or agents. Whatever authority these officers or agents may
have derived from the board or other governing body, unless conferred by the charter of the
corporation itself. In this case the elder Roxas who then controlled the management of the
corporation, being the majority SH, consented to the petitioner’s use and stay within the
properties. The Board did not object and were allowed to stay until it adopted a resolution to
the effect of authorizing moves to eject them. Since their stay was merely by tolerance, in
deference to the wishes of the majority SH who controlled the corporation, when Roxas died
his actions cannot bind the company forever. There is no provision in the by-laws or any
other resolution authorizing their continued stay.
EPG Construction v CA. EPG undertook the construction of the UP Law Library for around
P7.5M. Upon completion, the building was turned over to UP Law. Sometime thereafter, the
aircon in the 3rd floor was not functioning properly, and this was reported to EPG. After
inspection EPG agreed to repair the same and shoulder the expenses thereof, but for
whatever reason the repair was never undertaken despite repeated demands. EPG
demanded a hefty sum, which UP claims should be covered by the guarantee provision in
their contract. UP then contracts with another repair company, and demands reimbursement
from EPG. UP sues EPG and its President, Emmanuel de Guzman. TC ruled ifo UP, and
order both the company and its president to pay UP solidarily. The president Guzman claims
that as to him, UP was suing him in his official capacity and not in his personal capacity, thus
his inclusion as president of the company is superfluous, because his acts were corporate
acts imputable to EPG itself as his principal.
H: A corporation is invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other entity to which it may be related.
Mere ownership by a since SH or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate
personality.
The GM of a corporation cannot be made personally liable for his official acts in behalf of the
corporation, with the exception that if he official had acted maliciously or in BF, which would
make him liable personally. Since it was not proven that Guzman acted maliciously or in BF,
whatever damage was caused to UP as a result of his acts is the sole responsibility of EPG
even though Guzman is the principal officer and controlling SH.
Benguet Electric Cooperative v NLRC. Cosalan, GM of the Benguet Electric Cooperative,
was informed by COA that cash advances received by officers and employees of Benguet
Electric had been virtually written off the books, that per diems and allowances showed
substantial inconsistencies with the directives of the National Electricifcation Administration,
and that several irregularities in the utilization of funds released by NEA to Benguet. Cosalan
then implemented the remedial measures recommended by COA. Board members of
Benguet responded by abolishing the housing allowance of Cosalan, reduced his salary,
representation and other allowances, and directed him to hold in abeyance all disciplinary
actions, and struck his name out as principal signatory of Benguet Electric. The Board
adopted another series of resolutions which resulted in te ouster of Cosalan as GM. Cosalan
nonetheless continued to work as GM, contending that only the NEA can suspend and
remove him. The Board then refused to act on Cosalan request to release compensation due
him. Cosalan files a complaint with the NLRC against the Board of Benguet Electric, and
impleaded Benguet Electric itself as well as the individual members of the board in their
official and private capacities. Labor Arbitrer rules ifo Cosalan, holding both the company
and the board solidarily liable to Cosalan. NLRC modifies award to Cosalan by declaring
Bengeut alone, and not the Board members, was liable to Cosalan. Benguet appeals.
H: the Board members and officers of a corporation who purport to act for and in behalf of
the corporation, keep within the lawful scope of their authority in so acting, and act in GF, do
no become liable, civilly or otherwise, for the consequences of their acts. Those acts are
properly attributed to the corporation alone and no personal liability is incurred. In this case,
the board members obviously wanted to get rid of Cosalan and acted with indecent haste in
removing him from his GM position. This shows strong indications that the members of the
board had illegally suspended and dismissed him precisely because he was trying the rectify
the financial irregularities.
The Board members are also liable for damages under Sec 31 of the Corpo Code, which by
virtue of Sec 4 thereof, makes it applicable in a supplementary manner to all corporations,
including those with special or individual charters so long as these are not inconsistent
therewith.
The Board members are also guilty of gross negligence and BF in directing the affairs of the
corporation in enacting the said resolutions, and in doing so, acted beyond the scope of their
authority.
Woodchild Holdings Inc v Roxas Electric and Construction Co. The respondent posits
that Roxas was not so authorized under the May 17, 1991 Resolution of its Board of
Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No.
491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent
was not bound by such provisions contained in the deed of absolute sale.
H: Generally, the acts of the corporate officers within the scope of their authority are binding
on the corporation. However, under Article 1910 of the New Civil Code, acts done by such
officers beyond the scope of their authority cannot bind the corporation unless it has ratified
such acts expressly or tacitly, or is estopped from denying them. Thus, contracts entered into
67
by corporate officers beyond the scope of authority are unenforceable against the
corporation unless ratified by the corporation.
Evidently, Roxas was not specifically authorized under the said resolution to grant a right of
way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the
petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No. 491-
A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the
adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may
such authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to
the petitioner “on such terms and conditions which he deems most reasonable and
advantageous.” The general rule is 
that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside it. The act done must be
legally identical with that authorized to be done. In sum, then, the consent of the respondent
to the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed
provisions are not binding on it.
It bears stressing that apparent authority is based on estoppel and can arise from two
instances: first, the principal may knowingly permit the agent to so hold himself out as having
such authority, and in this way, the principal becomes estopped to claim that the agent does
not have such authority; second, the principal may so clothe the agent with the indicia of
authority as to lead a reasonably prudent person to believe that he actually has such
authority. There can be no apparent authority of an agent without acts or conduct on the part
of the principal and such acts or conduct of the principal must have been known and relied
upon in good faith and as a result of the exercise of reasonable prudence by a third person
as claimant and such must have produced a change of position to its detriment. The
apparent power of an agent is to be determined by the acts of the principal and not by the
acts of the agent.
It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the
latter had taken possession of the property. As such, the respondent had the right to retain
the P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of
the principal to be considered as an implied ratification of an unauthorized act of an agent,
such act must be inconsistent with any other hypothesis than that he approved and intended
to adopt what had been done in his name. Ratification is based on waiver – the intentional
relinquishment of a known right. Ratification cannot be inferred from acts that a principal
has a right to do independently of the unauthorized act of the agent. Moreover, if a writing is
required to grant an authority to do a particular act, ratification of that act must also be in
writing. Since the respondent had not ratified the unauthorized acts of Roxas, the same are
unenforceable. Hence, by the respondent’s retention of the amount, it cannot thereby be
implied that it had ratified the unauthorized acts of its agent, Roberto Roxas.
2. corporate officers and agents
— 23: the Board may validly delegate some of its functions and powers to individual
officers, committees, or agents it appoints
— Corporate officers are within the business judgment of the board to terminate or
delegate or appoint
 — general principles of agency govern the relation between the corporation and its • …but may be a director; proportional to alien equity
officers or agents — In close corporations:
— a corporate officer or agent may represent and bind the corporation in transactions o May be managed by SHs directly, so long as it is in the AOI
with third person to the extent that the authority to do so has been conferred upon § No directors
him, and this includes: § SHs appoint or elect the officers
o powers which have been intentionally conferred o AOI may provide that all or some officers are elected or appointed by the SHs
o such powers as in the usual course of business are incidental or implied from instead of the board
the powers conferred — In non-stock corporations:
o powers added by custom or usage, and o Members are allowed to directly elect the officers
o such apparent powers as the corporation has caused persons dealing with the § Exception: contrary provision in AOI or BLs
officer or agent
— Officers’ authority to bind NOT inherent in their office, but derived from:
Section 25. Corporate officers, quorum. - Immediately after their election, the directors of o law
a corporation must formally organize by the election of a president, who shall be a o the by-laws
director, a treasurer who may or may not be a director, a secretary who shall be a o delegation by the Board (express through BoardRes, or impliedly through
resident and citizen of the Philippines, and such other officers as may be provided for in custom or acquiescence)
the by-laws. Any two (2) or more positions may be held concurrently by the same person, — Corporate Officers are AGENTS of the corporation
except that no one shall act as president and secretary or as president and treasurer at o GRs on AGENCY as to the binding effect apply
the same time. o Acts which are within the authority BIND
o Acts beyond authority CANNOT BIND
§ Except:
The directors or trustees and officers to be elected shall perform the duties enjoined on
• Subsequent ratification
them by law and the by-laws of the corporation. Unless the articles of incorporation or the
• Estoppel
by-laws provide for a greater majority, a majority of the number of directors or trustees as
§ Lack of authority to bind is a defense which must be specially
fixed in the articles of incorporation shall constitute a quorum for the transaction of
pleaded (Ramirez case)
corporate business, and every decision of at least a majority of the directors or trustees
o GR: person dealing with a corporate officer is put on inquiry as to the scope of
present at a meeting at which there is a quorum shall be valid as a corporate act, except
his authority
for the election of officers which shall require the vote of a majority of all the members of
§ Exception: Innocent 3rd person cannot be prejudiced if he had the
the board.
right to presume under the circumstances the authority of the officer

Directors or trustees cannot attend or vote by proxy at board meetings. (33a) (1) President

— Three (3) officers which a corporation must have: — Presides over all meetings of the board and SHs
o President Elected by majority of o By-laws may delegated that function to Chairman
o Treasurer — Act of president done in the ordinary course of business is presumably within
ALL board members
o Secretary the scope of his authority
— By-laws may provide for other officers — Impliedly vested with broad powers
— GM: may be appointed from any of the officer positions o Burden of proof that an act of the president cannot bind= corporation
o By express provision of the by-laws — Power to sign and execute corporate contracts
— Officer need not be a director; thus, a non-SH can be an officer o He is authorized to sign in the name of the corporation…
o Exception: President. He must be a director (co-terminous with his position as o …but does not include the power to enter into contracts with 3rd persons
director) (that’s the Board’s function)
— No citizenship requirement — Capacity to negotiate…
o Exception: o …but cannot perfect the contract without board authorization
§ Corporate secretary — cannot also be concurrent Treasurer and Secretary
§ Industries partially or totally reserved for Filipinos — must be a director and SH
• No alien may be an officer…

68
 (2) vice-president
— no inherent power to bind
— takes over when president is absent or position becomes vacant
(3) secretary
— keeps corporate records and is the custodian
— duties are ministerial and cannot bind the corporation without board
authorization or appointment as GM
— must be a resident and a Phil citizen (Sec 25)
(4) treasurer
— appointed at the time of drafting the AOI
o Code requires Treasurer’s affidavit to attest to the fact of compliance with
the required incorporation subscription
— Receive and keep the corporate funds
— Disburse in accordance with the authority given by the board
— Cannot bind the corporation unless authorized
(5) general manager
— takes care of day-to-day affairs of the corporation
— powers are limited to implementing policies laid down by the board
— GR: can only perform such acts and enter into such contracts as are usual in
the ordinary course of business of the corporation (Yu Chuck case)
o exception: (deemed within his implied authority—Kalaw case)
§ where the board gives him broader authority
§ where the board had acquiesced in the past or had never
prevented or prohibited the GM from performing extraordinary
acts
§ where the board ratifies (express or implied) after
— can contract for purchase of ordinary supplies necessary for corporate
functions…
o …but no implied power to borrow money even for legitimate purposes
without prior approval by the board
— 3rd person has right to presume that a GM has authority to perform acts or
enter into ordinary contracts in the usual course of business
o innocent 3rd persons cannot be prejudiced
— any officer cannot be held personally liable for the consequences of their acts
o except: BF, negligence
o in personal capacity= personal liability
(6) other agents
69
— may appoint agents for specific purposes
o last say will have to be with the board
Yu Chuck v Kong Li Po. Kong Li Po is a corporation engaged in the publication of a
Chinese newspaper. Its AOI provide for a president who shall sign all contracts and other
instruments of writing, but does not provide for a business or general manager. CC Chen or
TC Chen was appointed general business manager of the paper. He then entered into an
agreement with Yu Chuck for the printing of the newspaper for P580 per month. Yu Chuck
worked for a year until they were discharged by the new manager Tan Tian Hong because
CC Chen had left for China. Yu Chuck sues the paper, claiming the the contract was for a
period of 3 years, and that discharge without just cause before the expiration of this term
entitles them to receive full pay for the remainder of the term. Kong Li Po counters that CC
Chen was not authorized to enter into the contract with Yu Chuck. TC ruled ifo of Yu Chuck,
concluding that the contract had been impliedly ratified by Kong Li Po and that although he
had no express authority to enter into the contract, since he was general business manager
in charge of the printing of the paper and thus had implied authority to employ the petitioners
I: W/N CC Chen had the power to bind the corporation through the contract mentioned.
H: GR: The power to bind a corporation by contract lies with its board of directors or trustees,
but this power may either be expressly or impliedly delegated to other officers or agents of
the corporation. EXCEPTION: An officer or agent who has general control and management
of the corporation’s business or a specific part thereof, may bind the corporation by the
employment of such agents and employees as are usual and necessary in the conduct of
such business. Exception to exception: Where the authority is vested expressly in the BOD.
As to the term of employment, a manager has authority to hire an employee for such a
period as is customary or proper under the circumstances, but unless he is expressly
authorized or held out to have such authority, he cannot make a contract of employment for
a long future period, such as for 3 years. There can be no doubt that CC Chen as general
manager of the Kong Li Po, had implied authority to bind the defendant corporation by a
reasonable and usual contract of employment with the plaintiffs. But the term of employment
is unusually long, and the conditions are otherwise so onerous to the defendant corporation
that the possibility of the corporation being thrown into insolvency thereby is expressly
contemplated in the same contract.
The corporation also did not impliedly ratify the contract, just because the president of Kong
Li Po saw the plaintiffs work as printers in the office one day. Before a contract can be
ratified, knowledge of its existence must, of course, be brought home to the parties who have
authority to ratify it or circumstances must be shown from which such knowledge may be
presumed. No such knowledge or circumstances indicating knowledge is shown or proven in
the case. Moreover, a ratification by him would have been to no avail; in order to validate a
contract, a ratification by the BOD was necessary. The fact that the president was authorized
by the by-laws to sign documents evidencing contracts doesn’t mean that he had power to
make the contracts.
Lapulapu Foundation Inc v CA. Elias Q. Tan, then President of the co-petitioner Lapulapu
Foundation, Inc., obtained four loans from the respondent Allied Banking Corporation
covered by four promissory notes in the amounts of P100,000 each. As of January 23, 1979,
the entire obligation amounted to P493,566.61 and despite demands made on them by the
respondent Bank, the petitioners failed to pay the same. The respondent Bank was
constrained to file with the Regional Trial Court of Cebu City, Branch 15, a complaint seeking
payment by the petitioners, jointly and solidarily, of the sum of P493,566.61 representing
their loan obligation. Foundation denied incurring indebtedness from the respondent Bank
alleging that the loans were obtained by petitioner Tan in his personal capacity, for his own
use and benefit and on the strength of the personal information he furnished the respondent
Bank. The petitioner Foundation maintained that it never authorized petitioner Tan to co-sign
in his capacity as its President any promissory note and that the respondent Bank fully knew
that the loans contracted were made in petitioner Tan’s personal capacity and for his own
use and that the petitioner Foundation never benefited, directly or indirectly, therefrom. Tan
admitted that he contracted the loans from the respondent Bank in his personal capacity.
The parties, however, agreed that the loans were to be paid from the proceeds of petitioner
Tan’s shares of common stocks in the Lapulapu Industries Corporation, a real estate firm.
The loans were covered by promissory notes which were automatically renewable (“rolled-
over”) every year at an amount including unpaid interests, until such time as petitioner Tan
was able to pay the same from the proceeds of his aforesaid shares. According to petitioner
Tan, the respondent Bank’s employee required him to affix two signatures on every
promissory note, assuring him that the loan documents would be filled out in accordance
with their agreement. However, after he signed and delivered the loan documents to the
respondent Bank, these were filled out in a manner not in accord with their agreement, such
that the petitioner Foundation was included as party thereto.
H: The Court particularly finds as incredulous petitioner Tan’s allegation that he was made to
sign blank loan documents and that the phrase “IN MY OFFICIAL/PERSONAL CAPACITY”
was superimposed by the respondent Bank’s employee despite petitioner Tan’s protestation.
The Court is hard pressed to believe that a businessman of petitioner Tan’s stature could
have been so careless as to sign blank loan documents. In contrast, as found by the CA, the
promissory notes clearly showed upon their faces that they are the obligation of the
petitioner Foundation, as contracted by petitioner Tan “in his official and personal capacity.”
Moreover, the application for credit accommodation, the signature cards of the two accounts
in the name of petitioner Foundation, as well as New Current Account Record, all
accompanying the promissory notes, were signed by petitioner Tan for and in the name of
the petitioner Foundation. These documentary evidence unequivocally and categorically
establish that the loans were solidarily contracted by the petitioner Foundation and petitioner
Tan. The evidence shows that Tan has been representing himself as the President of
Lapulapu Foundation, Inc. He opened a savings account and a current account in the names
of the corporation, and signed the application form as well as the necessary specimen
signature cards twice, for himself and for the foundation. He submitted a notarized
Secretary’s Certificate from the corporation, attesting that he has been authorized, inter alia,
to sign for and in behalf of the Lapulapu Foundation any and all checks, drafts or other
orders with respect to the bank; to transact business with the Bank, negotiate loans,
agreements, obligations, promissory notes and other commercial documents; and to initially
70
obtain a loan for P100,000.00 from any bank. Under these circumstances, the defendant
corporation is liable for the transactions entered into by Tan on its behalf.
Per its Secretary’s Certificate, the petitioner Foundation had given its President, petitioner
Tan, ostensible and apparent authority to inter alia deal with the respondent Bank.
Accordingly, the petitioner Foundation is estopped from questioning petitioner Tan’s authority
to obtain the subject loans from the respondent Bank. It is a familiar doctrine that if a
corporation knowingly permits one of its officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the public as possessing the power to do those
acts; and thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agent’s authority.
Board of Liquidators v Kalaw. Maximo Kalaw is chairman of the board and general
manager of the National Coconut Corporation (NACOCO), a non-profit GOCC empowered
by its charter to buy sell barter export and… deal in coconut, copra, and dessicated coconut.
Bocar, Garcia and Moll were directors. It entered into contracts for the trading and delivery of
copra. Nature intervened—4 typhoons devastated agriculture and copra production.
NACOCO was on the verge of sustaining losses and could not be able to make good on the
contracts. Sensing this, Kalaw submitted the contracts to the board for approval and made a
full disclosure of the situation. No action was taken, and no vote was taken on the matter. On
20 Jan 1947 the board met again with Kalaw, Bocar, Garcia, and Moll in attendance, and
approved the contracts. NACOCO however only partially performed the contracts. One of the
contracts concerns the Louis Drayfus & Co., which sued NACOCO. NACOCO settled out-of-
court and paid Drayfus P567,024.52 representing 70% of total claims. The total settlements
sum up to P1.3M. NACOCO sues Kalaw, and his directors Bocar, Moll and Garcia to recover
this sum, alleging negligence and BF and breach of trust in approving the contracts, by not
having them approved by the board. TC dismisses complaint. NACOCO claims that the by-
laws provide that prior Board approval is required before the GM can perform or execute in
behalf of NACOCO all contracts necessary to accomplish its purpose.
I: W/N the Kalaw contracts are valid despite its lack of prior board approval as required by
the NACOCO by-laws
H: The contracts in question are “forward sales” contracts—a sales agreement entered into,
even though the goods are not yet in the hands of the seller. Given the peculiar nature of
copra trading, ie copra must be disposed of asap else it would lose weight and would
decrease its value, it necessitates a quick turnover and execution of the contract on short
notice (w/in 24 hours). It would be difficult if not impractical to call a formal meeting of the
board each time a contract is to be executed.
NACOCO board met the difficulties attendant to forward sales by leaving the adoption of the
means to the sound discretion of Kalaw. Long before the contracts came into being, Kalaw
already contract by himself alone some 60 such contracts, and NACOCO reaped a gross
profit. These contracts were contracted without prior authority from the Board and were
known to all the members, but nothing was said by them. Also contracts entered into by
Kalaw had been submitted to the board after execution, not before as required by the by-
laws. The Board has knowledge of this and did not object to the same. Thus the practice of
the corporation has been to allow its GM to negotiate and execute contracts in behalf of
NACOCO without prior Board approval, and by its acts and through acquiescence practically
laid aside the requirement in the by-law. The contracts are therefore valid.
Ratification by a corporation of an unauthorized act or contract by its officers relates back to
the time of the act or contract ratified and is equivalent to original authority. The theory of
corporate ratfication is predicated upon the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority. Ratification “cleanses the
contract from all its defects from the moment it was constituted. By corporate confirmation of
the contracts in dispute on 20 Jan, the Kalaw contracts are thus purged of whatever vice or
defects they may have. Thus even in the face of an express by-law requirement of prior
approval, the law on corporations is not to be held so rigid and inflexible as to fail to
recognize equitable considerations.
There was no BF or breach of trust on the part of Kalaw. The board knew, and Kalaw had so
informed it, that the contracts would cause heavy losses. The Court found no trace of any
dishonest purpose or moral obliquity or ill will that partakes of the nature of fraud which
would consitute BF on the part of Kalaw. The Board did not eventhink of raising their voice in
protest against past contracts which brought enormous profits to NACOCO. The ratification
was an act of simple justice and fairness to the GM and to the best interest of the corporation
whose prestige would have been seriously impaired by a rejection of the board of those
contracts which proved disadvantageous.
Zamboanga Transportation v Bachrach Motor. The Zamboanga Transpo Corp, a
corporation managed by a BOD composed of 5 stockholders, purchased trucks, automobiles
and parts from Bachrach Motors Inc. It incurred a balance of P44K due on several White
trucks, secured by 2 CMs. As it was in dire financial straits, Zamboanga through its GM,
President and Auditor Jose Erquiaga, entered into loan and additional agreements with Jose
Clos, Bishop of Zamboanga, who was also the majority stockholder. As security for the
financial accommodation, a new CM agreement was executed, wherein goods pledged to
Bachrach was also pledged to the Bishop. Erquiaga submitted the mortgage deed to the
board for approval. Two directors of Zamboanga expressed their satisfaction with the
arrangement. Zamboanga partially complied with the mortgage deed. Bachrach sought the
cancellation of the 2 CMs and to have it recorded in the registry of deeds. Erquiaga replied
that the cancellations cannot be recorded pending the approval by the board of the mortgage
deed. The BoD of Zamboanga then convened and rejected the mortgage deed, because of
the discovery that the mortgage had been registered by Bachrach without the knowledge or
consent of Zamboanga and without having first recorded the cancellations of the two
previous mortgages. This also prompted the Board to adopt another resolution authorizing
legal action to annul the mortgages. Bachrach also sued Zamboanga, and was able to obtain
possession of all the chattels and sold the same at public auction. Zamboanga claims that
an oral agreement existed such that the mortgage would not be valid without approval by
resolution of the board and that it would not be recorded until approval thru resolution was
obtained, among other conditions.
I: W/N the CMs executed by Erquiaga is valid and binding upon the Zamboanga
Transportation Corp after payments have been made to Bachrach and notwithstanding the
fact that the CMs were disapproved by the Board of Directors of Zamboanga.
71
H: In his manifold capacity as President, GM, legal counsel, auditor, and majority
stockholder, Erquiaga entered into the CM contract with Bachrach by virtue of which
Zamboanga obtained greater advantages. While it is true that the last CM contract was not
approved by the board, whose approval was needed in order to validate it according to the
by-laws, the broad powers vested in Erquiaga, the approval of his acts with the other CMs,
the approval of the other directors, and the payments made to Bachrach are equivalent to a
tacit approval by the BoD of the CM contract and binds Zamboanga Transport. In truth and in
fact Erquiaga was and is the factotum of the corporation and may be said to be the
corporation itself. While the chief officers of the corporation are in reality its owners and are
permitted to manage the business by the directors, the acts of such officers are binding on
the corporation, which cannot escape liability as to third persons dealing with it in GF. Thus
when the president of a corporation, who is one of the principal stockholders and at the
same time its general manager, auditor, legal counsel, is empowered by the by-laws to enter
into CM contracts, subject to the approval of the board, one of whom is also a principal
shareholder, and both of whom, together with the president, form a majority and said
corporation takes advantage of the benefits afforded by said contract, such acts are
equivalent to an implied ratification of said contract by the board and binds the corporation
even if not formally approved by the board.
3. board committees
— BOD can create committees for the performance of certain functions, so long as the
board clearly specifies and limits the functions delegated, and the delegation does not in
effect constitute an abdication of its powers vested by law
— S35 of Corpo Code allows delegation to an Executive Committee of any act within the
contemplation of the board with exceptions:
o Provided that the delegation is on specific matters and is not a blanket or general
one
o Implies that the board or by-laws may specifically authorize the executive
committee to study and review a board resolution not expressly unamendable or
unrepealable
o The delegation cannot go so far as to render the board powerless and free from all
responsibility
Section 35. Executive committee. - The by-laws of a corporation may create an
executive committee, composed of not less than three members of the board, to be
appointed by the board. Said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board, except with respect to: (1) approval of
any action for which shareholders' approval is also required; (2) the filing of vacancies in
the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4)
the amendment or repeal of any resolution of the board which by its express terms is
not so amendable or repealable; and (5) a distribution of cash dividends to the
shareholders.
4. stockholders or members (Sec 23)
Section 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the
directors or trustees of all corporations organized under this Code must be residents of
the Philippines.
— GR: all corporate powers vested in the board of directors
— Exceptions: otherwise provided in the Code
o Where the Code expressly requires the stockholders or members consent to
certain matters before any action may be taken
o Usually involves the major changes in the corporation
o Stockholders or members approval usually expressed during a meeting, which may
be regular or special
Section 49. Kinds of meetings. - Meetings of directors, trustees, stockholders, or
members may be regular or special. (n)
o Sec. 50: Regular meeting: annually on a date fixed by the by-laws, or…
§ Anytime in April as determined by the board
o Meeting not required in case of amendment to the AOI, when written assent of ALL
the stockholders is sufficient
o Exceptions:
§ amendment to shorten or extend corporate term or
§ amendment to increase capital stock
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
72
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or trustees
stating the fact that said amendment or amendments have been duly approved by the
required vote of the stockholders or members, shall be submitted to the Securities and
Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within
six (6) months from the date of filing for a cause not attributable to the corporation.
Section 37. Power to extend or shorten corporate term. - A private corporation may
extend or shorten its term as stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by
at least two-thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of extension of corporate term,
any dissenting stockholder may exercise his appraisal right under the conditions
provided in this code. (n)
Section 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless approved by a majority vote
of the board of directors and, at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of
the capital stock, or the incurring, creating or increasing of any bonded indebtedness.
Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and place
of the stockholder's meeting at which the proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded indebtedness is to be considered,
must be addressed to each stockholder at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally.
Must be through vote of 2/3 of OCS/members in a SH mtg
A certificate in duplicate must be signed by a majority of the directors of the corporation
and countersigned by the chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have been complied with;
 (2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or increasing of
any bonded indebtedness shall require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of the corporation and
the other shall be filed with the Securities and Exchange Commission and attached to
the original articles of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five (25%) percent of such increased
capital stock has been subscribed and that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual cash to the corporation or that there
has been transferred to the corporation property the valuation of which is equal to
twenty-five (25%) percent of the subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its effect shall prejudice the rights
of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase the
same, with the approval by a majority vote of the board of trustees and of at least two-
thirds (2/3) of the members in a meeting duly called for the purpose.
73
Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms
thereof. (17a)
(1) requirements of stockholders or members meetings and of voting
Jack: Publish notice when it is not sure that
a notice there will be a quorum
Section 50. Regular and special meetings of stockholders or members. - Regular
meetings of stockholders or members shall be held annually on a date fixed in the by-
laws, or if not so fixed, on any date in April of every year as determined by the board of
directors or trustees: Provided, That written notice of regular meetings shall be sent to
all stockholders or members of record at least two (2) weeks prior to the meeting,
unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one (1) week
written notice shall be sent to all stockholders or members, unless otherwise provided in
the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or
member.
— By-laws may shorten or extend the time required by the Code for giving notice
— Board of SMB Workers: Failure to give notice would, as a rule, render any
resolution made therein voidable at the instance of an absent stockholder who
was not notified of the meeting
— Attendance by a stockholder despite want of notice operates as a waiver of
the requirement
— If all stockholders are present or duly represented, it will be valid even if no
notice at all was sent
Section 51. Place and time of meetings of stockholders of members. - Stockholder's or
member's meetings, whether regular or special, shall be held in the city or municipality
where the principal office of the corporation is located, and if practicable in the principal
office of the corporation: Provided, That Metro Manila shall, for purposes of this section,
be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the
meeting be improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting. (24 and 25)
Jack: in publicly held corps,
notice published in newpaper

— Requisites of notice:
o Specify time and place of meeting
o Purpose
o Only matters reasonably related to the purpose must be taken up
o Sent to last known address
— Attendance of stockholder is an exercise of his personal right as owner of the
stocks of the corporation
Board of SMB Workers v Tan. Stockholder John del Castillo files an action in court to
declare null and void the election of the members of the board of directors and Election
Committee of SMB Workers Savings and Loan Assoc Inc. and to compel the board to call for
an hold another election in accordance with its by-laws and the Corporation Law, and to
restrain the illegally elected directors from exercising the functions of their office. TC grants
the petition and declared the election null and void and ordered another election to be held.
However, the same members of the Election Committee set the meeting of the members of
the association to elect the new members. Del Castillo et al contends that it would be
inequitable for them to conduct and supervise again the election. Furthermore, since the
notice was posted and sent out only on 26 March, and the election would be held on 28
March, or two days after notice, it is not in accordance with the by-laws which provide that 5
days notice is required. The TC entered an order that the election set for 28 March be
cancelled and a committee of three be constituted and appointed to call conduct and
supervise the election.
H: it appears that the notice was posted on 26 March and 28 March was the date for the
election. Therefore the five days previous notice required by the by-laws was not complied
with.
As regards the creation of a committee of three vested with the authority to call conduct and
supervise the election, and the appointment of Viernes as chairman of the Committee, the
court in the exercise of its equity jurisdiction may appoint such committee, it having been
shown that the Election Committee provided for in the by-laws has been annulled by the TC
and would jeopardize the rights of respondents if allowed to act.
b place of meeting
Section 51. Place and time of meetings of stockholders of members. - Stockholder's or
member's meetings, whether regular or special, shall be held in the city or municipality
where the principal office of the corporation is located, and if practicable in the principal
office of the corporation: Provided, That Metro Manila shall, for purposes of this section,
be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the
74
meeting be improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting. (24 and 25)
— by-laws cannot fix a place of meeting other than that fixed in Sec 51
— for non-stock corporations: Sec 93
Section 93. Place of meetings. - The by-laws may provide that the members of a non-
stock corporation may hold their regular or special meetings at any place even outside
the place where the principal office of the corporation is located: Provided, That proper
notice is sent to all members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the Philippines. (n)
c quorum
Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the
by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations. (n)
— GR: quorum is a majority of outstanding capital stock or majority of members
of non-stock corporations
— Exception:
o special rules in the Code
o by-laws may provide for greater or lesser number
— to constitute a quorum, stockholders need not be present personally but may
be represented by proxies whose vote will be as effective as if they were
personally present:
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in writing, signed by the
stockholder or member and filed before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting
for which it is intended. No proxy shall be valid and effective for a period longer than five
(5) years at any one time. (n)
Section 59. Voting trusts. - One or more stockholders of a stock corporation may create
a voting trust for the purpose of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period not exceeding five (5) years at any
time: Provided, That in the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof. A certified
copy of such agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and unenforceable.
The certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same effect as
certificates of stock.
— Stock corps: vote is based on number of outstanding shares represented and
not on number of stockholders present
— Non-stock: vote based number of members
Section 137. Outstanding capital stock defined. - The term "outstanding capital stock",
as used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares. (n)

— Close corps: AOI can provide for a quorum and voting requirements in
The voting trust agreement filed with the corporation shall be subject to examination by
stockholders meetings than that provided in Sec 52
any stockholder of the corporation in the same manner as any other corporate book or
o Each member has only one vote unless the by-laws or AOI limit the right
record: Provided, That both the transferor and the trustee or trustees may exercise the
or broaden it
right of inspection of all corporate books and records in accordance with the provisions
o By-laws may provide for voting by mail
of this Code.

Section 97. Articles of incorporation. - The articles of incorporation of a close

Any other stockholder may transfer his shares to the same trustee or trustees upon the corporation may provide:
terms and conditions stated in the voting trust agreement, and thereupon shall be bound
by all the provisions of said agreement.
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
No voting trust agreement shall be entered into for the purpose of circumventing the law subject to the provisions of the following section;
against monopolies and illegal combinations in restraint of trade or used for purposes of
fraud.
2. For a classification of directors into one or more classes, each of whom
may be voted for and elected solely by a particular class of stock; and
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as
well as the certificates of stock in the name of the trustee or trustees shall thereby be 3. For a greater quorum or voting requirements in meetings of stockholders or
deemed cancelled and new certificates of stock shall be reissued in the name of the directors than those provided in this Code.
transferors.
-xXx-
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise. (36a) e non-voting stocks or members

— stockholders cannot unjustifiably walk-out, thereby breaking the quorum and — can still vote/are required to vote in the ff:
defeating the validity of any act proposed and approved by the majority (1) amendment to the AOI
— if justified, the meeting cannot be validly continued if the remaining (2) adoption/amendment to the BLs
stockholders present do not constitute a quorum (3) sale, lease, mortgage, etc of all or substantially all corporate assets
(4) bonded indebtedness
d vote (5) increase/decrease in capital stock
(6) merger/consolidation
— vote required to carry a resolution of the stockholders or members depends (7) investment in another corporation
on: (8) dissolution
o the nature of the resolution, and
o corresponding rule as required by the code where all stockholders present
— GR: majority vote of the shares or members present or represented, provided
that there is a quorum

75
 — GR: Meeting VOID If no notice or defective notice, or venue in another place
other than in BLs or AOi,
— Any matter taken up will be voidable at the instance of an objecting SH
— But presence of ALL SHs, personally or thru representatives, constitutes a
waiver of any irregularity or defect
Section 51. Place and time of meetings of stockholders of members. - Stockholder's or
member's meetings, whether regular or special, shall be held in the city or municipality
where the principal office of the corporation is located, and if practicable in the principal
office of the corporation: Provided, That Metro Manila shall, for purposes of this section,
be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated therein.
All proceedings had and any business transacted at any meeting of the stockholders or
members, if within the powers or authority of the corporation, shall be valid even if the
meeting be improperly held or called, provided all the stockholders or members of the
corporation are present or duly represented at the meeting. (24 and 25)
Johnston v Johnston. Logan, Irene, and Felisa Johnston, and Louis and Rosario Johnston,
and Elizabeth Araneta are the majority shareholders of a family stock corporation known as
Johnston Lumber Co Inc. A stockholders meeting was scheduled to elect a new set of
directors who would in turn choose the new officers of the corporation. Logan presented a
proxy by his mother, Felisa, and another proxy by his wife, Irene, which all-in-all represented
1,242 of the 2,462 shares of the corporation. He also requested that the duly endorsed
shares of JB Solis be listed in the books for voting purposes. Minority SH Louis Johnston, as
Chairman of the board, denied the request. Logan quickly sent for the original owners so that
they could vote in his favor. Louis also disallowed Logan from voting the 307 shares of the
elder Johnston which he had been voting in his capacity as administrator of the estate
because the estate proceedings were already terminated. Thereafter, and before the
existence of a quorum could be declared, Logan et al walked out of the SH meeting and
refused to recognize the validity of the meeting. Louis’ group, the minority carried on and
elected themselves directors and officers. Another SH meeting was called by Louis at the
instance of Logan, which will cover matters not taken up or not finished during the regular
SH meeting. During the meeting Logan moved for the election of a new board, claiming that
there was no quorum in the last meeting and thus was not validly held. Louis denied the
motion. Logan, who represented majority of the stocks, then nominated his own set of
directors, and his group cast their votes in favor of the nominees, which were elected the
new members of the board. This action was overruled again by Louis as Chair. Logan Irene
and Felisa filed a quo warranto suit alleging that they were the duly elected members of the
BOD of Johnston Lumber Co, and were also elected as the corporate officers thereof and
praying for the ouster of Louis, Araneta and Rosario Johnston.
I: (1) Which of the two factions, the Logan group or the Louis group, was validly elected as
directors and officers of the corporation
76
H: The SHs who remained after the group representing the majority walked out without a
quorum being declared represented the minority and did no constitute a quorum, and it is
clear that they could not have validly transacted further business much less have elected a
new set of directors. It follows that if the election of the directors after the withdrawal of
Logan was null and void, then the subsequent meeting of the board at which the Louis group
was elected was likewise null and void.
If the purpose in bolting the meeting was to deliberately defeat the existence of a quorum,
the absence of a quorum, then it would produce the effect of nullifying the proceedings that
follows. It is to be noted that a SH can, for justifiable reasons, break the quorum by
w/drawing from the meeting. Logan walked out because Louis persistently and with reason
overruled Logan on his requests to vote the shares of the Silos family, which he validly
purchased. That Logan did everything possible to register the stocks in order to vote them
was substantial compliance with the charter and the by-laws. The denial by Louis to vote the
shares of the minor children of Albert Johnston was likewise unreasonable. The withdrawal
of Logan, although it actually defeated the existence of a quorum, was neither unreasonable
nor unjustifiable.
The second meeting of SH was properly convened. All parties were present. The roll was
called and a quorum was declared. The contention of Louis that the 2nd meeting did not
amount to an election cannot be sustained. It must be remembered that the Logan group
held the majority of stocks when they cast their votes ifo the nominees. The inaction of the
Louis faction, did not have the effect of defeating or invalidating the election. It is the
essence of all elections that the will of the majority, properly expressed, shall govern. A
majority of votes cast will decide, although some SHs who are present may refuse to vote,
and thus the majority of the votes cast may be less than a majority of the persons or stocks
present or represented.
Neither may the second election be assailed on the ground that notice did not specifically
include the election of the new board on the agenda. The notice provided that matters not
taken up or finished during the first meeting will be part of the agenda, therefore the SHs
knew that Logan would press for the new board and they were prepared for it, having
attended the first meeting. Furthermore, all SHs were present either in person or by proxy
during the 1st meeting and whatever defect in the notice was cured b their presence and
acquiescence.
(2) where no meeting called
— Sec 50 and 6 of PD 902-A are intended to protect the SHs from a situation where no
meeting is called due to the absence of any person authorized to call it or fraudulent or
unjustified refusal to call it
— 50: limited to a situation where there is no person authorized to call a meeting
Section 50. Regular and special meetings of stockholders or members. - Regular
meetings of stockholders or members shall be held annually on a date fixed in the by-
laws, or if not so fixed, on any date in April of every year as determined by the board of
directors or trustees: Provided, That written notice of regular meetings shall be sent to
all stockholders or members of record at least two (2) weeks prior to the meeting,
unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one (1) week
written notice shall be sent to all stockholders or members, unless otherwise provided in
the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or
member.
Whenever, for any cause, there is no person authorized to call a meeting, the
Securities and Exchange Commission, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have chosen one of their number as presiding
officer. (24, 26)
— transfers power to authorize the calling of a meeting from the courts to the
SEC, and only when NO person is authorized to call a meeting
— intended to protect stockholders/members from a situation where no meeting
is called due to the absence of any person authorized to call the same or due
to the neglect of fraudulent refusal o directors to call a meeting for the election
of new directors or whenever it is necessary to act on certain matters
Ponce et al v Encarnacion. At a stockholders meeting of the Daguhoy Enterprises Inc, the
voluntary dissolution of the corporation and the appointment of Potenciano Gapol, the
majority stockholder, as receiver was agreed upon, with a petition for voluntary dissolution
drafted and signed by Ponce. Instead of filing the petition, Gapol changed his mind and filed
a complaint in court to compel Ponce et al to render an accounting of the funds of the corp,
reimburse it for expenses and purchases, and other amounts which were allegedly misspent
and misappropriate for Ponce’s own use. Gapol also sought the removal of Ponce et al as
members of the board, and prayed for an order directing him to call a meeting of the
stockholders and to preside thereat. 2 days later, without notice to the Ponce group and to
the other board members, the TC issued the order prayed for. Ponce only got to know about
the order when the bank refused to honor the checks because of its refusal to recognize the
new board members.
H: The by-laws of the corporation provide in part that its board shall be elected by the
stockholders every even year during the month of January. The requirement in the Corp
Code that “on the showing of good cause therefor” does not mean that the petition must be
set for hearing with notice served upon the board. The TC was satisfied that there was good
cause considering that the chairman had failed, neglected, or refused to perform his duty to
call a meeting of the stockholders to elect new sets of directors, in accordance with the by-
77
laws. They had no right to continue as directors unless reelected by the stockholders in a
meeting called for that purpose every even year. They had no right to hold-over brought
about by the failure to perform the duty incumbent upon any of them. The alleged illegality of
the election of one members of the board at the meeting called by Gapol was authorized by
the court being subsequent to the order complained of and cannot affect the validity and
legality of that order. If it be true that the director elected at the meeting authorized by the
court was not qualified in accordance with the by-laws the remedy for the aggrieved party
would be a quo warranto.
5. instances when stockholder or members action is necessary—where board
action is insufficient, which includes election of directors/trustees but also major
changes in the corporation
— most significant rights of a stockholder:
o right to vote
o right to share in the profits
o right to participate proportionately, upon dissolution and after payment to
creditors, in the distribution of the corporate assets
(1) election of directors or trustees
— 24: at all elections of directors or trustees, there must present, either in person
or by proxy, the owners of the majority of OCS
— right to vote is a right emanating from ownership
— this is the only way a stockholder can have a voice in the management of
corporate affairs
— it is the only way members can have a say as to how the purposes of the
corporation should be achieved
— once elected, stockholders relinquish all corporate powers to the board
— right to vote can be waived in exchange for preferences and privileges, such
as the issuance of preferred and redeemable shares as non-voting shares
— right to vote in certain areas cannot be denied (Sec 6)
Section 6. Classification of shares. - The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided
in this Code: Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series of shares may have
a par value or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-par value shares
of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution
of dividends, or such other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued
for a consideration less than the value of five (P5.00) pesos per share: Provided,
further, That the entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate
of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
78
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights. (5a)
— rules to be followed in the election of directors/trustees:
Section 24. Election of directors or trustees. - At all elections of directors or trustees,
there must be present, either in person or by representative authorized to act by written
proxy, the owners of a majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. The election must be by ballot if
requested by any voting stockholder or member. In stock corporations, every
stockholder entitled to vote shall have the right to vote in person or by proxy the number
of shares of stock standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or where the by-laws are silent, at the time of the
election; and said stockholder may vote such number of shares for as many persons as
there are directors to be elected or he may cumulate said shares and give one
candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the total number of votes
cast by him shall not exceed the number of shares owned by him as shown in the books
of the corporation multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise provided in the
articles of incorporation or in the by-laws, members of corporations which have no
capital stock may cast as many votes as there are trustees to be elected but may not
cast more than one vote for one candidate. Candidates receiving the highest number of
votes shall be declared elected. Any meeting of the stockholders or members called for
an election may adjourn from day to day or from time to time but not sine die or
indefinitely if, for any reason, no election is held, or if there are not present or
represented by proxy, at the meeting, the owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of the member entitled to vote. (31a)
— the above provision requires presence either in person or proxy, implying that
a stockholders meeting is required
Section 92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may
be more than fifteen (15) in number as may be fixed in their articles of incorporation or
by-laws, shall, as soon as organized, so classify themselves that the term of office of
one-third (1/3) of their number shall expire every year; and subsequent elections of
trustees comprising one-third (1/3) of the board of trustees shall be held annually and
trustees so elected shall have a term of three (3) years. Trustees thereafter elected to
fill vacancies occurring before the expiration of a particular term shall hold office only for
the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws, officers of a
non-stock corporation may be directly elected by the members. (n)
Section 93. Place of meetings. - The by-laws may provide that the members of a non-
stock corporation may hold their regular or special meetings at any place even outside
the place where the principal office of the corporation is located: Provided, That proper
notice is sent to all members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the Philippines. (n)
a quorum required
— for a valid election of directors/trustees= majority of outstanding capital stock
or members entitled to vote
— Campos: quorum also based on the number of outstanding voting stocks or
members entitled to vote
b manner of voting; cumulative voting
— viva voce is sufficient, unless ballot voting is requested
— in stock corporations, cumulative voting in the election of directors is
mandatory
— right to cumulative voting cannot be curtailed by the by-laws
— number of voting stockholder votes = product of number of shares owned and
the number of directors to be elected
o stockholder may distribute them any way he pleases
c in close corporations
— special privilege in sec 97
d qualifications and disqualifications of directors
— no one can be elected director unless he owns at least one share in the
corporation, registered in his name on the books
S23
79
— if a director disposes all his shares, he ipso facto ceases to be a director and a
vacancy is created
— majority of directors/trustees must be residents of RP
— citizenship requirements: subject to Constitutional limitations
— by-laws may not do away with the qualifications required by law, buy may add
qualifications or provide for disqualifications
Detective & Protective Bureau v Cloribel. Fausto Alberto was managing director of the
Detective and Protective Bureau Inc. who illegally seized and took control of the assets and
books of the corporation, concealed them illegally and refused to allow any member of the
corporation to examine. The stockholders in a meeting removed Alberto as managing
director and elected Jose de la Rosa, who did not own a share of stock of the corporation.
Alberto refused to vacate and surrender his office and continued to perform unauthorized
acts and to use corporate funds. The corporation claimed that Alberto arrogated unto himself
the powers of the board because of his refusal to surrender his office despite removal by the
stockholders.
H: Since de la Rosa did not own a share of stock of the corporation, he cannot become a
director in accordance with the Corpo Code. If he could not be director, then it follows that he
cannot be managing director. Since he is not qualified, then Alberto cannot be compelled to
vacate his office because the by-laws itself provide that directors shall serve until the election
and qualification of duly qualified successor.
Gokongwei v SEC. This involves two actions in the SEC filed by John Gokongwei, a San
Miguel Corporation stockholder by himself and through the URC and CFC, who sued the
majority of the SMC BoD (Soriano, Zobel, Roxas, Ortigas, Prieto et al) and SMC itself to
declare null and void the amended by-laws and a cancellation of the certificate of filing the
amended by-laws. He alleges the following:
— SMCBOD acted without authority in amending the by-laws without the
prescribed 2/3 vote of stockholders holding subscribed and paid-up capital
stock
— Some members of the SMCBOD amended the by-laws which state that in
determining whether or not a person is engaged in competitive business, the
Board may look into factors such as competitive business and family
relationship, thus purposely providing for Gokongwei’s disqualification as
director, and effectively disqualified him from being elected as director
Gokongwei also files an action in the SEC to compel SMC to allow him to inspect the records
of the corporation, including the minutes of the last stockholders meeting, copy of the
management contract with ANSCOR, latest financial statements among others, including the
authority of the stockholders to invest corporate funds in San Miguel International Inc.
The Sorianos counter by alleging that Gokongwei as president and majority stockholder of
URC and CFC, conducted bad publicity against the SMC to generate support from the
stockholders in his effort to secure a seat in the board. They add the fact Gokongwei was
rejected by the stockholders because he was engaged in competitive business and securing
a seat would have subjected SMC to grave disadvantages. SEC grants Gokongwei motion
but denies the motion to inspect the financial statements and records of San Miguel
International as he is not a stockholder thereof. SEC also allowed him to run as director but
cannot sit as long as the validity of the by-laws has been settled. Meanwhile the SMCBOD
submitted the amended by-laws to the stockholders, who ratified the same.
I: were the amended by-laws valid and reasonable
H: In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the
power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation
Law; that in a special meeting on February 10, 1977 held specially for that purpose, the
amended by-laws were ratified by more than 80% of the stockholders of record; that the
foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company
in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders'
annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
I: Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination
or election to the Board of Directors of SMC are valid and reasonable
H: Gokongwei claims that the amended by-laws are invalid and unreasonable because they
were tailored to suppress the minority and prevent them from having representation in the
Board, at the same time depriving petitioner of his "vested right" to be voted for and to vote
for a person of his choice as director. Upon the other hand, respondents Andres M. Soriano,
Jr., Jose M. Soriano and San Miguel Corporation content that the exclusion of a competitor
from the Board is legitimate corporate purpose, considering that being a competitor,
petitioner cannot devote an unselfish and undivided Loyalty to the corporation; that it is
essentially a preventive measure to assure stockholders of San Miguel Corporation of
reasonable protective from the unrestrained self-interest of those charged with the promotion
of the corporate enterprise.
Under US corporate law, corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the corporation's Board of
Directors. ... [A]n amendment which renders ineligible, or if elected, subjects to removal, a
director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." This is based upon the principle that where the
director is so employed in the service of a rival company, he cannot serve both, but must
betray one or the other. Such an amendment "advances the benefit of the corporation and is
good." In the Philippines, section 21 of the Corporation Law expressly provides that a
corporation may make by-laws for the qualifications of directors. Thus, it has been held that
an officer of a corporation cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has received as such officer,
under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is
an officer or director.”
80
It is also well established that corporate officers "are not permitted to use their position of
trust and confidence to further their private interests." In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct
to the exclusion of his principal.”
I: W/N Gokongwei, as SH of SMC, has a vested right to be voted as director in the
corporation.
H: It is further argued by SMC that there is no vested right of any stockholder under
Philippine Law to be voted as director of a corporation. Pursuant to section 18 of the
Corporation Law, any corporation may amend its articles of incorporation by a vote or written
assent of the stockholders representing at least two-thirds of the subscribed capital stock of
the corporation If the amendment changes, diminishes or restricts the rights of the existing
shareholders then the dissenting minority has only one right, viz.: "to object thereto in writing
and demand payment for his share." Under section 22 of the same law, the owners of the
majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-
laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in
the face of the fact that the law at the time such right as stockholder was acquired contained
the prescription that the corporate charter and the by-law shall be subject to amendment,
alteration and modification.
Although in the strict and technical sense, directors of a private corporation are not regarded
as trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust." “The ordinary trust
relationship of directors of a corporation and stockholders", according to Ashaman v. Miller,"
is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of
the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof.
I: Whether or not respondent San Miguel Corporation could, as a measure of self- protection,
disqualify a competitor from nomination and election to its Board of Directors.
H: It is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two
corporations owned or controlled by him, control over the following shareholdings in San
Miguel Corporation. According to respondent SMC, in 1976, the areas of competition
affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion
total product sales of SMC. The CFC-Robina group was in direct competition on product
lines which, for SMC, represented sales amounting to more than P478 million.
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in
its by-laws "the qualifications, duties and compensation of directors, officers and employees
... " This must necessarily refer to a qualification in addition to that specified by section 30 of
the Corporation Law, which provides that "every director must own in his right at least one
share of the capital stock of the stock corporation of which he is a director ... " Any person
"who buys stock in a corporation does so with the knowledge that its affairs are dominated
by a majority of the stockholders and that he impliedly contracts that the will of the majority
shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law." To this extent, therefore, the stockholder may be considered
to have "parted with his personal right or privilege to regulate the disposition of his property
which he has invested in the capital stock of the corporation, and surrendered it to the will of
the majority of his fellow incorporators. ... It cannot therefore be justly said that the contract,
express or implied, between the corporation and the stockholders is infringed ... by any act of
the former which is authorized by a majority..."
It is not denied that a member of the Board of Directors of the San Miguel Corporation has
access to sensitive and highly confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification; (c) research and development;
and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups with
other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to promote his individual or
corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations
and place the performance of his corporation duties above his personal concerns.
Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director has an economic
incentive to appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies
and pricing policies of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by the competitor of
the strategies for the development of existing or new markets of existing or new products
could enable said competitor to utilize such knowledge to his advantage.
e term of director or trustee
81
— 23: in stock corporations= 1 year…
— … but directors may hold-over as directors until the annual election is held
— 92 and 108: in non-stock corps, unless AOI provide otherwise, the term of
trustee is 3 years except education corporations (5 years)
f vacancies in the board
— 29: vacancies in the board are to be filled by the SHs in a meeting:
— no quorum
— removal
— expiration of term
— increase in number of directors
— may occur by reason of death, resignation, removal, expiration of term, or
abandonment
— mere withdrawal insufficient—there must be clear intention to resign
— Mead: abandonment of office may be implied when the director has accepted
a position outside of the RP where his work would require his continuous
presence, making it incompatible with his position as director of corporation
— if thru removal or expiration of term: majority of remaining directors
(2) removal of directors
— only SHs have the power to remove directors under the procedures in 28
— removal of director before expiry of his term, even without cause, is a right
granted to the SHs for their protection against fraud, incompetence or abuse
— NOTE: no cumulative voting in the removal of directors—as fast as the
minority elects a director by exercising their right to cumulate their votes, the
latter can be removed by 2/3 vote OCS
— Vacancy can be filled in the same meeting where the removal is effected; NO
need for notice
— Vote required: 2/3 OCS in stock corps; 2/3 members entitled to vote in non-
stock corps
Roxas v Dela Rosa. The majority SHs of Binalbagan Estate Inc formed a voting trust,
wherein the trustees (Fisher, Laguda, and Monteblanco) were authorized to represent and
vote the shares pertaining to the majority SHs. During the SH meeting the trustees were able
to elect a board to their liking without opposition from the minotiry. Various substitutions have
been made in the personnel of the voting trust, such that the present composition wanted to
oust the officers of Binalbagan elected by the voting trust previously, without waiting the
termination of their official term or after one year from date of their election. The trust then
called a special general meeting of the SHs for the election of the board, amendment of by-
laws, and other business. A board member and a single SH sued the trustees to enjoin them
from holding said meeting. TC granted the petition.
H: Under the law the directors of a corporation can only be removed from office by a vote of
the SH representing 2/3 of the subscribed capital stock entitled to vote, while vacanies in the
board can only be filled by mere majority vote. While the trust controls a majority of the
stock, it does not have a clear 2/3 majority. It was therefore impolitic for the trust, in forcing
the call for the meeting, to come out frankly and say in the notice that one of the purposes of
the meeting was to remove the directors of the corporation. Instead the call was limited to
the election of the board, it being the evident intention to elect a new board as if the
directorate had been then vacant. Since the present directors were regularly elected, the
proposal to elect another directorate, if carried into effect, would result in the election of a
rival set of directors, who would need a court order of quo warranto to install them in office.
Thus the TC was correct in forestalling that eventuality and to enjoin the second election.
Angeles v Santos. Angeles et al were minority SHs, while Santos et al were the majority
SHs of Paranaque Rice Mills Inc. At an extraordinary SH meeting the SH appointed an
investigation committee to investigate and determine the properties, assets, and losses of
the corporation. Santos denied access to the properties and the records and books of the
corporation. Santos took the records and books and appropriated for his own benefit the
properties and funds of the corporation. He also refused to issue a certificate of stock for
Angeles, and refused to call a SH meeting and a board meeting, as well as disposed of the
properties of the corporation without authority. Santos also called no meeting of the board or
of the SH thus enabling him to continue holding without any election, the position of
president and GM. Angeles et al sought a court order to appoint a receiver, to order Santos
to render an accounting, to issue to certificate of stock ifo Angeles, and to remove the
present board and hold a special SH meeting to elect a new board.
H: There is ample evidence to show that Santos et al have been guilty of breach of trust as
directors of the corporation. The Board is a creation of the SH by delegation of the SH. But
the board, or the majority thereof, occupies a position of trusteeship in relation to the minority
of stock in the sense that the board should exercise GF, care, and diligence in the
administration of the affairs of the corporation. And should protect not only the interests of
the majority but also those of the minority of the stock. Where the majority of the board
performs ultra vires acts or commits fraud or wrongful harm to the corporation, the court, in
its exercise of equity jurisdiction, and upon showing that an intracorporate remedy is
unavailing, will entertain a suit for and in behalf of the corporation to redress the injuries of
the minority SHs against wrong by the majority.
Where corporate directors are guilty of a breach of trust—not of mere error of judgment or
abuse of discretion—and intracorporate remedy is futile or useless, a SH may institute a suit
in behalf of himself and other SH and for the benefit of the corporation.
GR: SH cannot ordinarily sue in equity to redress wrongs done to the corporation, but the
action must be brought by the board
Exception: If the corporation is under the complete control of the wrongful members of the
board, or where a demand or suit would be useless and futile
The appointment of a receiver upon application of the minority SH is a power to be exercised
with great caution. This does not mean that the rights of the minority SH may be entirely
disregarded, and that where necessity has arisen, the appointment of a receiver for a
corporation is a matter resting largely in the sound discretion of the court.
82
As to the contention that it was wrong for the TC to order the removal of the directors and
members of the board upon application by the minority SHs, the law does no confer
expressly upon the courts the power to remove a director. But if the court has acquired
jurisdiction to appoint a receiver because of the mismanagement and resulting injury caused
by the members of the board, these may thereafter be removed and others appointed in their
place by the same court in the exercise of its equity jurisdiction. In the present case, the
properties and assets of the corporation are amply protected by the appointment of a
receiver and thus the removal of the directors is unnecessary and unwarranted.
Campbell v Leow Inc. Two factions have been fighting for control of Leows Inc—the
Tomlinson (majority SH) Faction, and the Vogel (president) Faction. At the SH meeting each
nominated 6 directors and a neutral director, or 13 directors in all. 2 of the 6 Vogel directors,
a Tomlinson director, and the neutral director resigned, making it 5-4 ifo Tomlinson. A
quorum is 7. Only the 5 Tomlinson directors attended a directors’ meeting to fill the
vacancies in the board. Before the meeting, Vogel as president called a SH meeting to fill
director vacancies, amend the by-laws to increase the number of board members from 13 to
19, to increase the quorum from 7 to 10, and to elect 6 additional directors, as well as to
remove 2 Tomlinson directors. A proxy statement was sent out by Vogel soliciting SH
support for the agenda in the notice of the Vogel meeting and to fill the board with Vogel
nominees. Tomlinson sued. He claims the president had no authority to call a special
meeting of SH to act upon policy matters which have not been defined by the board. He also
alleges that the president had no authority, without board imprimatur, to propose an
amendment of the by-laws to enlarge the board.
H: Vogel as president had authority to call the special meeting of SH, although the purposes
of the meeting were not in furtherance of the routine business of the corporation, because it
is expressly granted by the by-laws. Nonetheless, the SH, by permitting the by-laws to stand,
have given the president power to state these broad purposes in his call for a meeting. The
call of the Sh meeting is not of the character that would impinge on the power given directors
by the statute. A by-law giving the president power to submit matters for SH action
presumably only embraced matters which are appropriate for SH action. So construed the
by-laws do not impinge on the statutory right and duty of the board to manage the business
of the corporation.
As to the enlargement of the board, although a radical change in corporate management and
could be determinative of control, the wording of the by-law authorizes such action.
As to the call of meeting for filing newly created directorships, which plaintiff claims is invalid,
the SHs have the inherent right between annual meetings to fill newly created directorships.
It would take strong by-law language to warrant the conclusion that those adopting the by-
laws intended to prohibit the SHs from filing new directorships.
As to the removal of directors by the SH even for cause, which is not authorized by state law,
the court ruled that the SH have such power. This power must be implied when we consider
that otherwise a director who is guilty of the worst sort of violation of his duty would
nevertheless remain on the board. Considering the damage a director might be able to inflict
upon his corporation, the doubt must be resolved by construing the statute and by-laws as
leaving untouched the question of director removal for cause. This power exists even where
there is a provision for cumulative voting. If a director’s presence or action is clearly
damaging the corporation and its SH in a substantial way, it is difficult to see why that
director should be free to continue such damage merely because he was elected under a
cumulative voting system. However, a SH has standing and the right to challenge the legal
propriety of action proposed to remove a member of the board, and can attack procedures
adopted to remove directors for cause where the procedure is invalid in its face.
(3) fundamental changes
— in the following basic changes in the corporation, although usually initiated by the board,
its decision is not final, and therefore approval of the SH would be necessary.
o Non-voting stocks or non-voting members will be entitled to vote (Sec 6)
o Vote required: 2/3 of outstanding capital stock or 2/3 of members entitled to vote
§ For amendment of by-laws: simple majority
§ Unanimous vote never required
a amendment of AOI
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.
— AOI embodies the basic agreement of the SHs; thus any change requires their consent
— Note: no requirement of SH or members meeting; “written assent” is sufficient
o Secs 37 38 39 40 42 43 and 44 however require a meeting first
— Extension (or shortening) of term and increase (or decrease) of capital stock also
involve an amendment of the AOI but are covered by Sec 37 and 38
— Amendment of “certain matters”:
Section 103. Amendment of articles of incorporation. - Any amendment to the articles of
83
incorporation which seeks to delete or remove any provision required by this Title to be
contained in the articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether
with or without voting rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly called for the purpose.
-- x X x --
Section 96. Definition and applicability of Title. - A close corporation, within the meaning
of this Code, is one whose articles of incorporation provide that: (1) All the corporation's
issued stock of all classes, exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class. Notwithstanding the foregoing, a
corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights is owned or controlled by another corporation which is not a
close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil
companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance with
the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
— Note that such an amendment in sec 103 would make a corporation a close one. Any
amendment to these would in effect change the status of the corporation as a close
one, and will deprive it of special privileges accorded by the Code to ordinary
corporations
— This must prevail over the general provision of Sec 16 which does not require a SH
meeting
b sale or other disposition of substantially all assets
— sale of all or substantially all assets is not just an act of mgt—it is an act of
ownership, and therefore SH approval is necessary
— requires a meeting duly called and notice to SHs
Section 40. Sale or other disposition of assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill, upon
such terms and conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property or consideration,
as its board of directors or trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or
in case of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholder's or member's meeting duly called for the purpose. Written
notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That any dissenting stockholder may exercise
his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of continuing
the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of said corporation or if the proceeds of the sale
or other disposition of such property and assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at
least a majority of the trustees in office will be sufficient authorization for the corporation
to enter into any transaction authorized by this section.
c investment in another business or corporation (compare
with 36)
— 42 adopts the ruling in Dela Rama that where the investment by the
corporation is reasonably necessary to accomplish its primary purpose in the
AOI, the approval of SHs is NOT necessary. However…
— … In 36: expressly limits such investment to one which may be reasonable
and necessarily required by the lawful business of the corporation, which
would make any other kind of investment ultra vires!
84
— Campos: The power to invest in another business other than its primary
purpose must therefore be expressly allowed by the AOI! If not, and the
corporation wants to make such an investment, it should amend its AOI.
— In either case: SHs approval is mandatory
— 42 and 36 are based on the principle that the SHs have a right to decide how
their funds will be invested
Section 42. Power to invest corporate funds in another corporation or business or for
any other purpose. - Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any purpose other than the
primary purpose for which it was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two thirds (2/3) of the members in the case
of non-stock corporations, at a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That any dissenting stockholder
shall have appraisal right as provided in this Code: Provided, however, That where the
investment by the corporation is reasonably necessary to accomplish its primary purpose
as stated in the articles of incorporation, the approval of the stockholders or members
shall not be necessary. (17 1/2a)
Section 36. Corporate powers and capacity. - Every corporation incorporated under this
Code has the power and capacity:
-- x X x --
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution;
Dela Rama et al v Ma-ao Sugar. Derivative suit by 4 minority SHs against the Ma-ao Sugar
Central, its president and 3 other directors. The minority SHs contend that the president
subscribed for P3M worth of capital stock of the Phil Fiber Co Inc, a company making sugar
bags, making 2 payments without any board resolution authorizing the investment at the
time, but only after the investment was already made. They claim that the transaction is still
wanting in legality, since no resolution was approved by affirmative vote of 2/3 of SHs.
H: a private corporation, in order to accomplish its purpose as state in its AOI, and subject to
the limitations of the Code, has to power to acquire, hold, mortgage… shares, bonds, and
other debt instruments of any domestic corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of the Shs, but when the purchase of shares
of another corporation is done solely for investment and not to accomplish its purpose, the
vote of approval of the SH is necessary. When the investment is necessary to accomplish its
purpose in the AOI, the approval of SHs is not necessary.
Gokongwei v SEC. I: W/N the SH of a corporation may ratify the investment of corporate
funds in a foreign corporation.
H: If the investment is made in pursuance of the corporate purpose, it does not need
approval of the SH. It is only when the purchase of shares in another corporation is done
sholey for investment and not to accomplish the purpose of the corporation that the vote of
approval of 2/3 of SH is necessary.
In this case, the purchase of beer manufacturing facilities by SMC was an investment in the
same business as stated in its AOI, which is to manufacture or market beer. Even assuming
that the board of SMC had no authority to make the investment, there is no question that a
corporation, like an individual, may ratify and render binding upon it the originally
unauthorized acts of its officers or other agents. It is a corporate transaction or contract
which is within the corporate powers, but which is defective from a purported failure to
observe the requirement of law the a vote of 2/3 of SH holding voting stock. This requirement
is for the benefit of the SHs. Thus only they may ratify the investment, and such ratification
obliterates any defect which it may have had at the time of investment.
d merger and consolidation (cf Mergers and Combinations)
— merger: the union of two or more corporations by virtue of which one of them
absorbs all the others
o juridical personalities are extinguished, except only that of the absorbing
corporation
— consolidation: union of two or more corporations with the formation of a new
corporation, extinguishing all the constituent corporations in the process
Section 77. Stockholder's or member's approval. - Upon approval by majority vote of
each of the board of directors or trustees of the constituent corporations of the plan of
merger or consolidation, the same shall be submitted for approval by the stockholders or
members of each of such corporations at separate corporate meetings duly called for the
purpose. Notice of such meetings shall be given to all stockholders or members of the
respective corporations, at least two (2) weeks prior to the date of the meeting, either
personally or by registered mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation. The affirmative
vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock
of each corporation in the case of stock corporations or at least two-thirds (2/3) of the
members in the case of non-stock corporations shall be necessary for the approval of
such plan. Any dissenting stockholder in stock corporations may exercise his appraisal
right in accordance with the Code: Provided, That if after the approval by the
stockholders of such plan, the board of directors decides to abandon the plan, the
appraisal right shall be extinguished.
85
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or trustees
of all the constituent corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3)
of the members of each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or consolidation. (n)
e APPRAISAL RIGHT (cf Appraisal Right sidebar in
Amendments to Charter)
— appraisal right: a SH who dissented and voted against the proposed corporate
action may choose to get out of the corporation by demanding payment of the
fair value of his shares
— the SH is granted by law the appraisal right in any of the four fundamental
changes (amendment of AOI; sale or other disposition of substantially all
assets; investment in another business/corporation; merger/consolidation)
— GR: a SH cannot just pull out his investment, other than selling his shares to a
willing buyer, which he subjects to all the risks of the business of the
corporation, and will have to wait until dissolution of the corporation.
o Exception: in specified and specific major changes in his contract of
investment
o The law presumes that the SH did not foresee the changes when he
bought the shares or made the investment
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation. (n)
— all instances of amendment of the AOI gives rise to a SH’s appraisal right
o changes that affect or restrict the rights of any SH gives rise to his
appraisal right
o ex. Mere change in name or principal office not sufficient to invoke the
appraisal right

Section 82. How right is exercised. - The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the date on which the vote
was taken for payment of the fair value of his shares: Provided, That failure to make the
demand within such period shall be deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or affected, the corporation shall pay to such
stockholder, upon surrender of the certificate or certificates of stock representing his
shares, the fair value thereof as of the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was approved by
the stockholders, the withdrawing stockholder and the corporation cannot agree on the
fair value of the shares, it shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings of the majority of the appraisers shall
be final, and their award shall be paid by the corporation within thirty (30) days after such
award is made: Provided, That no payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to cover such
payment: and Provided, further, That upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith transfer his shares to the corporation. (n)
— if SH was absent during the meeting or if present, abstained in the voting on
the approval of a corporate action, then he does not have the appraisal right
— one very important condition: the corporation must have unrestricted retained
earnings. This is intended to protect both corporate creditors and the
remaining SHs
— costs and expenses of appraisal are borne by the corporation, unless the fair
value ascertained by the corporation is approximately the same as the price
which the corporation may have offered to pay the SH
Section 83. Effect of demand and termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares until either the abandonment of the
corporate action involved or the purchase of the said shares by the corporation, all rights
accruing to such shares, including voting and dividend rights, shall be suspended in
accordance with the provisions of this Code, except the right of such stockholder to
receive payment of the fair value thereof: Provided, That if the dissenting stockholder is
not paid the value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored. (n)
Section 84. When right to payment ceases. - No demand for payment under this Title
may be withdrawn unless the corporation consents thereto. If, however, such demand for
payment is withdrawn with the consent of the corporation, or if the proposed corporate
action is abandoned or rescinded by the corporation or disapproved by the Securities
and Exchange Commission where such approval is necessary, or if the Securities and
86
Exchange Commission determines that such stockholder is not entitled to the appraisal
right, then the right of said stockholder to be paid the fair value of his shares shall cease,
his status as a stockholder shall thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to him. (n)
Effect of the demand for the fair value:
— if the corporation refuses or fails to pay the fair value w/in 30 days of the
award, SH is restored to all his rights ipso facto
o even if the inability to pay is due to insufficient unrestricted retained
earnings
— same effect:
o corporate action is abandoned or rescinded
o necessary approval of SEC cannot be obtained
o SEC decides that SH is not entitled to appraisal right
o SH withdraws demand for fair value of shares with consent of corporation
Section 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall
be borne by the corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the latter. In the case of an action to
recover such fair value, all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive payment was unjustified. (n)
Section 86. Notation on certificates; rights of transferee. - Within ten (10) days after
demanding payment for his shares, a dissenting stockholder shall submit the certificates
of stock representing his shares to the corporation for notation thereon that such shares
are dissenting shares. His failure to do so shall, at the option of the corporation,
terminate his rights under this Title. If shares represented by the certificates bearing such
notation are transferred, and the certificates consequently cancelled, the rights of the
transferor as a dissenting stockholder under this Title shall cease and the transferee
shall have all the rights of a regular stockholder; and all dividend distributions which
would have accrued on such shares shall be paid to the transferee. (n)
— If dissenting SH sells his shares before getting paid, his right to payment ceases, and
transferee acquires all rights of a regular SH
Section 105. Withdrawal of stockholder or dissolution of corporation. - In addition and
without prejudice to other rights and remedies available to a stockholder under this Title,
any stockholder of a close corporation may, for any reason, compel the said corporation
to purchase his shares at their fair value, which shall not be less than their par or issued
value, when the corporation has sufficient assets in its books to cover its debts and
liabilities exclusive of capital stock: Provided, That any stockholder of a close corporation
may, by written petition to the Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly
prejudicial to the corporation or any stockholder, or whenever corporate assets are being
misapplied or wasted.
— A situation where the SH can still get back his investment from the corporation before
dissolution
— Refers only to SHs of close corporations
— Sec 105 makes the close corporation very much like a partnership where a partner,
even without just cause, can leave the business at any time and effect a dissolution
— Withdrawal of SH does not cause the dissolution of the corporation
— Corporate creditors are protected—the code requires that the assets of the corporation
be sufficient to cover its debts and liabilities exclusive of capital stock
o Note difference between the above condition and the requirement in Sec 82 (i.e.
existence of unrestricted retained earnings)
f increase and decrease of capital stock; creation or
increase of bonded indebtedness (cf Financing…)
(Sec 38 supra)
g adoption, amendment, and repeal of by-laws
Amendments of Charter)
— Code does not consider amendment of BLs as a major change in the
corporation, therefore SHs have NO appraisal right
— Vote required: majority OCS
— Power to amend BLs can be delegated to the board by 2/3 vote OCS
— Q: Will delegation continue to be effective even if the capital stock has been
greatly increased thereafter? (Gokongwei)
— Campos: YES. Under 48, if the present SHs wish to revoke the board
delegated authority, they can do so in a meeting called for the purpose, thru a
majority vote
— Non-voting stocks cannot vote here
— Amendments effective only after SEC issuance of certification
Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority
vote thereof, and the owners of at least a majority of the outstanding capital stock, or at
least a majority of the members of a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-
laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of
the members in a non-stock corporation may delegate to the board of directors or
trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That
any power delegated to the board of directors or trustees to amend or repeal any by-laws
or adopt new by-laws shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority of the members in
non-stock corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-
laws shall be attached to the original by-laws in the office of the corporation, and a copy
thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities and Exchange Commission the
same to be attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities
and Exchange Commission of a certification that the same are not inconsistent with this
Code. (22a and 23a)
(4) other instances requiring stockholders action
a declaration of stock dividends (cf Dividends)
— 43: no stock dividend may be issued without the approval of at least 2/3 OCS
— stock dividends deprive the SHs of the right to participate in the current profits
of the corporation
(cf — stock dividends are ploughed back into the capital and made part of the
capital stock, exposing it to risk
b management contracts (cf Corporate Powers)
— defn of mgt contract: one entered into between 2 corporations by virtue of
which one agrees that its corporate affairs will be managed by the other
— 44: SHs of BOTH corporations must give their consent—majority vote at a
meeting duly called
— NOTE: non-voting stocks have no say in the approval of mgt contracts
Section 44. Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members in the case of a
non-stock corporation, of both the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed corporations own
or control more than one-third (1/3) of the total outstanding capital stock entitled to vote
of the managing corporation; or (2) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management contract must be
approved by the stockholders of the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. No management contract shall be
87
entered into for a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
c fixing consideration for no-par shares (cf Consideration for
Shares)
— vote: majority OCS
— right to vote the fixing of consideration arises only when the AOI does not fix it
and the board is not authorized by the AOI or BLs
— non-voting stocks have no right to participate in the voting under Sec 6
Section 62. Consideration for stocks. - Stocks shall not be issued for a consideration
less than the par or issued price thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible property such
as patents of copyrights, the valuation thereof shall initially be determined by the
incorporators or the board of directors, subject to approval by the Securities and
Exchange Commission.
88
Shares of stock shall not be issued in exchange for promissory notes or future service.
The same considerations provided for in this section, insofar as they may be applicable,
may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of incorporation or by
the board of directors pursuant to authority conferred upon it by the articles of
incorporation or the by-laws, or in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a meeting duly called for the
purpose. (5 and 16)
d fixing compensation of directors
Section 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable per diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a regular
or special stockholders' meeting. In no case shall the total yearly compensation of
directors, as such directors, exceed ten (10%) percent of the net income before income
tax of the corporation during the preceding year. (n)
e deadlocks in close corporations
— AOI of a close corporation may provide for a greater quorum and voting
requirement in board and SH meetings
— AOI of a close corporation may provide that the mgt of the corporation shall be
done by the SHs, which shall be deemed directors
— This makes chances of deadlock greater and balance of control more
precarious
— SEC may intervene, even on the action of only one SH regardless of the
number of his shares, with the power to prohibit the directors or SHs from
performing any corporate act and even to dissolve the corporation
— SEC can also appoint a provisional director
Section 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation, if the
directors or stockholders are so divided respecting the management of the corporation's
business and affairs that the votes required for any corporate action cannot be obtained,
with the consequence that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally, the Securities and Exchange
Commission, upon written petition by any stockholder, shall have the power to arbitrate
the dispute. In the exercise of such power, the Commission shall have authority to make
such order as it deems appropriate, including an order: (1) cancelling or altering any
provision contained in the articles of incorporation, by-laws, or any stockholder's
agreement; (2) cancelling, altering or enjoining any resolution or act of the corporation or for which it is intended. No proxy shall be valid and effective for a period longer than five
its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the (5) years at any one time. (n)
corporation or its board of directors, stockholders, officers, or other persons party to the
action; (4) requiring the purchase at their fair value of shares of any stockholder, either — two meanings of proxy:
by the corporation regardless of the availability of unrestricted retained earnings in its o person duly authorized by the stockholder to vote in his behalf at a
books, or by the other stockholders; (5) appointing a provisional director; (6) dissolving stockholder’s meeting
the corporation; or (7) granting such other relief as the circumstances may warrant. § is actually an agent for a special purpose
§ rules on agency apply to the relationship
A provisional director shall be an impartial person who is neither a stockholder nor a o the actual document evidencing this authority
creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose — types of proxy:
further qualifications, if any, may be determined by the Commission. A provisional o general proxy—gives the power to vote for directors and on all ordinary
director is not a receiver of the corporation and does not have the title and powers of a matters which may be properly be taken in an SH meeting
custodian or receiver. A provisional director shall have all the rights and powers of a duly § does not include the power to vote for an amendment to the
elected director of the corporation, including the right to notice of and to vote at meetings AOI or other unusual transactions
of directors, until such time as he shall be removed by order of the Commission or by all o limited proxy—restricts the authority to vote to specified matters only and
the stockholders. His compensation shall be determined by agreement between him and may direct the vote to be case in a certain way
the corporation subject to approval of the Commission, which may fix his compensation — Nature of proxy: a special form of agency governed by the laws on agency
in the absence of agreement or in the event of disagreement between the provisional o Strictly fiduciary relation, and therefore as a GR, revocable in nature
director and the corporation. despite contrary stipulations
o Exception: coupled with an interest
Right to vote § Includes where the proxy has parted with the value or incurred
liability at the SHs request…
— Sec 6: no share may be deprived of voting rights except those classified and issued as § … which would mean to it is NOT the giving of onerous
“preferred” or “redeemable” shares, and there shall ALWAYS be a class of shares consideration that makes a proxy one that is coupled with an
which have complete voting rights interest, but that the proxy is an integral part of the security by
— Non-voting shares are entitled to vote in certain matters enumerated in Sec 6 which a loan is to be paid
— requisites for valid proxy (58)
Devices affecting control o in writing
o signed by SH or member
— GR: extent of control would be proportional to the number of shares a stockholder owns o filed before the scheduled meeting
i.e. the more shares, the greater the possibility of control — term of proxy:
— Except, that it is possible for a person or group owning only a minority of shares can o proxy may fix the period it may be used, but cannot exceed 5 years,
obtain control by successfully electing the majority of directors, through devises renewable for not more than 5 years per renewal
— Common problem in devises: effect of transfer of some or all stocks by one of the o no period specified: expires after the meeting for which it was given and
parties to the voting agreement cannot be used for another meeting unless it is renewed
— who may be appointed proxy?
o Stock: no limitation, and BL restrictions on SH right to appoint a proxy will
1. the proxy device be VOID
o Non-stock: 89: AOI or BL may restrict right to appoint proxy
— Corpo Code expressly allows voting by proxy in all stockholders and members — revocability:
meetings o GR revocable even before the period has expired and even if it expressly
provides for irrevocability
o Exception: coupled with an interest
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all § Irrevocable for the period fixed
meetings of stockholders or members. Proxies shall in writing, signed by the
§ Upon expiry, proxy automatically ceases to be effective unless
stockholder or member and filed before the scheduled meeting with the corporate renewed
secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting § What constitutes sufficient interest? Depends from case to case

89
 — Procedure/practice:
o management usually sends a proxy form with notice of the annual
stockholders meeting
o persons suggested as proxies have been selected by the incumbent
directors and are sometimes referred to as the proxy committee
o the existing management who may own only a small portion of the
corporation’s shares can retain its control over corporate affairs for as
long as they can obtain the necessary number of proxies from absentee
stockholders
o proxies may not be appointed orally and the written proxy should be filed
with the corporate secretary before the meeting
§ failure to comply will render the proxy void and ineffective
§ vote or presence counted on the basis of a void proxy may
result in the invalidation of any action, unless the number of
shares required for quorum or voting is present
o when a group of SH feel dissatisfied with management, they may seek
control to correct such mismanagement by soliciting proxies for the next
election of directors
o each block of SH will seek proxies of absentee SHs
o since management has the right to defend its present policies, it can as a
rule, use corporate funds and facilities in solicitation, as long as:
§ it acts in GF,
§ the expenses are reasonable under the circumstances and
§ the proxy war is not a personal one
— GR: when the right to vote by proxy is given by statute, a stockholder cannot
be deprived of it by any by-law
— Exception: non-stock corps—Code allows for a waiver of the right provided
this is made in the AOI or by-laws
— By-laws may also impose reasonable conditions as to the form and manner of
voting by proxy
In re Giant Portland Cement. H: Stock transferred on the books of the corporation within 20
days prior to a stockholders meeting, for the election of directors, is temporarily
disenfranchised, and cannot be voted either by the transferor or by the transferee. The
persons on whose proxies the SH meeting were the SH of record within the provision of the
statute, although they were not real beneficial or equitable owners of the stock. The right to
vote shares of corporate stock, having voting powers, has always been incident to its legal
ownership. Whatever the rights of the mere unrecorded assignee of the stock certificate
might be in the absence of a by-law or other contract provision requiring all transfers of
shares to be recorded on the books of the corporation, it is not contended that such a
provision is not authorized or is not binding as between SHs and the corporation. As
between the transferor and the unrecorded transferee to the stock certificate, the legal title
passes to the latter. A very different rule applies between the corporation and the mere
unrecorded assignee of the certificate of stock. That is because limited contract restrictions
relating to stock transfers, are for the benefit of the corporation, and to enable it to ascertain
from its records who its members of SHs are. So far as the corporation is concerned, until
such a by-law is complied with, the record owner must therefore be regarded as the real
90
owner of the stock, with the consequent general right to vote it by proxy or otherwise. When
considered from a legal standpoint, there is no privity of contract between the mere holder of
the certificate and the corporation, and he is not a real member of that organization until the
transfer is recorded. Until that time, the possible legal rights of the holder of the certificate
are of an inchoate nature. In other words, a real novation, whereby a new contract between
the mere holder of the certificate and the corporation is substituted for the prior contract of
the record owner, can only be brought about by complying with the corporate regulation
relating to transfers of stock. The record owner may, therefore, be the mere nominal owner,
or technically a trustee for the holder of the certificate, but legally he is still a stockholder in
the corporation, and so far as the corporation is concerned, like the usual trustee, ordinarily
has the right to vote the stock standing in his name. In cases of this nature, when nothing
more than a mere dry trust is involved the owners of the certificates can usually protect their
rights by recording the transfers and having the new certificates issued; but even though that
could not be done in this case because the corporate transfer books were closed at the time
of the assignments, they could have compelled the record owners to give them proxies to
vote the stock standing in their names. A mere nominal owner naturally owes some duties to
the real beneficial owner or equitable owner of the stock, and even if the right to demand a
proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to
materially and injuriously affect the rights of the vendee, he is perhaps answerable in
damages in some cases. It can hardly be contended that the actual consent of the holder of
the certificate is ordinarily essential to the right of the record owners to vote stock standing in
their names.
When the right and power of a mere record owner to vote is questioned, some ultra vires,
negligent, or improper willful act or omission on the part of the corporation or its agents is
relied upon and must appear. In some cases the court may also reject votes cast by the
record owners, which are regarded as improper, solely because of some peculiar inequitable
circumstances affecting the relation between such apparent owners and the transferee of the
certificates. Conceding that as between a transferor who has parted will all the beneficial
interest in stock and his transferee, the board equities are all in favor of the latter in the
matter of its voting.
State ex rel Everett Trust v Pacific Wax. I: W/N the proxy to vote the stock owned by
Paine-Mitchell and Jordan was revocable
H: The rules against perpetuities is usually stated as prohibiting the creation of future interest
or estates, which by possibility may not become vested within a life or lives in being and 21
years… the rule however applies only to the vesting of future estates and does not apply to
vested estates. The option agreement did not create a future estate or interest to become
vested at some future time. It was a promise by an owner of stock in a corporation that if at
any time during the next 20 years he desired to sell his stock he would give the promissee
the first opportunity for a period of 15 days to purchase it a such price and upon such terms
and conditions as the promisor offered. It was in effect a promise to give an option in the
even the promisor desired to sell his stock.
GR: a proxy given by a SH to vote his corporate stock at a meeting of the SHs of a
corporation is revocable by him even though the proxy by its terms is expressly made
irrevocable.
Exceptions:
(1) where authority or power is coupled with an interest—a power coupled with an interest is
a power or authority to do an act, accompanied by or connected with an interest in the
subject or thing itself upon which the power is to be exercised, the power and interest being
united in the same person. The interest is not limited to the thing itself upon which the power
is to be exercised, but is also included the subject upon which the power is to be exercised.
It is however sufficient that the proxy holder have an interest in the subject matter upon
which the power is to be exercised. The “thing itself” may refer to tangible shares or
certificates of stock, but the subject matter may refer to the intangible voting right and the
incidental control of the corporation.
(2) where authority is given as part of a security or is necessary to effectuate a security—in
such a case the interest of an agent is something more than an interest in being permitted to
exercise the power, yet something less than an estate in the subject matter or thing upon
which the power is to be exercised.
It is clear from the proxy agreement that the parties agreed that Paine Mitchell stock should
be used in conjunction with the stock owned by Engle so that the policies of the respondent
should be thus controlled. In this situation Engle was more than a mere agent. In voting
stock he served purposes of his own in maintaining control of the corporation by his choice
of directors and the determination of policies and business affairs of the corporation. This
voting of the stock for these purposes was the subject matter of the agency. Engle acquired
an interest in the subject matter of the power given to him and this interest was coupled with
such power. The power to vote the stock was necessary in order to make Engle’s control of
the corporation secure. The mutual agreement as a whole created something like a
community of interest in the stockholdings of the parties having for its purpose the use of
their stock as a unit and the effect of which was to give both parties an interest in the voting
of the stock, although the power to vote was to be exercised by Engle after the death of
Jordan or by Paine-Mitchell after the death of Engle. This power was couple with an interest
and by the entire agreement between the parties the power was intended to be and became
a security to effectuate the main purpose of the agency. The parties did no more than
promise to give each other an option to purchase in the even either had a proposal to buy his
or its stock; but the option agreement must be considered with the proxy agreement in
determining the intention of the parties and whether Engle had an irrevocable proxy. The
conclusion is that Engle had a power coupled with an interest and that the authority was
given to him as part of a security and was necessary to effectuate such security and
therefore the proxy was not revocable by the appellant.
A proxy in favor of the pledgee of the shares subject of the proxy is sufficient interest to
render the proxy irrevocable
Alejandrino v de Leon. Pambul Inc was organized by the controlling stockholders of
Pampanga Sugar as a scheme to perpetuate their monopoly of the directorship and
executive positions of Pampanga sugar by loaning money to its SHs at as low a rate of
interest as 7% per annum on the security of their shares of stock, the amount of the loans
being as high as 90% of the par value of the shares, thereby inducing the SHs to avail
91
themselves of the loan and thereby enabling the management of Pampanga Sugar through
Pambul to secure sufficient proxies for their purpose, and as a result the pledgors-
stockholders could do nothing even if they should make use of their right to vote when and if
the management should commit corporate abuses, excesses, and mistakes.
H: We do not think such alleged circumstances are sufficient in law or equity to vitiate or
invalidate or render revocable the irrevocable proxies in question. The desire and design of a
majority of SHs of a corporation to control its management and operation is legitimate per se,
and is in fact the universal practice in the business world. The SH who own a majority of the
stock of a corporation may elect themselves directors or appoint themselves its agents, or
form and carry into effect policies of management as freely as if the business were their own,
so long as they act honestly and do not devote the corporate assets or business to their own
private gain or to the prejudice of other stockholders, and no one can question their acts,
which are surely intra vires.
The allegations of monopoly positions in a corporation, without any allegation of fraud or
irregularity resulting therefrom to the prejudice of any stockholder, is not actionable per se.
The SH owning 30% of the outstanding stock of a corporation cannot secure its control
without the willingness, adherence, cooperation, or support of other SHs. Assuming that the
two families owning 30% of the capital stock have been able to procure such support by
organizing Pambul for the purposes above indicated, it would be admitted that the
organization of Pambul was accomplished by vote of the majority and not of only 30% of
capital stock of Pampanga Sugar. It cannot be assumed that the meeting in which the
organization of Pambul was agreed upon the SHs other than the two families referred to
were deprived of their vote by means of the proxies now assailed, because said proxies
could not have existed before Pambul was organized. Even now the SHs of Pambul are also
the SHs of Pampanga Sugar, the former cannot be said to be under the control of the said
two families because the latter are not alleged from the facts. In other words, Pambul SHs
are free to vote their stock and elect the directors they want; and the board of directors of
Pambul is at liberty to change any or all of the onditions of the contract of pledge in question.
Even assuming that respondent de Leon controls Pampanga Sugar, it would not necessarily
follow that he or the company also hold voting proxies on the shares of stock of Pambul.
Therefore the SHs of Pambul are free to vote their shares at the election of its directors. It is
thus clear that if the alleged minority SHs of Pampanga Sugar cannot or do not elect even
one candidate to represent them in its BOD, nothing appears to prevent them from doing so
except their own volition. Nobody forces them to pledge their stock to Pambul. They must
either be satisfied with the management or indifferent with regard to voting. Only Alejandrino,
as one of the minority SHs, owning 112 shares, has come before the court to assail the
contracts of pledged entered into by 18 other SHs and in which he is not even a party.
To vote at a meeting of the SHs of a corporation is, unlike a political franchise, but an
exercise of the right of ownership involving no public interest. To call the transfer of such
right bribery is to distort the meaning of the word; it can no more be called bribery than the
payment by the purchaser of the price of goods bought by him may be considered a bribe to
the seller
Would it not, rather, be morally wrong to permit a SH to obtain a liberal loan of pledging and
transferring his stock and the right to vote it and then repudiate the proxy to vote without
paying the loan? Would it be fair to convert the pledgee or its representative into a mere
voting puppet of the pledgor when the former accepted the pledge from the latter in GF and
in the belief that the security for its investment could be protected by it by exercising the right
to manage the property through the voting proxy.
Campbell v Leows Inc. Action to restrain Loew’s Inc from using corporate funds,
employees, and facilities for solicitation of proxies for the Vogel group and from voting
proxies so solicited. Campbell contends that the Vogel Group, by calling the meeting and by
using corporate funds and facilities, are usurping the authority of the BOD, and that the
president is in effect in using his corporate authority and the corporate resources to deny the
will of the BOD and to maintain himself in office. The by-laws provide for 13 directors. 7 is a
quorum. Due to 4 resignations there are now 9 directors in office. 5 of 9 are of the Tomlinson
Faction while the remaining 4 are of the Vogel Faction. Since the Vogel Group will not attend
directors meetings, it follows that the Tomlinson Group is unable to muster a quorum of the
BOD and is thus unable to take action on behalf of the Board.
H: The BOD acting as a board must be recognized as the only group authorized to speak for
management in the sense that under the statute they are responsible for the management of
the corporation. Since the Vogel Group, being in physical possession of the records and
facilities of the corporation, treated the request of the directors for a stockholders list as
though it were to be judged by standards applicable to a mere SH’s request, they violated
the duty owed such directors as directors. The fact the Vogel, as president, had the power to
call a SH meeting to elect directors and is so to speak, in physical control of the corporation,
cannot obscure the fact that the possible proxy fight is between two sets of directors. Vogel
has no legal standing to make his faction the exclusive voice of Loew’s in the forthcoming
election.
On the issue of how the two groups should be classified for purposes of determining the
rights of the Vogel Group in connection with the use of corporate money and facilities for
proxy solicitation at the SH meeting—w/n the SH approve of a record made by one group
and opposed by another group. While the Tomlinson Group has 5 of 9 directors, it would be
most misleading to have them represent to the SH that they are management in the sense
that they have been responsible for corporate policy and administration. It is apparent that
the Vogel Group is entitled to solicit proxies, not as representing a majority of the board, but
as representing those who have been and are now responsible for corporate policy and
administration. Whereas the Tomlinson Group, while not management in the sense that it is
able to take effective director action, is representative of the majority of the incumbent
directors and is entitled to so represent to the SHs if it decides to solicit proxies. Since Vogel
is entitled to expend reasonable sums of corporate funds in the solicitation of proxies, it
follows that the request for an injunction against such us will be denied.
On the issue of the entitlement of the Vogel group to use corporate facilities and employees,
because such action would carry the intracorporate strife even deeper within the corporation
and there is no practical way to ensure equal treatment for both factions where only one
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group (Vogel) is in control of the physical facilities, Vogel should thus by enjoined from using
corporate facilities and personnel in soliciting proxies.
On the issue of w/n Vogel, in soliciting proxies, misrepresented himself as management and
thus the proxies should not be voted, the evidence presented by Tomlinson Group are not so
misleading as to void the proxies. Since the meeting was validly called by the president,
there was nothing misleading in the creation of the impression that the meeting and the
material were initiated by the company. The whole impact of the proxy material conveyed to
the average reader the impression that there is a bitter fight between the president and his
faction and another faction on the board. The overall result is no so misleading as to justify
the nullification of the proxies for any purpose.
2. voting trust agreement
— Def’n: a trust agreement whereby a stockholder transfers his shares to a trustee
who will exercise his voting rights. Under this arrangement, the stockholder
remains the beneficial or equitable owner of the shares, but legal ownership is
transferred to the trustee.
— Essence of voting trust: real ownership is separated from the voting rights
— Involves the complete surrender by the SH of his voting rights to a trustee or
trustees
— Voting trustee is only a share owner vested with colorable and fictitious title for the
sole purpose of voting upon stocks that he does not own
— Transferring SH ceases to become SH of record but retains the right of inspection
of corporate books
— During the period of the agreement, it is irrevocable for as long as the trustee has
not violated the trust by his misconduct or fraud.
— Conditions for the use of voting trusts—Sec 59:
Section 59. Voting trusts. - One or more stockholders of a stock corporation may create
a voting trust for the purpose of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period not exceeding five (5) years at any
time: Provided, That in the case of a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof. A certified
copy of such agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and unenforceable.
The certificate or certificates of stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same effect as
certificates of stock.
The voting trust agreement filed with the corporation shall be subject to examination by
any stockholder of the corporation in the same manner as any other corporate book or
record: Provided, That both the transferor and the trustee or trustees may exercise the
right of inspection of all corporate books and records in accordance with the provisions
of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees upon the
terms and conditions stated in the voting trust agreement, and thereupon shall be bound
by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or used for purposes of
fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as
well as the certificates of stock in the name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall be reissued in the name of the
transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise. (36a)
— Requisites of a valid voting trust: (59)
o In writing and notarized
o Certified copy filed with the corporation and the SEC
o Period not longer than 5 years, but renewable each time for not more than 5 years
§ Exception: where the voting trust is a condition of a loan agreement, in
which case it may be for a longer period but not beyond the time when
the loan is fully paid
o Certificates of stock is to be cancelled, and new ones issued to the trustee stating
that it is issued in pursuance of a voting trust agreement
o Transfer must be entered in the corporate books
o Trustee should issue voting trust certificates in favor of transferring SHs
o Not for an illegal purpose, or for the benefit only of the trustee without any
obligation to perform any useful service for the protection of the stockholders or
creditors of the corporation
§ it must have a legitimate business purpose to promote the best interest of
the corporation or even to protect the legitimate interests of others in the
corporation
— creation of voting trust:
o transferring SHs receive transferable voting trust certificates as evidence of their
rights
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§ rights other than voting rights may also be transferred to the trustee
o but the SH ceases to be a SH and his rights are now against the trustee in
accordance with the agreement
o SH has the express right to inspect corporate books and records
o Trustee is also qualified to become a director, since he is the registered owner of
the shares and fulfills the qualifications of the Code that at least one share is
owned to become qualified as director
o No voting trust agreement may be kept secret among the parties thereto; it must be
open to examination
o No voting trust agreement may be exclusive, since the law gives a SH the right to
transfer his shares to the trustee upon the same terms and conditions in the
agreement
Abercrombie v Davis. 6 stockholders, led by Davies (president) of the American
Independent Oil Company took steps to form a coalition, in order to ensure the smooth
functioning of its board considering that not one SH holds a majority of the stock of the corp,
and no one SH is represented by more than four directors. The Davies 6 hold 54.5% of the
corporate shares and is represented on the board by 8 of 15 directors. An agreement was
executed between the 8 directors representing the Davies group and are called “agents,”
and the Davies 6 to achieve effective control of the board and control of corporate policy.
Motive was to prevent acquisition of control by Philipps, the largest single SH holding 1/3 of
the stock. The agreement provides that it transfers voting conrol of the stock of the Davies 6
to the 8 agents for a period of 10 years. An agreement of 7 of the 8 agents is required to vote
the stock and in case of disagreement an arbitrator will be designated. Abercrombie (one of
the organizers of the company), Philips et al sued Davies and the agents, claiming that the
agreement is invalid. In substance it is a voting trust but since it did not comply with the
voting trust statute it should be void. Davies contends that it was never intended to be a
voting trust but a mere pooling agreement.
H: The agreement is a voting trust. If any SH agreement provided for joint or concerted
voting is so drawn as in effect to occupy the field reserved for the voting trust, it is illegal,
whatever the mechanics may be devised to attain the result.
Definition of voting trust: a device whereby two or more persons owning stock with voting
powers, divorce the voting rights thereof from the ownership, retaining to all intents and
purposes the latter in themselves and transferring the former to trustees in whom the voting
rights of all depositors in the trust are pooled. The principal object of such trust is voting
control.
The agent’s agreement effectively divorces the voting rights of the pooled stock from its
beneficial ownership, transfers the rights to the agents through irrevocable proxies for 10
years, pools the stocks in the agents as a group through the proxy devise with no SH
retaining the right to vote, and its principal object is the voting control of the company. These
elements are elements of a voting trust. The provision in the agreement which gives the
agents the power to withdraw the stock from escrow and transform the agreement into a
voting trust merely added only the special mechanics of a voting trust that the statute
requires, the substance of the voting trust having already existed in the agreement. Since the
voting trust statute was not complied with i.e. shares were not transferred in the books and a
copy not furnished to corporation, it effectively created a secret voting trust. The statutory
requirement is for the benefit of all SHs and all beneficiaries of the trust, who are entitled to
know where voting control of the corporation resides.
This failure to transfer stock on the books is not a sufficient reason for holding the agent’s
agreement not a voting trust. The stock here was endorsed in blank and delivered to the
agents for deposit in escrow with irrevocable proxies. Transfer on the books is not essential
to effect an irrevocable transfer of voting rights to fiduciaries. It is such a transfer which is
characteristic of a voting trust.
The fact that the agents are subject to control by their respective principals does not prevent
the agreement from constituting a voting trust. The stock is voted by the agents as a group.
No one SH retains complete control over the voting. It cannot vote its own stock directly; all it
can do is direct its agent how to vote on a decision to be made by the agents as a group/ in
effect, each SH participating in the agreement reserves the right to name and remove the
fiduciary representing him. Such a provision is not inconsistent with a voting trust.
Davies cites the ruling in Ringling Bros v Ringling in arguing that their agreement is only a
pooling agreement. As a pooling agreement in substance and purpose approaches more
and more nearly the substance and purpose of the voting trust statute, there comes a point
which if the statute is not complied with, it is illegal. A pooling agreement may not escape the
statutory controls by calling the trustees agents and giving to the SH receipts instead of
voting trust certificates.
Everett v Asia Banking. Teal & Company is indebted to HW Peabody & Co. for P300K for
tractors, plows, and parts delivered, of which it has paid P150K. Asia Banking Corp held
drafts accepted by Teal under the HW Peabody’s guarantee. Tractors were returned to HW
Peabody due to its being unsellable due to financial and agricultural depression in the RP.
Teal ordered another lot of tractors from Smith Kirkpatrick, but shipment was delayed until
the rescission of the credit of Teal with Asia Bank. Yet Smith still delivered the order, and
Teal at the request and advice of the Bank accepted the drafts and stored the same. Asia
bank persuaded Teal, Peabody, and Smith Kirkpatrick to enter into a “creditors agreement”
wherein it was mutually agreed that neither of the parties should take action to collect its
debts from Teal for 2 years. Teal soon became indebted to Asia Bank for P750,000, secured
by mortgage. The Bank then suggested that, for the mutual protection of Teal and itself, it
was advisable that the Bank should temporarily obtain control of the management and affairs
of the company. To this end, it was necessary for the SHs to place their shares in a voting
trust to be held by the Bank, then the Bank would finance Teal under its own supervision.
The Teal SHs were thus induced to enter into the Voting Trust Agreement, with the purpose
that the agreement will be intended for the protection of all parties from outside creditors.
Shortly after the execution and delivery of the voting trust and the MOA, Mullen as GM of the
Bank, caused the displacement and removal SH representatives in the Board and the
substitution in their place of the Bank’s employees or representatives. The new Board, who
have not purchased any share of stock of Teal, proceeded to remove the Corp Secretary,
discharge all the old managers and displace them with creatures of their own choosing
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whose interest consisted wholly in pleasing themselves and the Bank, and who were wholly
foreign to the stockholders.
— Right of transferring SHs to set aside the trust agreement when their rights are trampled
upon by the trustee. Corpo Code now provides that no VTA will be used for purposes of
fraud.
Mackin v Nicollete Hotel. Dixon was the owner of a leasehold interest in a tract of land in
Minneapolis upon which stood what was known as the Nicollet Hotel. Nicollet Hotel Inc was
organized for the purpose of adding to the hotel accommodation of that city. Arrangements
were made to have Dixon take 2500 shares for his lease and to erect an new Nicollet Hotel
upon this property. Cost was $3M, to be raised by the sale of $1M mortgage bonds and
$1.25M of preferred stock. The Minnesota Loan and Trust Co approved the loan application
of Nicollet for $1.8M secured by the said mortgaged bond. The loan agreement stipulates
that a voting trust agreement is entered covering the common stock of Nicollet. The State
Securities Commission approved Nicollet’s application for the license to sell its preferred
stock, provided that the common stock is to be trusted with three trustees for 10 years for the
protection of preferred SHs. Thereafter a voting trust agreement was entered with Dixon et al
as voting trustees. Mackin is the owner of a trust certificate representing 80 shares of
common stock, alleging that the voting trust is void and that the trustees and directors
appointed have mismanaged the company and have caused large losses. The agreement
also allegedly denied them the right to inspect the books, and they ask the court to declare
the same null and void and appoint a receiver until the beneficial owners can elect a new set
of directors.
I: W/N the voting trust is valid
H: Voting trusts are not illegal per se. In the instances where the voting trust has been held
void, there existed invalidating circumstances such as want of consideration, voting power
not coupled with an interest, fraud, illegal purpose, and so on. In this case there was no
charge of illegality or fraud, nor of any invalidating circumstance. The voting power of the
three trustees is coupled with an interest because of one of the trustees is a substantial
owner of the common stock, and all are charged with the duty of protecting and conserving
property for the benefit of those who became purchasers of preferred stock and bonds. The
whole purpose of the agreement is legitimate and wholesome. It was a matter of civic pride
and to make this possible, it involved the invitation of combinations of capital in substantial
amounts, which could only be secured by having those who invested their money assured of
the fact that there would be a continuity of management during a period of years until such
time that the new enterprise would have an opportunity to justify a successful financial future.
It would be a manifest injustice to the large number of holders of bonds and preferred stocks,
not to the parties to the suit, to adjudge and hold illegal a trust agreement upon the strength
of which they had invested their money in the enterprise. It also appears that Mackin
purchase the certificates of trust after the creation of the trust agreement and are presumed
to have full knowledge of the limitation of their rights.
NIDC v Aquino. Batjak, a manufacturer of coco oil and copra cake for export, is on the brink
of bankruptcy. It entered in to a Financial Agreement with PNB for additional operating
capital for its 3 processing mills and to pay its other debts to other banks. Under the
agreement with PNB, NIDC, a wholly-owned subsidiary of PNB, would invest P6.7M worth of
preferred shares convertible within 5 years into common stock to pay off the other debts and
the balance to pay off its own due with PNB. PNB also granted various credit
accommodations. Batjak as part of the deal, mortgaged all its properties in the province. A 5-
year voting trust agreement was executed ifo NIDC by the SHs representing 60%
outstanding stock of Batjak. Years later, PNB instituted foreclosure proceedings against the
mortgaged properties due to Batjak’s insolvency, and soon became owner of the properties.
Batjak failed to exercise its right to redeem within the period allowed and PNB transferred
ownership of the 2 oil mills to NIDC. 3 years later, Batjak represented by majority SHs,
inquired with NIDC if it was still interested in negotiating the renewal of the voting trust
agreement. NIDC replied that its was no longer interested and requested turn-over of all
Batjak assets and properties. Batjak demanded an accounting of all assets and properties
and operations but NIDC refused to comply. Batjak then filed an action for mandamus. CFI
Judge Aquino issued a TRO prohibiting NIDC from removing any record, report, or document
or disposing all of the properties of Batjak, and allowed Batjak to inspect the same. Batjak
then moved for the appointment of a receiver. NIDC and PNB opposes, but overruled by CFI.
MRs denied.
H: Batjak premises its right to possession through the receivership of the 3 oil mills in the
voting trust agreement, claiming that under said agreement, NIDC was constituted as trustee
of the assets, management, and operations of Batjak, and that due to expiration of the
agreement, NIDC should turn over the assets to Batjak. What was assigned to NIDC was the
power to vote the shares of stock representing 60% of SHs, who are signatories to the
agreement. Nowhere in the agreement is mention made of any transfer or assignment to
NIDC of Batjak’s assets operations and management. NIDC was constituted as trustee only
of the voting rights of 60% of outstanding shares. What was to be returned by NIDC as
trustee to Batjak’s SHs upon termination of the agreement, was the certificates of stock, not
the properties or assets which were never delivered to NIDC in the first place. The
acquisition of PNB and NIDC of the properties was not in its capacity as trustee but as a
creditor in accordance with the financing agreement.
— SC failed to appreciate the fact that the voting trust was obtained from the SHs of the
borrowing corporation precisely to allow PNB-NIDC to have management and
undertake control in the operations of the borrowing corporation
— In this case, the VTA was part and parcel of the loan arrangement, and should have
been considered by the Court as a means by which the lending institution obtains
control over the management or operation of the borrowing corporation, and not merely
as a transfer only of voting or other rights pertaining to the shares
VTA as part of Loan Agreement
— VTA as part of loan agreement can exceed 5 years as an exception to the rule that
VTAs cannot be for more than 5 years
— VTA as part of loan agreement ensures that the lending institution would have a
controlling interest in corporate votes
— Constitutes further security to the lending institution
— In reality, the lending institution would have very little interest in the operations of the
corporation as to require a voting trust
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3. pooling and voting agreements
— Definition: an agreement between two or more SHs to vote their shares the same
way.
— Through this kind of agreement, SHs who individually own only a minority of the
shares but together represent the majority, can obtain control of the management
of the corporation.
— Usually relates to the election of directors, which may either specify the name of
the nominees to be voted for, or the number shares to be voted as a unit
— In case of disagreement: arbitration
— Since pooling agreements personal obligations to do, then although valid it cannot
be enforced by action for specific performance
— These agreements have been upheld as valid provided they do not limit the
discretion of the board or work fraud against the other SHs
o Ex. An agreement that directors once elected must vote for certain persons as
officers would be void, since the choice of officers is vested in law in the board
— Voting agreement vs. voting trust: VA does not involve a transfer of stocks but is
merely a private agreement between and among SHs to vote the same way.
Breach would therefore give rise to liability for damages.
— In close corporations: Sec 100:
Section 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive
the incorporation of such corporation and shall continue to be valid and
binding between and among such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with the articles of
incorporation, irrespective of where the provisions of such agreements are
contained, except those required by this Title to be embodied in said articles of
incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating
to any phase of the corporate affairs, shall be invalidated as between the
parties on the ground that its effect is to make them partners among
themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or interfere
 with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close corporation,
the stockholders shall be held to strict fiduciary duties to each other and
among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability
insurance.
— Para 1: SH agreements in general. Pre-incorporation agreements among SHs remains
effective even after incorporation if so intended and even if not reflected in AOI, except
matters required by the Code to appear in AOI
— Para 2: refers to pooling and voting agreements in particular. There is no reason for
denying SHs other than those in close corporations the right to enter into voting or
pooling agreements to protect their interest, as long as no wrong or fraud is committed
or intended to be committed on other SHs not parties
— Para 3: gives close corps freedom to operate as a partnership between and among the
SHs, but remaining a corp with respect to 3rd persons. Note: SHs who are parties
assume liabilities of directors
Ringling v Ringling Bros. Involves an action contesting the validity of the election of
directors and officers of Ringling Bros-Barnum & Bailey Combined Shows Inc. Edith Ringling
and Aubrey Haley, two of three majority SHs, entered into an agreement (valid for 10 years)
that neither party will sell any shares or VTCs without first making a written offer to the other
for the same price and under the same conditions, allowing a period of within 180 days to
accept the offer. Each party will consult with the other and act jointly in exercising voting
rights, and in case of disagreement, an arbitrator (Loos) will intervene, and his decision shall
be binding on the parties. It also provides that each will enter into VTAs or other agreements
as deemed advisable. From 1943-45 both parties voted together in accordance with the
agreement and elected 5 of 7 directors in each occasion. James Haley, as proxy for Mrs
Haley, refused to follow the instructions of the arbitrator Loos on a particular manner of
voting the shares (i.e. vote for adjournment and vote for 5 named nominees for director) by
voting all his wife’s shares for the election of Aubrey Haley and James Haley.
I: W/N the contested agreement is an “agreement to agree” thus not having any binding
obligations
H: The mutual promises in the agreement certainly constitute sufficient consideration to
support it. But did the parties agree to agree? Certainly the parties agree as to how they
would vote their stock, but they also provided that they shall be bound by the decision of the
arbitrator. The agreement to agree therefore has provisions which are capable of being
enforced with respect to particular facts. The very nature and object of the agreement render
it impossible to do more than agree to agree, and is sufficiently definite in terms of the duties
and obligations imposed on the parties to be legally enforceable.
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I: W/N the agreement is a voting trust agreement. If not, does it violate any public policy?
H: The SHs under the present agreement vote their own stock at all times, which is the
antithesis of a voting trust because the latter has for its chief attribute the severance of the
voting rights from the other attributes of ownership. In cases where the parties cannot reach
an accord as to how they will vote, and are directed by the arbitrator to vote in a certain way,
the substance of the matter may be said not to differ in effect from a voting trust agreement,
however, there is this substantial distinction—the right of the arbitrator to direct the vote is
limited to those particular cases where a SHs vote is called for and the parties cannot agree.
In a voting trust, the trustees in the first instance determine policy and implement it by their
votes, and have continuous voting control for the period stipulated in the voting trust. The
agreement in question is actually a variation of the stock pooling agreement and the voting
trust.
Generally agreements and combinations to vote stock or control corporate action and policy
are valid, if they seek without fraud to accomplish only what the parties might do as SHs and
do not attempt it by illegal proxies, trust, or other means. The objects and purposes in the
agreement are lawful and constitute no constitutional or public policy infirmity, and thus the
stock held thereunder should have been voted pursuant to the direction of the arbitrator.
When a party refuse to comply with the arbitrator, then the agreement constitutes the willing
party to the agreement an implied agent possessing the irrevocable proxy of the recalcitrant
party for the purpose of casting the particular vote. Here an implied agency based on an
irrevocable proxy is fully justified to implement the agreement without doing violence to its
terms. The provisions make it clear that the proxy may be treated as one coupled with an
interest so as to render it irrevocable under the circumstances.
The nature of the Agreement also does not preclude the granting of specific performance,
because to deny it would be tantamount to declaring the agreement invalid.
E K Buck Retail Store v Harkert. Suit for declaratory judgment to test the validity of a
corporation control agreement entered by the parties in their capacities as SHs of Harkert
House. Harkert, the sole owner of a chain of restaurants and burger chains, sought financial
aid from EK Buck, and entered into 4 purchase and resale agreements prior to the
incorporation of Harkert’s restaurants. These involve the selling of equipment and fixtures of
a designated outlet or stand to an investor for cahs and entering into an agreement to buy
back the same at the end of 5 years for a higher price. Harkert then incorporated his
business, with its net worth estimated at $47,504.38, which Buck knew. Harkert was then
obligated on the repurchase agreements to persons other than Buck. Harkert, also indebted
to Buck, entered into another agreement where buck would cancel the gross amount of
indebtedness and pay in cash into the business for which he was to receive as consideration
40% of the stock and equal board representation. Buck invested around $90K into the
Harkert Houses. In the agreement, the parties agree that the number of board members of
Harkert be reduced from 5 to 4, which would include Buck and Devor (of the EK Buck Retail
Stores), and at all times 2 nominees shall come from each party (Buck group and Harkert
group). It was also agreed between the parties that at all SH meetings all of the shares of the
parties be voted in such a manner by the directors elected. EK Buck Retail thus became
owner of 1198 shares to Harkert’s 1437. The contract was between the parties as SHs. They
involved no action on the part of the corporation. The board, offices, or other SH had no
knowledge of the transactions. Harkert claims that an agreement between SHs as to how
stock shall be voted at the election of directors ipso facto changes the manner of election
prescribed by the Constitution. He adds that although a SH may vote as he pleases, public
policy forbids the enforcement of a contract by which a SH undertakes to bargain away his
right to vote for directors according to his best judgment. Buck counters that no public policy
is violated in the making of an agreement between the majority and minority SHs to cause
voting rights in the corporation to be equal when it is beneficial to the corporation for the
purpose of brining fresh money into the business.
H: GR: an agreement purporting to control the actions of directors after they are elected, in
handling the ordinary business of the corporation, is void. This is because the law imposes
the business management of the corporation on its directors, who represent all the SHs and
creditors, and they cannot enter into agreements among themselves to abdicate their
independent judgment. But the correct rule is that SH control agreements are valid where it
is for the benefit of the corporation, where it works no fraud upon creditors or other SHs, and
where it violates no statute or recognized public policy. The court upheld the validity of a SH
agreement for voting trust, applying as a test the conclusion that there was no wrong to the
corporation or no special benefit to the parties to the contract and no turning over of
management to strangers. Applied in the present case, the agreement would be valid.
Furthermore, the agreement does not place Buck Retail, as the owner of 40% of stock, in
control of the corporation. It does give him veto power. But Buck would not have cancelled
the gross indebtedness of $55K and paid in fresh money without the stock agreement being
made. It must be assumed that the purpose of the agreement was to prevent the corporation
from getting into financial distress. The difficulties of Harkert and Buck only arose after 11
years of successful operations on the very policy which Buck sought to have maintained
when he brought in the fresh capital into the business by purchasing 40% of the stock.
SH control agreements are not invalid per se. If they are based on a sufficient consideration
between contracting SH they are valid and binding if they do not contravene any express
constitutional or statutory provision or contemplate any fraud, oppression, or wrong against
creditors or other SHs. It is not illegal or against public policy for 2 or more SH owning
majority shares to unity upon a course of corporate policy, or upon the officers or directors
whom they will elect.
Clark v Dodge. Action for specific performance between Clark and Dodge, SHs of two New
Jersey corporations, Bell & Co and Hollings-Smith Co, engaged in the business of
manufacturing medicinal preparations by secret formulae. Clark owned 25% and Dodge 75%
of each corporation. Dodge, a director, took no active part in the business but controlled the
other directors of both corporations. Clark was a director, treasurer and GM of Bell but was
in charge of a major part of the business of Hollings-Smith. The secret formulae were known
to Clark alone. Both entered into an agreement that Clark should continue in the
management and control of Bell so long as he remained faithful and competent, and that he
should not be the sole custodian of the formulae but share his knowledge with Dodge’s son.
The agreement also provides that Dodge during his lifetime and after death, a trustee to be
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appointed by him in his will would vote his stock and so vote as director that Clark would
continue to be a director and GM and receive ¼ of the net income of the corporations,
among others. Clark agreed to share the formula to Dodge’s son and instruct him on the
methods of manufacturing. Clark accuses Dodge of breach and his failure to use his control
of the stock to continue Clark as director and GM, and even prevented Clark from receiving a
proportion of the income as stipulated in the agreement.
I: W/N the contract in question is illegal as against public policy
H: GR: the business of the corporation shall be managed by its board. If the enforcement of
a particular contract damages nobody—not even the public—one sees no reason for holding
it illegal, even though it impinges on the general rule stated above. Damage suffered or
threatened is a logical and practical test. Where the directors are the sole SHs, there seems
to be no objection to enforcing an agreement among them to vote for certain people as
officers. The rule that all SHs by their universal consent may do as they choose with
corporate concerns and assets, provided the interests of creditors are not affected, because
they are the complete owners of the corporation, cannot apply in a case where the SHs are
not parties to the agreement in question. So when the public is not affected, the parties in
interest might, by their original agreement of incorporation, limit their respective rights and
powers. As the parties are the complete owners of the corporation, there is no reason why
the exercise of power and discretion of the directors cannot be controlled by valid agreement
between themselves, provided that the interests of creditors are not affected.
The agreement here in question was legal and that the complaint states a cause of action.
The only restrictions on Dodge were that he should vote for Clark as director, and that as
director he should continue Clark as GM, so long he “proved faithful, efficient and competent,
and entitlement to ¼ of the income. These are all perfectly legal contractual stipulations. If
there was an invasion of powers of the board, it is so slight as to be negligible; and certainly
there is no damage suffered or threatened to anybody.
NOTE: Although the GR is that pooling or voting agreement cannot limit the discretion of
directors, this principle has not been applied strictly to close corporations, as illustrated by
the Clark case. This variation is incorporated in sec 100. The Clark case also illustrates that
the remedy of specific performance is available in case of violation of a voting agreement.
4. cumulative voting
— the system of cumulative voting gives the minority an opportunity to elect a
representative to the board
— it is vital to both the majority and the minority to cumulate their votes so that they
can get as many seats as possible
5. classification of shares (Sec 6 supra; cf Financing Corporate Capital Structure)
— device of classification of shares can be used to achieve the allocation of control
desired by the parties
 — if shares are classified into common voting and preferred non-voting shares, the
management of corporate affairs will be controlled by whoever owns the majority of
the common voting, even though it may only be a minority of the total number of
shares (voting and non-voting)
— control would depend not on the amount of investment, but on the number of voting
shares acquired
— if non-voting shares are non-redeemable, the prospect that the investor may get
back his investment at some future time before dissolution would be a
compensating factor
— SEC: to prevent abuses, it requires where no dividends are declared for 3
consecutive years despite available profits, that preferred stocks be given the right
to vote for directors until dividends are declared
— In a close corporation, it is allowed to classify its directors into one or more classes,
each of whom may be voted for and elected solely by a particular class of stock
Gottschalk v Avalon Realty. I: W/N the provisions authorizing the holders of the 1st and 2nd
preferred stock to vote whenever default should exist in the payment of dividends…
constitute a denial of the right to vote
H: Yes. The AOI deny the right to vote of the first and second preferred SHs. The provision
that such stock may vote upon the happening of such contingencies clearly implies that it
may not until such contingencies occur. The right to vote may be denied by implication, such
as a provision that “sole voting power shall reside in the holders of common stock.” Such a
denial may exist expressly or by necessary implication. A denial may exist under an express
provision even though the denial may not be expressed. Unless a denial is clearly
manifested, it should not be given effect, but in this case, it should be given effect even
though it is not express.
6. restriction on transfer of shares (cf Transfer of Shares)
— common example: a restriction which gives a first option to other SHs and/or the
corporation to acquire the shares of a SH who wishes to sell
o peculiar to close corps
7. prescribing qualifications for directors; founders’ shares
— definition of the qualifications of directors or trustees may be provided in the by-laws
Section 24. Election of directors or trustees. - At all elections of directors or trustees,
there must be present, either in person or by representative authorized to act by written
proxy, the owners of a majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. The election must be by ballot if
requested by any voting stockholder or member. In stock corporations, every stockholder
entitled to vote shall have the right to vote in person or by proxy the number of shares of
stock standing, at the time fixed in the by-laws, in his own name on the stock books of
the corporation, or where the by-laws are silent, at the time of the election; and said
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stockholder may vote such number of shares for as many persons as there are directors
to be elected or he may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his shares shall equal,
or he may distribute them on the same principle among as many candidates as he shall
see fit: Provided, That the total number of votes cast by him shall not exceed the number
of shares owned by him as shown in the books of the corporation multiplied by the whole
number of directors to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in the by-laws,
members of corporations which have no capital stock may cast as many votes as there
are trustees to be elected but may not cast more than one vote for one candidate.
Candidates receiving the highest number of votes shall be declared elected. Any meeting
of the stockholders or members called for an election may adjourn from day to day or
from time to time but not sine die or indefinitely if, for any reason, no election is held, or if
there are not present or represented by proxy, at the meeting, the owners of a majority of
the outstanding capital stock, or if there be no capital stock, a majority of the member
entitled to vote. (31a)
— examples:
o a by-law provision that only SHs with a stated minimum number of shares fully paid
up may be elected as directors is valid (Govt v El Hogar)
o a by-law that disqualify a SH who is competing with the corporation, as the
corporation has the right to protect itself from persons who may use inside
information to its prejudice (Gokongwei v SEC)
o a by-law that only holders of “founders shares” may qualify for directorship (Sec 7)
§ exception to Sec 6 that non-voting shares shall be limited to preferred
and redeemable shares
§ 5 year period non-extendible
§ SEC approval
Section 7. Founders' shares. - Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be voted for in the
election of directors is granted, it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange Commission. The five-year period
shall commence from the date of the aforesaid approval by the Securities and Exchange
Commission. (n)
8. management contracts
— BOD may decide to enter into mgt contracts with another corporation
— The managing corporation will then perform all the managerial functions usually
pertaining to a GM
— BOD must still retain control of the basic corporate policies and power to recall the
contract where the corporation’s interest would greatly suffer from its continuance
Section 44. Power to enter into management contract. - No corporation shall conclude a
management contract with another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members in the case of a
non-stock corporation, of both the managing and the managed corporation, at a meeting
duly called for the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed corporations own
or control more than one-third (1/3) of the total outstanding capital stock entitled to vote
of the managing corporation; or (2) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management contract must be
approved by the stockholders of the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. No management contract shall be
entered into for a period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating
agreements or otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be provided by the
pertinent laws or regulations. (n)
— Not an exception to Sec 23 which lays down the fundamental principle that all
corporate powers shall be exercised by the BOD
— BOD cannot abdicate its responsibility to act as a governing body by giving
absolute powers to offices or others by way of management contracts
— The management contract is therefore a mere contract to manage the day-to-
day affairs of the corporation just like a GM
— It is one for lease of services and is not of agency
Sherman & Ellis v Indiana Mutual Casualty Co. F: Indiana Mutual Casualty Co was
organized to take over the business of an unincorporated association engaged in writing
policies covering risks created by the Indiana Workmen’s Compensation Law. It ratified an
agreement with Sherman & Ellis by which the management of the casualty company was
conferred upon Sherman Ellis for 20 years. Indiana Mutual terminated its contract after some
difficulties arose between Sherman Ellis and the Indiana state department in which the latter
tried to appoint a receiver for Indiana Mutual. Sherman sues for specific performance to
enforce the contract.
H: the contract provides that the underwriting and executive management for Indiana Mutual
will be performed by Ellis, president of Sherman Ellis, and may appoint another officer to be
the chief executive head and underwriting manager of the company. It also provides that the
managing company (Sherman Ellis) shall have general supervision and charge of
underwriting affairs and shall be entitled to 10% of the net earned premiums collected from
all policyholders. The grant of corporate power by a state is upon the hypothesis that these
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powers shall be exercised by the corporation’s officers, annually elected by the SHs and not
by the officers of another corporation. Although generally corporations may for a limited
period delegate to a stranger certain duties performed by the officers, there are duties the
performance of which may not be delegated to outsiders. In this case the period of control of
the managing corporation is 20 years. Nothing of importance was left for the BOD but the
mere ministerial duties. The agreement contemplated the substitution of Sherman Ells for the
officers of Indiana Mutual. The principal business of Indiana was write casualty insurance,
which is now solely exercised by Sherman Ellis. No other conclusion can be drawn other
than that Indiana Mutual was to be an instrumentality through which Sherman Ellis was to
conduct a casualty business in the state of Indiana.
9. unusual voting and quorum requirements
— a device which in effect increases the veto power of the minority
— usually involves the formation of a corporation which has clearly efined majority and
minority blocks.
o In exchange for the numerical majority in the board, the minority might bargain for a
provision in the AOI giving them strong veto power in mjor corporate decisions
— In close corps, a requirement in the AOI that unanimous vote of all SHs is necessary
would only have the effect of maintaining the status quo.
Section 97. Articles of incorporation. - The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or directors
than those provided in this Code.
— A provision requiring a higher quorum or voting requirement cannot be amended except
by the vote of SHs representing such higher voting requirement, whether voting or non-
voting
Section 103. Amendment of articles of incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any provision required by this Title to be
contained in the articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not be valid or effective unless approved by
the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether
with or without voting rights, or of such greater proportion of shares as may be
specifically provided in the articles of incorporation for amending, deleting or removing
any of the aforesaid provisions, at a meeting duly called for the purpose.
Devices affecting control—common denominator is the contractual obligation
Benintendi v Kenton Hotel. 2 men owned in equal amounts all the stock of a domestic — SHs NOT of record: CANNOT vote, CANNOT be vote for
business corporation, made an agreement to vote for and adopt the by-laws of the — Once voting rights are exercised by another, voting rights of the owner of shares are already impaired
corporation, providing that no action should be taken by the SHs except by unanimous vote — Proxies: proxy holder is an agent
o Does it affect ownership rights? No. Registration of shares? No
of the SH present in person or by proxy should be sufficient, that the directors of the
o Why do I need them?
corporation should be the 3 person receiving the unanimous vote of all SHs, that no action
§ No distinct and clear majority to collate enough votes to form majority
shall be taken by the directors except by unanimous vote of all directors. The minority SHs
§ Biggest SHs; Shares are so widely held/dispersed
sued to have the by-laws adjudged valid and to enjoin the majority from doing anything o 5-year term of proxies only applies to revocable proxies
inconsistent therewith. o voting trusts and proxies coupled with an interest (security for obligations)
o in Alejandrino: “deemed” to have sufficient interest
H: the device is intrinsically unlawful because it contravenes an essential part of State policy. § pledgor-pledgee: interest of pledgee in ensuring that the value of stock used as
rd
But a requirement, that there shall be no election of directors unless every single vote be security may not be impaired, and may be sold at a premium to 3 parties at public
cast for the same nominees is in direct opposition to the rule that the receipt of plurality of auction in case obligors/debtors default…
votes entitles a nominee to election. — Voting trust: beneficial owner is SH; legal ownership is trustee
rd
o Registration with SEC and corporation of stock certificate (effect is constructive notice to 3
The by-law which requires unanimous action of SHs to pass any resolution or take action of parties)
any kind, is equally obnoxious to the statutory scheme of stock corporation management. o All stock certificates issued in name of participating SHs are presented for cancellation and
The whole concept of a representative government in a corporation, with voting conducted issuance of new ones; voting trust certificates are issued by the trustee
conformably to statute, and with the power of decision lodged in certain fractions of the o Orig SHs are delisted; replaced by trustees with notation that it holds stocks of orig SHs
stock, is destroyed when the SHs by agreement or by-law or AOI provision as to unanimous o “walang pakialam and korporasyon sa relasyon ng SH at ng trustee”
o SH still has naked title; he can still sell the shares by selling the VTC. But trustee is now SH of
action, give the minority interest an absolute, permanent and all-inclusive power of veto.
record!
o Total divorce of voting rights
The last by-law makes it impossible for the directors to act on any matter except by § Voting rights: trustee; Economic rights: SH
unanimous vote of all of them. Such a by-law is almost unworkable and unenforceable o VTA is binding on participants even if there is disposition of the VTC
because, prima facie in all acts done by a corporation, the major number must bind the § Can trustee sell shares? NO! it holds it in trust
lesser, or else differences could never be determined. Every corporation is given the § Can transferee of VTC vote the shares? NO! only the trustee
privilege of enacting a by-law fixing its own quorum requirement at a fraction not less than o Only binding arrangement would be the fiduciary arrangement
that mandated by law. But the very idea of a quorum is that when that required number of § In proxies without an interest and pooing agreements, NO fiduciary nature!
persons goes into session as a body, the votes of a majority thereof are sufficient of binding o Key to determining w/n VTAs exist:
action. § trustee exercises DISCRETION as to the vote, but it may also be consensual, i.e.
trustees can agree among themselves who to vote
Dissent: While the 2 by-laws are indeed invalid because it is violative of the statutes, the § There is also delegation of authority; It is not the corporation constituting the VTA, it is
courts should nonetheless enforce against either SH the agreement made by both of them the SHs!
which finds expression in those by-laws. — Pooling agreements: reciprocal arrangement of those who reach a consensus to exercise right to vote
separately, but shares remain with SHs
— Consideration for voting devices
o sufficient consideration: In Clark, IPR, services, “secret formula”; In Harkert, loan/investment; In
Ringling, RFR; in Avalon, PS with econ rights
BOD:
o So long as consideration is in place, obligation satisfactorily performed, voting agreement is
— Majority to convene mtg
justified, enforceability should be there!
— Majority of majority to vote for binding corporate act
— Management contracts: Is the manager/managing corp a trustee? NO… covered by contract
— SHs ratification
— Effect of higher quorum or voting requirements
o GR: 2/3 vote; Exceptions: 50%+1
o Controlling interest of the corporation can be vetoed by the minority
Removal of directors: difficult to remove, SHs limited right to vote, difficult to personally
o Would affect disposition of corporate assets
sue, therefore law grants protection for SHs
o Controlling interest has the authority to formulate the policies
— Holdover of directors occurs when you cannot convene a meeting for want of
o Anarchy/tyranny of the majority
quorum
— In Roxas: election as mode of removal
— Angeles: appointment of receiver as mode of removal
— Campbell: outright removal, then elect new directors 100
— Personal action may also be instituted, but difficult
 Chapter VIII – Duties of Directors and Controlling Stockholders
— The law makes directors fiduciaries of the corporation
— Directors are expected to serve the corporation with reasonable diligence and skill and
with utmost loyalty
— Obligation of directors to act within their corporate powers
— Cannot act alone where SHs have the power of final approval
— Personal liability would still arise if due diligence has not been observed or there is
disloyalty
— Three-fold duties of directors, trustees, and officers:
o Duty of obedience
o Duty of diligence
o Duty of loyalty
— Governed by 31, 32, 33, 34
— Duties and obligations of directors, trustees, and officers have their bases in common
law, derived from the nature and relationship created in the corporate setting and the
fiduciary nature of the positions held by such persons
— Attempt of the Corpo Code to codify the nature od duties and obligations to cover most
of such situations, but cannot be considered as to exclude other forms of violations of
such duties
— GR: members of the board and corporate officers who purport to act for and in behalf of
the corporation, keep within the lawful scope of their authority in so acting, and act in
GF, do not become liable for the consequences of their acts
o These acts would be attributable to the corporation alone and no personal liability
is incurred by such officers and board members (Benguet Electric v NLRC)
o Although a director may have been voted into office by a block of SHs, it is the
director’s duty to vote according to his own independent judgment and his own
conscience as to what is in the best interets of the corporation. (SMC v Kahn)
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to deal in
his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation. (n)
Business Judgment Rule
— Corporate principle recognizing corporate power and competence to be lodged primarily
with the board of directors
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— A resolution or transaction pursued within the corporate powers and business
operations of the corporation, and passed in GF by the board is valid and binding, and
generally courts have no authority to review the same or substitute their own judgment
— Business judgment rule has two (2) applications:
(1) resolutions and transactions entered into by the board within the powers of the
corporation cannot be reversed by the courts
(2) GR: directors and officers acting within such business judgment cannot be
personally liable for the consequences of such acts
— Exceptions:
i. When the director willfully and knowingly vote for patently
unlawful acts of the corporation
ii. When he is guilty of gross negligence or BF
iii. When he acquires any personal or pecuniary interest in conflict
with his duty as such directors
— business judgment rule is not only a substantial rule of law, but also a rule on evidence
— once entered into by the board in the exercise of its judgment, it will be presumed to be
valid
Duty of Diligence
— 31: 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 BF in the
directing the affairs of the corporation shall be solidarily liable for all damages
o available to SHs, the corporation, and to creditors
o mere assent would make director liable
o it is not enough that he abstains from voting; he should cast a negative vote
o but mere ownership of majority of shares or mere holding of officership position
does not make one personally liable (Board of Liquidators v Kalaw)
— Directors are expected to manage the corporation with reasonable diligence, care and
prudence
o Can be held liable for willful dishonesty and negligence
o Should keep themselves sufficiently informed about the general condition of their
business and to some extent the manner in which its is conducted; if due to their
fault or negligence, the corporate assets are wasted or lost, each of them may be
held responsible for any loss proximately caused by the wrongful acts or
omissions.
o But they cannot be held liable for mistakes or errors in the exercise of their
business judgment, provided the act in GF and with due care and prudence
(Barnes v Andrews infra)
o Degree of care and diligence:
§ that which is usually required of men prompted by self-interest in the
exercise of their own affairs
§ that which is demanded by the particular circumstances
• nature of business
• director of a bank is held to a higher degree of diligence than an
ordinary commercial transaction (Litwin v Allen)
— remedy of SHs: where directors have become grossly negligent or fraudulently
mismanaged the corporation, they can be removed by the SHs in accordance with Sec
28, + damages
Otis & Co. v Pennsylvania Railroad Co. F: Otis & Co is a SH in and among the wholly-
owned subsidiaries of the Pennsylvania Railroad Co (PRR), which included Pennsylvania
Ohio 7 Detroit Railroads (POD). One of its subsidiaries had an outstanding bond issuance of
$28.4M. The parent then negotiated with a third party, Kuhn, Loeb and Co, to refinance the
bonds. The directors of POD approved a resolution authorizing the sale of the new Series D
bonds at a best obtainable price. Bonds were then sold to Kuhn and Loeb. Another buyer
was willing to purchase the bonds at a better price but the directors declined. The Interstate
Commerce Commission found that the corporation was not able to get the best price for the
sale and that other options were not explored, that negotiations were only with one
investment house and were at “arms-length dealing”, and that it was possible to have greater
savings.
I: W/N the directors are liable for failing to exercise ordinary care and judgment in the
issuance and sale of $28M in bonds, which resulted in alleged losses suffered by the
corporation.
H: Business judgment rule: courts will not interfere in matters of business judgment, in which
it is presumed that judgment—reasonable diligence—has in fact been exercised. A director
cannot close his eyes to what is going on about him in the conduct of business judgment.
Courts have given directors wide latitude in the management of the affairs of the corporation
provided that the judgment is unbiased, honest and reasonably exercised. Negligence must
be determined as of the time of transaction. Mistakes or errors in the exercise of honest
business judgment do not subject the officers and directors to liability for negligence in the
discharge of their appointed duties. Directors are entrusted with the management of the
affairs of the corporation. If in the course of management they arrive at a decision for which
there is a reasonable basis, and they acted in GF as the result of their independent
judgment, and uninfluenced by any other consideration than what they honestly felt was in
the best interests of the corporation. In the present case, the SC found that the officers and
directors of the corporations acted honestly in GF and sought to exercise their best judgment
for the best interests of their corporation. No fraud was present, but only a faint suggestion of
BF. The directors had the right to negotiate privately with Kuhn and Loeb. In contracting with
the latter, the directors were not contracting with another firm in which they were interested,
nor did the directorship or officership positions interlock. There is no contention that fraud
existed and fraudulent acts will not be presumed.
Montelibano et al v. Bacolod-Murcia Milling Co Inc. Montelibano et al are sugar planters
adhered to the Milling Company’s sugar central mill under identical contracts. The contracts
would be in force for 30 years and provide that the resulting product should be divided in the
ratio of 45% for the mill and 55% for the planters. It was proposed to execute the milling
contracts, increasing the planter’s shares to 60% of the manufactured sugar and molasses
and extending the period from 30 to 45 years. The Board of the Milling company then
adopted a resolution granting further concessions to the planters over and above the
amended contract. 17 years later, Montelibano sues the Milling company, contending that
the 3 sugar centrals with a total annual production exceeding 1/3 of the production of all
sugar millis in Negros, had already granted 62.5% participation to their planters, and in
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accordance with Para 9 of the resolution, it had become obligated to grant similar
concessions to them.
H: When a resolution is passed in GF by the board, it is valid and binding, and whether or
not it will cause losses or decrease the profits of the central, the court has no authority to
review them. Questions of policy or management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute its
judgment for that of the board; the board is the business manager of the corporation and so
long as it acts in GF its orders are not reviewable by the courts
Litwin v Allen et al. H: The officers are liable for the transaction because the entire
arrangement was so improvident, risky, and unusual and contrary to fundamental concepts
of prudent banking practice. A bank director when appointed takes oath that he will diligently
and honestly administer the affairs of the bank or trust company. Honesty alone would not
suffice; there must be more than honesty—there must be diligence, and that means care and
prudence as well. What sound reason is there for a bank, desiring to make an investment, to
buy securities under an arrangement whereby any appreciation will insure to the benefit of
the seller and any loss will be borne by the bank. There is here more than a question of
business judgment. The directors plainly failed to bestow the care which the situation
demanded.
A director, however, is not liable for loss or damage other than what was proximately caused
by his own acts or omissions in breach of his duty. The directors in this case are liable only
for the loss attributable to the improper transaction itself, and not after the option on the
improper transaction had expired.
Walker v Man et al. F/H: Corporation was engaged in real estate and advanced a loan to a
third person taking as security his PN. The loan was not authorized by the board and was
not for the benefit of the corporation nor was it in aid of its business. No effort was done to
collect on the loan, which became due and demandable. The corporation went bankrupt,
and the receiver sues the directors to collect on the amount due the insolvent corporation
and for damages. Court held that the director was negligent.
Steinberg v Velasco. F: The board of the corporation authorized the purchase of 330
shares of capital stock of the corporation and the declaration of dividends at a time when the
corporation was indebted and in such a bad financial condition. The directors relied on the
face value on the books of its A/R, which had little or no value. Furthermore it appears that
two of the directors were permitted to resign so that they could sell their stock to the
corporation. The corporation became insolvent, and the receiver Steinberg sues the
directors.
H: The corporation did not have a bona fide surplus with which dividends could be declared
and paid out. The directors did not act in GF and were grossly ignorant of their duties.
Directors were held personally liable for causing the corporation to purchase their own
shares and declaring dividends, which because of such failure to take into consideration of
worthless receivables, worked to the detriment of the creditors. The directors did not act with
diligence in taking the word of their chairman and not making an informed decision based on
the facts then available to them and on not relying on other documents available to them.
Creditors have the right to assume that so long as there are outstanding debts and liabilities,
the board will not use the corporate assets to purchase its own stock, and that it will not
declare dividends to SHs when the corporation is insolvent
Barnes v Andrews. F: Corporation manufactures starters for Ford motor vehicles and
airplanes. Director Andrews, the largest SH, who was induced by the President to become
director, held only 2 board meetings. During his term, the company business was
mismanaged. Barnes was then appointed receiver after the corporation had gone under, and
was found that the company had no funds. He alleged that Andrews failed to give adequate
attention to the affairs of the company, which had been conducted incompetently and without
regard to the wastage in salaries. Work had languished from incompetence and
extravagance and quarrels between the factory manager and the other personnel affected
production.
H: First liability must rest upon the director’s general inattention to his duties. He cannot be
charged with neglect in attending director meetings, since there had been only 2. But his
liability must depend upon his failure in general to keep advised of the conduct of the
corporate affairs. While directors are collectively managers of the company, they are not
expected to interfere individually in the actual conduct of its affairs. To do so would disturb
the authority of the officers and destroy their individual responsibility, without which no
proper discipline is possible. Having accepted a post of confidence, Andrews was charged
with an active duty to learn whether the company was moving to production, and why it was
not, and to consider what could be done to avoid the conflicts among personnel or correct
their incompetence, which was slowly bleeding the business to death. He must go further to
show that he should have been more active, as the cause of action against him by the
receiver rests upon a tort of omission as though it had rested on a positive act on his part.
When a business fails from general mismanagement or business incapacity, could the blame
be placed upon a single director and could he have saved the company if he had tried? A
director could have least fulfilled his duties to the company and to the SHs to have made the
company prosper, or at least to show that he had done his duty enough to have broken the
fall of the company. This Andrews failed to do. x
True, Andrews was not well-suited by experience for the job he had undertaken. Directors
are not specialists, but they must have good sense, and must have acquainted themselves
with the corporate affairs, but they need not have any technical talent. They are the general
advisers of the business, and if they faithfully give such ability as they have, it would not be
lawful to hold them liable. Must a director guarantee that his judgment is good? Can SHs call
him to account for deficiencies which their votes assured him did not disqualify him for
office?
Bates v Dresser. F: Bank employee was able to embezzle cash from the branch operations
for a considerable period of time, unbeknown to the bank officers, who relied to heavily and
trusted the employee. He was able to swindle money by concealing his withdrawals through
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entries in the records of the bank, and matched it with the correct statements which were
relied upon by the cashier.
H: Under the circumstances of this case, the directors did not neglect their duty in accepting
the statement of the cashier and failing to inspect the depositor’s ledger. They should not be
held answerable for taking the cashier’s statement to be as correct as the statement of
assets always was. The statement of assets were always correct. A committee was
appointed to examine the operations of the bank. The bank itself was in sound financial
condition. Their confidence seemed warranted by the semi-annual examinations by the
government examiner and they were encouraged in their belief that all was well by the
president. They were not bound by virtue of the office gratuitously assumed by them to call in
the passbooks and compare them with the ledger, and until the event showed the possibility
they hardly could have seen that their failure to look at the ledger opened a way to fraud.
The position of the president, however, is different. Practically he was the master of the
situation. He was at the bank daily for hours, had the ledger in his hands at time. He had
hints and warnings of the unexplained shortages and rapid decline in deposits. He knew the
errant employee had been living at a fast pace and had been dabbling in stocks. He had
been put on his guard, and had they been heeded by the President, it would have led to an
examination of the ledger’s and would have prevented future thefts. In accepting the
presidency Dresser must be taken to have contemplated responsibility for losses to the
bank.
Duty of Obedience
— Board is bound to observe the duty of obedience—they will direct the affairs of the
corporation only in accordance with the purposes for which its was organized
— 26: Directors and officers to be elected shall perform the duties enjoined on them by law
and by the BLs of the corporation.
Duty of Loyalty; Fiduciary Duties; Conflict of Interests
— Under 31: Directors or trustees who acquire any personal or pecuniary interest in
conflict with their duty as directors shall be liable solidarily for all damages resulting
therefrom
o When a director attempts to acquire or acquires any interest adverse to the
corporation, equity imposes a liability 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
— director is a fiduciary of the corporation
— in case of conflict of interest, he cannot sacrifice the interests of the corporation without
incurring liability for his disloyal act
— Code sets up standards but ultimately must be decided on the merits of each case
1. the self-dealing director
— a director who enters into a contract with the corporation of which he is a SH or member
— since he participates in the decision as to whether or not the contract is to be accepted,
he will be exposed to the temptation of putting his interest above those of the
corporation and could exert influence to obtain board approval of his contract with the
corporation
— but not all dealings of the director with his own corporation when it’ll be beneficial or
have the best interest in its welfare
— the rule thus absolutely disqualifying a fiduciary from dealing with his cestui que trust
has not been strictly applied to directors
sec 35: A contract of the corporation with one or more of its directors or trustees or officers
is voidable at the option of such corporation, unless all the following conditions are present
that:
(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
(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) the contract with the officer has been previously authorized by the board
— where any of the first two (2) conditions is absent, in the case of a contract with a
director or trustee, such contract may be ratified by a vote of 2/3 OCS
— but full disclosure of the adverse interest must be made
— not all conditions must be present
— also applies to corporate officers
— contract of a self-dealing director is VOIDABLE at the option of the corporation, w/n
there has been damages
— self-dealing contract is presumed unfair until the self-dealing director proves otherwise
— to validate the contract of a self-dealing director:
o ratification by the SHs thru a vote of at least 2/3 OCS (including the shares of the
self-dealing director)
§ although he may not have voted, if the other members of the board are
under his dominating influence, he will still be considered a self-dealing
director covered by the provision (Globe Woolen Co v Utica Gas &
Electric)
§ even when the director resigns in order to consummate the contract, but
after he has laid the foundation for the successful completion of the
same, he can still be held liable to account for the profits he may have
reaped (Steinberg v Velasco)
o full disclosure of the adverse interest
o contract must be fair and reasonable
Palting v San Jose Petroleum Inc. F: Case involves provisions in the by-laws of a
corporation seeking to have its securities registered and distributed in the Philippines.
H: Considering the questioned provision that no contract or transaction between the
company and any other association or corporation shall be affected except in case of fraud,
by the fact that any of the directors or officers of the company may be interested in or are
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directors or officers of such other associations or corporation, the impact of these provisions
upon the traditional fiduciary relationship between the directors and SHs of a corporation is
too obvious to escape notice. The directors and officers of the corporation can do anything,
short of actual fraud, with the affairs of the corporation, even to benefit themselves, with
immunity. This and other provisions which authorized the election of non-SHs as directors,
completely disassociate the SHs from the government and management of the business in
which they have invested.
Mead v EC McCullough. H: While a corporation remains solvent, there is no reason why a
director or officer, by authority of a majority of the SHs or board may not deal with the
corporation, loan it money or buy property from it. So long as a purely private corporation
remains solvent, its director are agents or trustees for the SHs. They owe no duties or
obligations to others. But the moment such a corporation becomes insolvent, its directors are
trustees of all the creditors, whether they are members of the corporation or not, and must
manage its property and assets with strict regard to their interest. A director or officer may in
GF and for an adequate consideration purchase from a majority of the directors or SHs the
property even of an insolvent corporation, and a sale thus made to him is valid and binding
upon the minority.
Where a director in a corporation accepts a position in which his duties are incompatible with
those as such director it is presumed that he has abandoned his office as director of the
corporation.
2. Fixing compensation of directors and officers
— Typical situation of self-dealing
— Takes various forms: per diems, salaries and profit-sharing arrangements like bonuses,
stock options plans, pension plans, etc
— GR: directors are NOT entitled to compensation for performing services ordinarily
attached to their office; they are presumed to serve without pay
— Exception: unless the AOI or BLs expressly provide or a contract is made in advance
(Lingayen gulf v Baltazar infra)
— Only the SHs and NOT the directors themselves may fix the amount of compensation
o A SHs resolution to grant such compensation can only refer to future and NOT to
PAST services (Barretto v La Previsora infra)
— Principles also applicable to non-stock corporations…
— … but NOT applicable to an officer who is not a director
— … also not applicable to directors who render service outside his usual duties
Sec 30
Sec 87
— Directors can receive compensation other than per diems only if the by-laws fix the
same or in the absence thereof, approval of majority of SHs
— Sec 30 allows directors to fix the amount of their own per diems; technically is self-
dealing but allowed by express provision of law
 o But the per diems must be REASONABLE
o Total amount of compensation—including per diems—must not exceed 10% of the
corporation’s net income before taxes
— As to corporate officers and employees not directors: may consist not only of salaries
but also bonuses, stock options, and other profit-sharing schemes
— As to the president: Code is silent, but SC held that he is expected to serve without
salary, and that the per diems paid were sufficient compensation for services (Lingayen
Gulf v Baltazar)
— SEC: stock option plans of widely-held corporations
o must be subject to full disclosure before they can publicly sell their securities
o must be approved by SHs representing 2/3 of SUBSCRIBED capital stock
o amount set aside must not be more than 20% of the subscribed capital stock
Gov’t of PI vs. El Hogar Filipino. (supra)
Barretto v La Previsora Filipina. F: Suit by the resigned directors of a building and loan
association to recover 1% of the profits to each complainant in accordance with an
amendment to the by-laws, which stipulate that they are entitled to a lifetime annuity from the
profits of the corporation.
H: The amended by-laws does create any obligation to pay to the persons name therein
such a life gratuity or pension out of the profits. A by-law of this nature must be clearly
regarded as beyond the lawful powers of a mutual building and loan association and is thus
ultra vires. As it were, the by-law cannot be held to establish a contractual relation between
the parties.
The authority conferred upon corporations in the code refers to providing compensation for
future services of directors, officers, and employees after the adoption of the by-law and
cannot in any sense be held to authorize the giving of continuous compensation to particular
directors after their employment has terminated for past services rendered gratuitously by
the them to the corporation. To permit the transaction would be to create an obligation
unknown to the law, and to countenance a misapplication of funds of the building and loan
association to the prejudice of SHs.
Contracts between a corporation and third persons must be made by or under authority of its
board and not by the SHs. The action of the SHs is only advisory and is not binding on the
corporation.
Kerbs v California Eastern Airways. F: The stock option plan of the company provides that
250,000 shares of the corporation’s unissued stock be subject to options to purchase at
$1/share, exercisable at any time within a period of 5 years. The profit sharing plan provides
that when quarterly earning exceeded $30,000 before taxes, 10% shall be distributed among
the name officers and executive personnel. If a loss is incurred, cumulative deficiency plus
operating losses shall be carried forward to succeeding quarterly periods. Both plans were
adopted at a board meeting, but only the stock options plan was ratified by the SH.
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H: The SH ratification cures any voidable defect in the action of the board on the stock
options plan. Ratification by SHs of voidable acts of directors is effective for all purposes
unless the action of the directors constituted a gift of corporate assets to themselves or was
ultra vires, illegal, or fraudulent.
The validity of a stock option plan depends directly upon the existence of consideration to
the corporation. Sufficient consideration to the corporation may be inter alia, the retention of
the services of an employee, or the gaining of services of a new employee, provided there is
a reasonable relationship between the value of the services rendered and the value of
options granted. In this case, the stock option plan is deficient because it is not reasonably
calculated to insure that the corporation will receive the contemplated benefits. No rule of
thumb can be devised to test the sufficiency of the condition which are urged as insurance
that the corporation will receive the contemplated benefit. The most that can be said is that in
each case there must be some element which, within reason, can be expected to lead to the
desired end. The plan and options issued do not of themselves insure that benefit of
retaining the services of the employee to whom the option is granted will inure to the
corporation. They are too insecure in nature to be regarded as a condition of the stock option
plan designed to insure that the corporation will receive the contemplated benefit.
3. Using inside information
— Directors and corporate officers are insiders having access to confidential information
relating to the business of the corporation
— Fiduciary position prohibits them from using any information to benefit themselves or
any competitor corporation
— Liability of guilty and disloyal director can be based on Sec 31
— RSA (now SRC) contains express provisions regarding use of inside information
Sec 36 RSA
Sec 30 RSA
Sec 53 RSA
Strong v Repide. F: Erica Strong is the owner of 800 shares of the Phil Sugar Estates Devt
Company, which owned ½ of the value of friar lands in the Philippines. Repide is director
and majority SH. The government made an offer to purchase the lands owned by the
corporation and from the other owners. The offer was rejected by Repide, without consulting
the other SHs, and held out for a better deal. He was aware that the value of the lands and
the shares would be of no value if the sale were not consummated, since the company had
not paid dividends, was living on credit, and could not even paid taxes. The land was the
only valuable asset of the corporation. Repide than took steps to purchase 800 shares of
stock owner by Strong. He employed Kaufmann, who then employed Sloan the broker, to
purchase the stock for him. Negotiations ensued. Strong through Jones agreed to sell
Strong’s shares to Repide. He thus obtained the 800 shares for 1/10th the amount they were
worth by the eventual sale of the lands two months after he bought the shares. The probable
value of the shares was unknown to anyone except Repide, while the agent of Strong had no
idea that it was Repide who wanted to purchase the shares.
I: W/n it was the duty of Repide, in GF, to disclose to the agent of Strong the facts which
would affect the value of the stock he purchased from the latter.
H: In this case, Repide was the chief negotiator for the sale of the lands, acting for all the
other SHs. Only he knew the state-of-play in the proposed sale. He owned ¾ of the shares
of the corporation. Under these circumstances, and before the negotiations for the sale were
completed, he employs agents to purchase shares of his company from another SH and
conceals his own identity and knowledge of the state of the negotiations on the sale of the
lands and their probable effect on the value of the shares to be purchased. A director may be
accountable directly to the SH where the special facts surrounding the transaction give rise
to the obligation to disclose his identity or the inside information he possesses. This is known
as the special facts doctrine.
Taylor v Wright et al. F: Mrs Wright and Allen Wright, majority SH and both director
respectively, employed an agent to purchase from Emma Taylor 3750 shares in the
corporation to which they are directors in. Said shares were pledged as security for a loan by
Taylor which the Wrights knew. The Wrights also knew that the company was operating at a
loss, and they knew the true value of the shares (which was not traded in the exchange).
They also concealed their identity and purpose in purchasing the stock from Taylor.
I: W/n the directors and officers of a corporation owe any duty to all SHs in relation to
transactions whereby officers and directors buy for themselves shares of stock from the SHs
H: Three (3) rules are recognized as applying to the case.
— The Majority rule—directors and officers owe no fiduciary duty at all to SHs, but may
deal with them at arm’s length. A director is a fiduciary with respect to the corporation as
an entity, and not to the SHs as individuals. In dealings with or for the corporation, the
director is exercising a corporate function, and is subject to the usual fiduciary duty to
disclose all material facts; but that in personal dealings with SHs he is not exercising a
corporate function, and is free to deal with them at arm’s length. It is based on the
theory that the corporation—the collective SHs—is a separate and distinct legal entity,
an artificial personality, to whom the director owes his duty.
— The Minority Rule—recognizes the director’s obligation to the SHs individually as well
as collectively, and refuses to permit him to profit at the latter’s expense by the use of
information obtained as a result of his official position and duties. Such a duty exists
because the SHs have placed the directors in a strategic position where they can make
it appear the shares are much less valuable than they really are.
— The Special Facts rule—an exception to the Majority rule; where special circumstances
are present which make it inequitable for the director to withhold information from the
SH, the duty to disclose arises, and concealment is fraud.
Assuming the Special Facts rule to be applicable, there is no doubt that the Wrights owed
Taylor a duty and violated that duty to her damage. The stock was not sold or traded in any
exchange. They concealed their position as directors, and had full knowledge of the real
value of the stock, but kept that knowledge to themselves. They had full control over the
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corporation. Under such circumstances the findings that the Wrights are guilty of fraud within
the meaning of the Special Facts rule are supported by the evidence.
4. Seizing corporate opportunity
— Significant aspect of fiduciary obligation is the duty to refrain from usurping a business
opportunity rightly belonging to the corporation
Sec 34: Where a director acquires for himself a business opportunity which should belong to
the corporation, thereby obtaining profits which should belong to the corporate corporation,
he must account to the latter for all such profits by refunding the same, unless his act has
been ratified by vote of the SHs owning 2/3 OCS
— Applicable only to directors and NOT to officers
— Allows ratification of a transaction by vote of 2/3 OCS
Sec 31: Directors or trustees who acquire any personal or pecuniary interest in conflict with
their duty as directors shall be liable solidarily for all damages resulting therefrom
— Applicable to directors, trustees, and officers
— Does NOT allow ratification of a self-dealing transaction
— If the transaction is one which the corporation has the right to appropriate, then the
director has a positive duty not to seize it for himself
— Should he do so, he must account for all profits he obtains, even if he used personal
funds
— Ratification by SHs representing 2/3 OCS cures the transaction
— Sec 34 covers only directors and not officers…
— … but an officer may still be held liable under Sec 31, para 2
o officer is a full time corporate agent and is paid a salary for his services, and thus
there would be stronger reasons to make an officer liable
o director not an officer spends only a part of is business time and efforts for the
corporation, for which he is not entitled to compensation unless expressly granted
— when is a corporate opportunity belonging to the corporation?
Singer et al v Carlisle. F: Singer et al are SHs of the United Corporation which owns all
capital stock of its subsidiary, NY United Corp, both of which are engaged in the business of
underwriting securities. Carlisle et al are directors of the two corporations. Other defendants
are investment houses JP Morgan, Drexel & Co, and Morgan Stanley. United Corp acquired
substantial voting stock of various holding and operating companies/utilities, which were all
publicly listed and obtained their funds through the public sale of their securities. JP Morgan
et al were able to obtain large profits from the underwriting of such securities to the exclusion
of United and NY United. Plaintiff Singer charge that the defendant bankers and investment
houses and the directors of the two corporations fraudulently caused the latter corporations
to use their influence and control over the subsidiaries in order to induce them to award the
underwriting business to the defendant bankers. Having eliminated United Corp and NY
United as their competitors for the underwriting business of the subsidiaries, the defendants
allegedly proceeded to utilize their control and influence to obtain the business for
themselves. Singer et al also claimed that the directors of the corporation, as fiduciaries,
eliminated their cestui as a competitor in the underwriting profits.
H: United and NY United were also engaged in underwriting as do the defendant banks. It
was the duty of their directors and officers to make every effort consonant with good, honest
judgment to obtain for those corporations as much of the underwriting business as possible,
and to make this business as profitable as possible. This does not mean, however, that the
directors and controlling SHs of United and NY United were required to do anything
detrimental to the affairs of other corporations of which they were officers and directors, and
to the affairs of United and NY United. One in control of a majority of the stock and of the
board of a corporation occupies a fiduciary relation towards the minority, and is charged with
the duty of exercising a high degree of GF, care, and diligence for the protection of the same.
Every act in its own interest to the detriment of the minority interests becomes a breach of
duty and of trust, and entitled them to plenary relied. So strict is the rule of undivided loyalty
to the beneficiary that the mere fact that a trustee has an interest inconsistent with the
interest of his cestui, casts upon him that burden of justification. Where this duty exists, the
duty of the trustee is to manage the property and affairs of the corporation with an eye single
to the advantage of the corporation itself. It is not proper for the fiduciary to take those
opportunities unto itself, while at the same time it stayed the processes of its subsidiary
directed towards the same business ends. It is not only a case of a fiduciary seizing
business opportunities of the cestui. The trustee at the same time kept its dominant hand
over the cestui, suppressing any attempt by the cestui to go out and compete with the
trustee.
Where a fiduciary is engaged in a business in competition with his corporation, he cannot
actively use his position and power over his corporation so as to prevent the corporation
from seeking certain businesses in competition with himself. It is charged that the directors
here not only failed and refused any attempt to obtain certain business for their own
corporation, but that they affirmatively prevent the corporation from competing with them for
that business. This they may not do. Directorship in two competing corporation does not in
and of itself constitute a wrong. It is only when a business opportunity arises which places
the director in a position of serving two masters, and when dominated by one, he neglects
his duty to the other, that a wrong has been done.
Irving Trust Co v Deutsch et al. F: Irving is the trustee of the insolvent company Sonora
Acoustic. Acoustic desired the patents of the De Forest company and wanted gain at least
minority stake to have a voice in the management of its patents and products, which goes to
Acoustic’s corporate purpose. Reynolds & Co, receiver of the insolvent De Forest, offered to
give Acoustic 1/3 participation in the purchase of 600,000 shares of De Forest stock. It also
stipulated that Acoustic’s nominees should hold 4 of 9 seats in the board and that it should
have the right to enter into a contract to handle the managing and selling of De Forest
products. This offer was presented to the board of Acoustic and a resolution was passed
authorizing its president, Deutsch, to obtain sufficient funds to enable Acoustic to carry out
its obligations in case it accepts the offer. No funds were obtained but Biddle and Deutsch et
al, agreed to put up the money and accept the certificates of De Forest stock issued when
date of payment came under the offer. Reynolds agreed and issued the certificates. The deal
was consummated on the purchase of De Forest stock. It was then traded in the exchange
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and Biddle, Deutsch et al were able to reap huge profits in selling their shares. Acoustic
declares bankruptcy and sues the Biddle group, three of whom were directors of De Forest,
appropriated to themselves Acoustic’s right under its contract, when as fiduciaries they were
obligated to preserve those rights for Acoustic and were forbidden to take position where
personal interest would conflict with the interest of their principal.
H: The theory of the suit is that a fiduciary may make no profit for himself out of a violation of
duty of the cestui, even though he risked his own funds in the venture, and that any one who
assists in the fiduciary’s dereliction is likewise liable to account for the profit so made. It is
clear that there is no contract between Acoustic and Reynolds because the offer did not run
to Acoustic but to the Biddle group as individuals. The management contract, once entered
into, would enable access to the patents, stock ownership in De Forest as a going concern
after receivership was lifted, and were all concededly legitimate corporate purposes. Thus
the proposed purchase is not ultra vires.
The facts of the present case militate strongly against the directors since in this case, they
absolutely bound Acoustic by contract to make payments to Reynolds and exposing it to risk
of a suit for damages for nonperformance, without committing themselves to it to relieve it of
this obligation if necessary when time for payment arrives. Directors of a solvent corporation
are forbidden to take over for their own profit a corporate contract on the plea of the
corporation’s financial inability to perform. If the directors are uncertain whether the
corporation can make the necessary outlays, they need not embark upon the venture. If they
do, they cannot substitute themselves for the corporation any place along the line and divert
possible benefits into their own pockets.
Litwin v Allen et al. F: JP Morgan, in disposing of 1,250,000 shares of CS of Alleghany
corporation, offered 500,000 to Guaranty Corporation to be sold on a commission at
$24/share. Before the public offering, Morgan also offered the other 750,000 to friends at
$20. Among those receiving the shares were some directors of Guaranty Corp, who received
40,000 shares. The market opened at a premium and the directors were able to dispose of
their stock at a substantial profit.
H: A director of a corporation is in a position of fiduciary. He will not be permitted to
improperly profit at the expense of the corporation. Undivided loyalty will ever be insisted
upon. Personal gain will be denied to a director when it comes because he has taken a
position adverse to or in conflict with the best interests of the corporation. The fiduciary
relationship imposes a duty to act in accordance with the highest standard. There is thus no
basis for holding that in acquiring stock through JP Morgan at $20, any of the defendants
were guilty of a breach of fiduciary duty. The CS purchased did not represent in any case a
business opportunity for the Guaranty Corporation. Having fulfilled their duty to the
corporation in accordance to their best judgment, the directors were not precluded from a
transaction for their own account and risk.
In order to constitute a corporate opportunity that was deprived by the directors, it was
necessary to prove the ff:
— The shares purchase were in contemplation of equity offered to the cestui
— That the cestui had some legitimate right or expectancy in these shares

The question to ask is, have the directors profited at the expense of their corporation; have
they gained because of disloyalty to its interest and welfare? In this case, the “opportunity”
was a routine piece of business wholly lacking in the unique and special quality which
distinguished other corporate opportunity cases. The interest of the directors in the stock
was purely speculative, and they even incurred a definite risk which at the time was totally
eliminated from the cestui’s position in the same stock. In other words, the profit of the cestui
was assured; that of the directors were still at hazard.
5. Interlocking directors
— One who occupies a positioning two (2) corporations dealing with each other
— Sometimes presented definite advantages to the corporation
Sec 33: GR: A contract between two or more corporations having interlocking directors shall
not be invalidated on that ground alone
— Exceptions:
o Cases of fraud
o if the contract is not fair and reasonable under the circumstances
o if merely nominal interest, interlocking director shall still be subject to the same
ratificatory vote required in cases of dealings of directors, trustees, and officers
— interests exceeding 20% of OCS is considered substantial
— The burden is on the corporation which seeks to uphold the contract to prove the
fairness or unfairness of the transaction
— Interlocking director may actually be a self-dealing director where his interest in one
corporation is merely nominal, but his interest in the other corporation is greater than
20% of its OCS:
Globe Woolen Co v Utica Gas & Electric. F: Globe Woolen needed electric power to run
its mills. Its president and majority SH, Maynard, was able to get a contract with the electric
company Utica Gas which was ratified by the executive committee of Globe’s board.
Maynard was a nominal SH in the electric company also, and did not vote in the meeting.
Globe desires to enforce the contract.
H: Contracts are voidable at the instance of Utica Gas. Globe argues that by refusing to vote,
Maynard shifted responsibility to his associates, and may reap a profit from their errors. One
does not divest oneself so readily of one’s duties as trustee. The refusal to vote, has indeed
this importance: it gives to the transaction the form and presumption of propriety, and
requires one who would invalidate it to prove beneath the surface. The trustee or director
holds a duty of constant and unqualified fidelity. He cannot rid himself of the duty to warn
and to denounce, if there is improvidence or oppression, either apparent on the surface, or
lurking beneath it.
There was an influence in this case which was exerted by Mr Maynard the president of
Globe Woolen. From beginning to end he dealt with a subordinate, who was alert to serve at
his pleasure. The unfairness in the contract is startling and the consequences could be
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disastrous. No matter how large the business, or how great the increase in prices of labor or
fuel, or there be extensions to the plant, the electric company had pledged that for 10 years
there will be saving of $600/month, $300 for each mill, $7200/year. As a result of that pledge
it has supplied the plaintiff with electric current for practically nothing, and even owes it some
money thereafter. Mr Maynard knew the unfairness of the contract, and he cannot have
failed to know that he held a one-sided contract which left the defendant at his mercy. Thus
his refusal to vote does not nullify, as of course an influence and predominance exerted
without a vote. A constant duty rests on a trustee to seek no harsh advantage to the
detriment of his trust, but rather to protect and renounce he gains what is unfair.
Close corporation
— SHs of a close corporation can choose to manage the corporation themselves, instead
of having a board, and thus the law treats them as directors with all the powers, duties,
and liabilities attached thereto
Sec 97 (1-3)
Jack: not limited to the board; it also has to be assumed by the SHs who own the majority;
all boils down to control!
Sec 100 (5)
— 100: SHs can be made personally liable for corporate torts
o in other corporations: liable only if there is negligence in his duties
o SHs are solidarily liable with the corporation
Duty of controlling interest
— A SH who is able to control a corporation by owning a majority of voting shares or
otherwise, owes a duty as well of GF to the corporation and to the minority
— Majority SH is subject to the duty of GF when he acts by voting at a SH meeting
— persons enjoying management control hold it in behalf of the SHs, and not as their
personal property
— GR: controlling SH may dispose of his stock at any time and at any price
o But they cannot abuse by transferring office to persons who re known as intending
to raid the corporate treasury or improperly benefit or enrich themselves
(Insuranshares Corp case)
Insuranshares Corporation v Northern Fiscal Corp. F: The Management group
(composed of Philadelphia banks) transferred control over the Insuranshares Corporation,
an investment trust specializing in shares of small life insurance companies, to the Boston
Group, none of whom ever had any interest of any in it. With the control went plenary power
under the by-laws to sell or transfer all the securities in the company’s portfolio. Such
acquisition of control was the first step of a grand scheme, planned by the Boston Group with
the connivance of brokers, to strip the corporation of its valuable assets, leaving a mere shell
to the remaining SHs.
H: This case involves more than just a question of liability in the sale of corporate stock: it is
the sale of control by a minority—but controlling—interest. Fiduciary obligation:
Those who control a corporation either by the majority or minority stock ownership owe some — Commences at the time director assumes office
duty to the corporation in respect of the transfer of the control to outsiders. Owners of control — Remission can be action, inaction, gross negligence
in a corporation are under a duty not to transfer ownership to outsiders if the circumstances — Liability not the SHs but to the corporation
surrounding the proposed transfer are such as to awaken suspicion and put a prudent man One word: fiduciary
on his guard. In this case the evidence shows that the Boston group were acquiring control — Trust imposed by SH collectively
over the corporation by improper means and for an improper purpose. — Directors collectively mandated to make full use of corporate
property
— Fiduciary obligation owed to corporation, not the SH
Jack: a systematic, orchestrated move to transfer mgt/control to an irresponsible group; duty
2 types of responsibilities:
to inform SHs applied to situations where there is a clear-cut majority
— As a Board, collectively
Duty to creditors — As a director, individually
o Degree of responsibility is greater as an individual director
— No express duty in Corpo Code; based on contract law — 31: repository of duties of directors collectively and individually
— GR: directors cannot be personally liable to corporate creditors for general inefficient — distinguish if director is an interlocking director
management of a solvent corporation — directors transaction with corporation can prove to be beneficial
o Remedy of creditors is against the corporation itself — prohibition against self-dealing is not absolute
— Exception: when corporation is insolvent, the directors will be DEEMED trustees of the o threshold: fraud
creditors and should manage its assets with strict regard to the creditor’s interest (Mead o burden of proof: corporation
v McCullough) — fixing compensation
— Upon insolvency of the corporation, the board is duty bound to hold the assets of the o directors sit on board, can do anything and everything with the
corporation primarily first for the payment of liabilities corporate assets
— 31: should they willfully and knowingly assent to patently unlawful acts of the o success or downfall is borne by directors
corporation or are guilty of gross negligence or BF in directing the affairs of the o board can only recommend compensation! Subj to SH approval
corporation, they become solidarily liable with for damages to the corporation + Determination:
damages to third persons including creditors
— did they discharge their duties mandated by the statute?
— 65: director who fails to object in writing to the issuance of stock for less than par or
— was there liability arising from their actions and to whom?
issued value is solidarily liable with the guilty SH to the corporation as well as to its
creditors for the difference

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 Chapter IX – Inspection making his demand.

Basis of right Stock corporations must also keep a book to be known as the "stock and transfer book",
in which must be kept a record of all stocks in the names of the stockholders
— SHs do not directly participate in the management of the business and have little alphabetically arranged; the installments paid and unpaid on all stock for which
knowledge, if at all, of how the corporate affairs are being run by the directors and subscription has been made, and the date of payment of any installment; a statement of
officers every alienation, sale or transfer of stock made, the date thereof, and by and to whom
— As beneficial owners, SHs have the right to know only the financial condition but also made; and such other entries as the by-laws may prescribe. The stock and transfer book
how the corporate affairs are being run by their elected directors and the appointed shall be kept in the principal office of the corporation or in the office of its stock transfer
officers agent and shall be open for inspection by any director or stockholder of the corporation at
— Law grants them the right to inspect the records of the corporation to obtain information reasonable hours on business days.
they need
— Significant for minority SHs
No stock transfer agent or one engaged principally in the business of registering
What records covered transfers of stocks in behalf of a stock corporation shall be allowed to operate in the
Philippines unless he secures a license from the Securities and Exchange Commission
and pays a fee as may be fixed by the Commission, which shall be renewable annually:
Sec. 74 Books to be kept; stock transfer agent. - Every corporation shall keep and
Provided, That a stock corporation is not precluded from performing or making transfer of
carefully preserve at its principal office a record of all business transactions and minutes
its own stocks, in which case all the rules and regulations imposed on stock transfer
of all meetings of stockholders or members, or of the board of directors or trustees, in
agents, except the payment of a license fee herein provided, shall be applicable. (51a
which shall be set forth in detail the time and place of holding the meeting, how
and 32a; B. P. No. 268.)
authorized, the notice given, whether the meeting was regular or special, if special its
object, those present and absent, and every act done or ordered done at the meeting.
Upon the demand of any director, trustee, stockholder or member, the time when any Books and records legally required to be prepared, maintained, and kept by the corporation:
director, trustee, stockholder or member entered or left the meeting must be noted in the — Books that record all business transactions
minutes; and on a similar demand, the yeas and nays must be taken on any motion or o “records of all business transactions” broad enough to include those which the
proposition, and a record thereof carefully made. The protest of any director, trustee, Code of Commerce requires all merchants including corporations:
stockholder or member on any action or proposed action must be recorded in full on his § book of inventories and balances
demand. § journal
§ ledger
§ book for copies of letters and telegrams
The records of all business transactions of the corporation and the minutes of any § financial statements
meetings shall be open to inspection by any director, trustee, stockholder or member of § income tax returns
the corporation at reasonable hours on business days and he may demand, writing, for a § vouchers and receipts
copy of excerpts from said records or minutes, at his expense. § contracts and all papers pertaining to the contracts
§ voting trust agreements
Any officer or agent of the corporation who shall refuse to allow any director, trustees, o records of business transactions
stockholder or member of the corporation to examine and copy excerpts from its records § SH need not blindly accept figures in the financial report given by
or minutes, in accordance with the provisions of this Code, shall be liable to such management
director, trustee, stockholder or member for damages, and in addition, shall be guilty of § Records are voluminous and may be difficult to interpret—thus SC held
an offense which shall be punishable under Section 144 of this Code: Provided, That if that a SH may make copies, extracts, and memoranda of such records
such refusal is made pursuant to a resolution or order of the board of directors or (Veraguth v Isabela Sugar)
trustees, the liability under this section for such action shall be imposed upon the — Minutes book for meeting of SHs
directors or trustees who voted for such refusal: and Provided, further, That it shall be a — Minutes book for meetings of the board
defense to any action under this section that the person demanding to examine and copy o Informs the SHs of the policies of the board
excerpts from the corporation's records and minutes has improperly used any information o SC: until minutes are approved, no SH has the right to make a copy thereof
secured through any prior examination of the records or minutes of such corporation or of — Stock and transfer book
any other corporation, or was not acting in good faith or for a legitimate purpose in o Contains the names of all SHs

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 o Code does not require the corporation to furnish a SH with the list of names of
other SHs
o SEC: SH cannot demand that he be furnished with such a list; he should instead
directly examine the books of the corporation
— Annual financial statements
o Most recent financial statements: Granted by Sec 75
o 75: Within 10 days from receipt of written request, corporation must furnish most
recent financial statement:
§ Balance sheet as end of last taxable year
§ Profit and loss statement showing in detail the assets and liabilities
— Annual report to the SEC
o 141: every corporation domestic or foreign, lawfully doing business in the
Philippines
— Report of election of directors, trustees and officers within 30 days after election
— by-laws
o required by law to be open to inspection, but curiously not the AOI
o but since the AOI are filed with the SEC, these are open to inspection by persons
with legitimate interests and during reasonable hours on business days
Sec. 75 Right to financial statements. - Within ten (10) days from receipt of a written
request of any stockholder or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance sheet as of the end of the last
taxable year and a profit or loss statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of the
corporation for the preceding year, which shall include financial statements, duly signed
and certified by an independent certified public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the financial
statements may be certified under oath by the treasurer or any responsible officer of the
corporation. (n)
Effect of and limitations on the Right
— Unbridled exercise of the right to inspect could be harassing to the corporation and
would impair its efficient operations
— Balance must be sought between the interests of the individual SH and the interests of
the corporation
— A corporation may regulate the time and manner of the inspection its books, but it
cannot make a by-law which gives the directors absolute discretion to allow or disallow
inspection
o By-law provisions limiting inspection must be reasonable and not inconsistent with
law
111
— 74: right to inspect subject to three (3) limitations:
(1) must be exercised at reasonable hours on business days
(2) person demanding right has not improperly used any information secured through
any previous examination of the records
(3) demand is made in GF and for a legitimate purpose
1. Limitations as to time and place
— Time of inspection
o Only at reasonable hours on business days, throughout the year
o By-laws cannot limit inspection to merely a few days during the year
chosen by the directors
o By-laws cannot provide for inspection only upon authority of the president
o Business hours are reasonable hours; but inspection should not impede
efficient operations of the business
— Place of inspection
o 74: enjoins the corporation to keep all its records and stock and transfer
books at its principal office, and inspection should be at such office
o Veraguth case: SH cannot demand that he be allowed to take the
corporate books out of the principal office for the purpose of inspecting
them, but may make copies thereof
2. Purpose
— Is purpose material?
o 74 implies that the purpose of the SH in exercising his right to inspect is material;
must not act in BF and must be for a legitimate purpose
o purpose is presumed to be a proper one and the corporation cannot refuse to grant
him the right on a mere belief that the motive is improper
o burden of proof that the motive is improper is on the corporation and its officers
— what is a legitimate purpose?
o One which is germane to the interests of the SHs as such and not contrary to
the interests of the corporation (Gokongwei v SEC)
§ Access to stock and transfer book (contains names of all SHs) may be
upheld provided the purpose in inspecting it is reasonably related to a
SHs interest as such
§ Gonzales v PNB (supra): Where a person acquired one share of a
corporation just so he can exercise his right to inspect a transaction
entered into before he became a SH, his purpose is not germane to his
interest as such and is thus not legitimate. Right is denied.
— Proper purposes:
o To ascertain whether the corporation is being mismanaged
o To ascertain financial condition of the corporation
o To ascertain the value of shares
o To obtain a mailing list of SHs to solicit proxies or influence voting, in anticipation of
SH meetings
— Improper purposes:
o To obtain information as to business secrets or to reveal business secrets
o To secure business prospects or investment of advertising lists
o To find technical defects in corporate transactions to bring nuisance or “strike suits”
for blackmail
o To obtain information to be published to embarrass the corporation, depress the
value of its assets, and cause loss to SHs, or to demoralize and cause dissension
among SHs
o Wrongful denial of the right to inspect a criminal offense punishable under Sec 144
of the Corpo Code.
Pardo v Hercules Lumber. F: Corporate secretary of Hercules Lumber refused to permit
Pardo, a SH, or his agent to inspect the records and business transactions of the company
at the times desired by Pardo. Basis of the refusal was the provision in the company’s by-
laws which stipulated that every SH may examine the books of the company and other
documents upon the days which the board annually fixes.

Who may exercise the right
— Directors, trustees, SHs, or members
o Either personally or through an agent
o Limitations on a SH operate equally to directors and trustees
— Voting trust agreement: both voting trustee and the transferor have the right of
inspection
o Transferor is STILL the beneficial owner of the shares and should have as much
right to seek information to protect his investment as any SH
— Parent-subsidiary
o If legally separate and independent entities: no right of inspection to subsidiary
o If not, i.e. both are one and the same and under the control of the parent: right to
inspect available to subsidiary and the parent (Gokongwei)
Who may be held liable
H: The resolution of the board limiting the rights of SHs to inspect its records to a period of
10 days prior to the annual SH meeting is an unreasonable restriction in accordance with the
Corpo Code, which provides that the right to inspect can be exercised at reasonable hours.
The right of inspection was interpreted to mean that the right may be exercised at
reasonable hours on business days throughout the year, and not merely during an arbitrary
period of a few days chosen by the directors.
Gonzales v PNB. H: The Code has prescribed limitations to the right of inspection, requiring
as a condition for examination that the person requesting must not have been guilty of using
improperly any information secured through a prior examination, and that the person asking
for such must be acting in GF and for a legitimate purpose. It is the SH seeking to exercise
the right of inspection to set forth the reasons and purposes for which he desires such
inspection. SC held that the purpose of Gonzales, which was to arm himself with evidence
which he can use against the bank for acts done by the latter when he was still a total
stranger (i.e. not a SH), were not deemed proper motives and his request was denied.

— Corporate officer who has custody of the books and papers sought to be inspected who Veraguth v Isabela Sugar Co. F: Directors have the unqualified right to inspect the books
refuses to allow inspection and records of a corporation at all reasonable times. Pretexts may not be put forward by the
— Directors or trustees who voted for refusal if stated in a board resolution officers to keep a director or SH from inspecting the books and minutes of the corporation,
and the right to inspect cannot be denied on the grounds that the director or SHs are on
Defenses available to persons held liable unfriendly terms with the officers. A director or SH has no absolute right to secure certified
copies of the minutes until these minutes have been written up and approved by the
— Person demanding has improperly used any information secured through any prior directors.
examination
— One requesting was not in GF or does not have a legitimate purpose Gokongwei v. SEC. F: Gokongwei, a major SH of San Miguel Corporation, sought to
exercise his right to inspect the books and records of SMC Int’l, a foreign subsidiary wholly-
Remedies available if inspection refused owned and controlled by SMC. Since he was not a SH of the subsidiary, SMC denied his
request to inspect its books.
— Mandamus (Gokongwei case)
o Directed to the corporation H: Where the right to inspect is granted by statute to the SH, it is given to him as such and
o Secretary may be joined as party-defendant must be exercised by him with respect to his interest as a SH and for some purpose
— If mandamus is inadequate: injunction germane thereto or in the interest of the corporation. The inspection has to be germane to
— Action for damages against the officer or agent who refused inspection the petitioner’s interest as a SH and has to be proper and lawful in character and not inimical
o Corporation itself may not be necessarily liable to the interest of the corporation.
o 74: damages shall be imposed instead on the erring officers and directors if refusal
is pursuant to a board resolution The SH’s right to inspect is based on his ownership of the assets and property of the
— Criminal suit corporation. It is therefore an incident of ownership of the corporate property, whether this
o Against the offending officers

112
ownership or interest be termed an equitable ownership, beneficial ownership, or quasi-
ownership, and is predicated upon the necessity of self-protection.
On application for mandamus to enforce the right, it is proper for the court to inquire into and
consider the SH’s GF and his purpose and motives in seeking inspection. But the impropriety
of purpose such as will defeat enforcement must be set up by the corporation defensively if
the Court is to take cognizance of it as a qualification. In other words, the specific provisions
take from the SH the burden of showing the propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive.
The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would
be more in accord with equity, GF, and fair dealing to construe the statutory right of
Gokongwei as SH to inspect the books of the parent as extending to the books of the
subsidiary in its control.
113
Chapter X – Derivative Suits
— Def’n: one instituted by a SH or a member for and in behalf of the corporation for its
protection from acts committed by directors, trustees, corporate officers, and even third
persons
— Common law recognized the right of a SH to sue in behalf of the corporation through the
“derivative suit”
— SH files a derivative suit in behalf of the corporation in order to protect or vindicate
corporate rights, whenever corporate officers refuse to sue or are the ones to be sued
or hold control of the corporation
Nature and basis of derivative suit: distinguished from individual and representative
suit
— Suits by SHs or members of a corporation based on wrongful or fraudulent acts of
directors or officers may be classified into:
o Individual suits—ex. Where right of inspection is denied because wrong is done
to SH who avails of the right
o Class/representative suits—where the wrong is doe to a group of SHs ex. PS
holders’ rights are violated
— Derivative suits—where the acts constitute a wrong to the corporation itself, cause of
action belongs to the corporation and not to the individual SH
o Each SH is necessarily affected by such a wrong to the corporation because the
value of his interest would be impaired
o Decision to sue or not to sue based on a wrong committed against the corporation
primarily rests within the discretion and exercise of sound business judgment by
the board of directors
§ Primary duty of the directors is to increase net asset value of the
corporation by deriving profits…
§ … but remedies such as derivative suits against wrongful, negligent, or
illegal acts which causes losses or injury to the corporation may even be
more costly in terms of future profits
§ when the board exercises its business judgment in GF that it will not
pursue remedies in behalf of the corporation, then the use of the
derivative suit will not prosper
§ when the cause of action is against third parties, or against some
members of the board, and there remains enough disinterested members
to validly act as a body, the determination whether to take corporate
action still lies within the business judgment of the board
o It is only when the board itself has been the author of the wrong being done or
having been done to the corporation, where business judgment is inapplicable and
not even an intra-corporate remedy would be successful
§ In cases of mismanagement where wrongful acts are done by
directors/trustees, the directors would never be willing to sue themselves
§ The suing SH is regarded as the nominal party, with the corporation as
the party-in-interest
— Basis: Angeles v Santos
 o Board is a creation of the SHs and controls the corporate affairs by delegation of
the SHs
o Board occupies a position of trusteeship:
§ Must exercise GF, care and diligence in their administration of the
corporate affairs
§ Must protect the interests of the majority and also of the minority
o Where the board or directors wastes the corporate funds, fraudulently disposes of
its assets or performs ultra vires acts, the courts, upon showing that an intra-
corporate remedy is unavailable, will entertain a suit of the minority members of the
board (or any SH), for an in behalf of the corporation, to prevent waste, stop the
commission of illegal acts, and redress the injuries of the minority against the
majority
Requirements relating to derivative suit
— Corpo Code contains no provision at all relating to derivative suits, but ff rules apply:
(SMC v Kahn)
— Proper forum for derivative suit:
o SRC: all intra-corporate disputes under Sec 5 of PD 902-A are transferred to the
RTC
1. Exhaustion of intra-corporate remedies:
— GR: Suing SH must have exhausted his remedies within the corporation
o Made a demand on directors to sue
o Directors refuse or fail to sue
— Exception: demand not necessary where it would be futile to make it, as where the
majority of the board are the very ones guilty of the wrong complained of (Everett v Asia
Banking Corp.)
— Not only a procedural rule but also a substantive one
— Do the remedies within the corporation include removal of the errant directors, or
ratification of the transaction?
— A SH can also ask for the appointment of a receiver to take management away from the
board and place in the hands of a receiver
2. Standing to institute a derivative suit as a SH in behalf of the corporation.
— GR: SH must have been a SH at the time of the transaction or act complained of took
place, or the shares devolved upon him
o SMC v Kahn: bona fide ownership by a SH in his own right suffices to invest him
with standing to bring a derivative action for the benefit of the corporation
o Rep. v. Cuaderno: Number of shares is immaterial since the SH is not suing in his
own behalf
— Exception: Even if the SH was not a SH at the time the questioned transactions took
place, but the covered transactions continue and are injurious to the SH or affect him in
some other way, he may bring a derivative suit (Pascual v Orozco)
— Exceptions to the exception:
114
o If a SH transferred his shares after he had a chance to institute the derivative suit
but failed to do so before the transfer, the transferee cannot institute the derivative
suit himself
o If a transferor is estopped, the transferee is also estopped from suing
o If the transferor is himself party to the fraud or wrongful act against the corporation
3. The action must be brought for the benefit and in behalf of the corporation
— See Evangelista v Santos infra
— GR: Corporation should be made a party-defendant
o Exception: Everett case, Angeles v Santos
4. Any benefit recovered by the SH as a result of the derivative suit must be
accounted for to the corporation as the real party-in-interest
5. Plaintiff SH is entitled to reimbursement from the corporation for the reasonable
expenses of litigation
Evangelista et al v Santos. F: Plaintiffs are minority SHs who brought a derivative suit
against the principal officer for damages resulting from the mismanagement of corporate
affairs and misuse of corporate assets. The complaint prayed for judgment requiring
defendant, among others, to pay plaintiffs the value of their respective participation in said
assets on the basis of the value of the shares held by them.
H: Suit would not prosper. SHs brought the action not for the benefit of the corporation but
for their own benefit since they asked that the defendant make good the losses occasioned
by his mismanagement and pay them the value of their respective participation in the
corporate assets on the basis of their respective holdings. The relief sought could not be
done until all the corporate debts, if there are any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution. Since it is the
corporation which is the real party-in-interest, then the reliefs prayed for must be for the
benefit or interest of the corporation. When the reliefs prayed for do not pertain to the
corporation, then it is an improper derivative suit.
Republic Bank v Cuaderno. F: A derivative suit was brought against the officers and the
board. Complaint alleged that the directors approved a resolution granting excessive
compensation to the corporate officers. Suit was filed in order to prevent dissipation of the
corporate funds for the payment of salaries of the said officers. Board claims the action
cannot prosper for failure to compel the board to file the suit for and in behalf of the
corporation.
H: Such a suit need not be authorized by the corporation where its objective is to nullify the
action taken by its manager and the board, in which case any demand for intra-corporate
remedy would be futile, and thus necessitating the court to intervene by granting the petition
for a derivative suit.
A SH in a banking corporation has a right to maintain a suit for an in behalf of the
corporation, but the extent of such right depends upon when and for what purpose he
acquired the shares of stock of which he is the owner.
On the issue that the relators controverted the right to question the appointment and
selection of Cuaderno and Dizon, which they contend to be the resilt of corporate acts with
which the plaintiff as SH, cannot intervere, the SC held that an individual SH is permitted to
institute a derivative suit in behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever the official of the corporation refuses to sue,
or are to ones to be sued.
San Miguel Corporation v Kahn. H: Requisites for a proper derivative suit:
(a) party bringing suit should be a SH as of the time of the act or transaction
complained of and at the time of filing of the suit. Number of shareholdings
immaterial. A bona fide ownership by a SH in his own right suffices to invest him
with standing to bring a derivative action in behalf of the corporation
(b) party has tried to exhausted intra-corporate remedies (made demand on the board
to sue in behalf of the corporation, but the latter failed or refused)
(c) cause of action actually devolves on the corporation, the wrongdoing or harm
having been or being caused to the corporation itself and not to the suing SH
115
Chapter XI – Financing the Corporation; Capital Structure
Sources of financing
Three main sources:
— Equity investments; Contributions of SHs
o Investor making equity investments expects that his returns shall be tied up with
the success or loss of the operations of the corporation
§ Return of equity investor is intricately woven into the business affairs of
the corporation and participates in the income
§ Investor/SH is given a say in the management—he is entitled to
participate in the election of the board and cast votes on corporate
matters where SHs are required to give ratificatory action
§ Absence of carrying cost since corporation is not bound to pay any return
on investment unless there are profits and subject to business judgment
of the board in declaring dividends
o Equity investment generally non-withdrawable for so long as the corporation has
not been dissolved
o Investors of equity can only receive a return of their investment only from the
remaining assets after payment of creditors
— Debt contracts: Loans/advances by creditors
o Person extending a loan or debt looks at the financial condition and operations of
the corporations as a means of gauging capacity to pay
§ Creditor puts no stake on the operations of the business; his relationship
to the corporation is based on contract
§ Contractual obligation of corporation to pay the stipulated return (in the
form of interest) remains even when losses are incurred
o Expected return: creditor can only demand the stipulated fixed return/interest
o Legal preference in payment from corporate properties—once insolvent, the
corporation shall devote and prefer all corporate assets towards the payment of
creditors
— Profits of the corporation
Capital structure
— Refers to the aggregate of the securities issued by the corporation
— Two classes of securities:
o Shares of stock
o Debt securities
o Senior securities: those which have a prior but limited claim upon corporate
earnings (such as debt and typical PS)
o Equity securities: those which have the residual interest in corporate earnings
(such as CS and participating PS)
— Important characteristics of securities as forms of investments:
o Right to any early claim on the income before other security holders
 o Right to residual income
o Right to vote
— Only 25% of authorized capital stock need be subscribed initially
o Promoters are not bound to limit the starting capital needed by the business
o Other sources of capital may be tapped, at the initial stages or when the
corporation is already a going concern
— Two questions to consider:
o What should be the relation between basic equity interests and senior securities?
o What type of senior securities should be issued?
Capital and Capital Stock Distinguished
— 137: total shares of stock issued to subscribers or SHs, whether or not fully or partially
paid, provided there is a binding subscription agreement; composed of (2) items:
o portion paid by the SHs (paid-up capital)
o portion which is to be paid on the subscriptions (subscription receivables)
— Capital stock: the amount fixed by the AOI to be subscribed and paid in or secured to
be paid in by the SHs, either in money, property, or services
o Represents the legal and proportional standing of the SHs with respect to the
corporation and corporate matters
o Represents the financial and proprietary claim of the SHs to the net assets of the
corporation upon dissolution
o Totality of the portion of the corporation’s assets and receivables covered by the
trust fund doctrine and are deemed protected for the benefit of corporate creditors
o The corporation does not have to issue all shares at one time
o Remains the same unless the AOI are amended to either increase or decrease
o Cannot be used to declare dividends
— Capital: actual property of the corporation, including cash, real and personal property
o Includes all corporate assets—contributions of SHs, loans by creditors, earnings
less losses
o Fluctuates depending on current profits or losses of the business
Shares of Stock; Kinds
Sec 6
— Defn: Share of stock: a unit or several units of interest acquired when a person
contributes capital to a corporation by way of equity
o Units into which the capital stock is divided
o Represents the interest of the holder:
§ to participate in the management of the corporation,
§ to share proportionally in the profits, and
§ upon liquidation, to obtain an aliquot part of the corporate assets after
creditors are paid
116
o GR: SH cannot get back his investment until dissolution or liquidation of the
corporation
o Ownership of shares do not make the SH the owner of any specific property of the
corporation, but the shares owned are his own personal property which he may
transfer, mortgage, pledge, or otherwise dispose of
o Not to be confused with certificate of stock—evidence of the interest of the SH in
the corporation
Nature of shares of stock
— Constitute personal property of the SH which he can contract with as in any other form
of property
— Represent aliquot parts of the corporation’s capital or the right to share in the proceeds;
holder is not the owner of any part of the capital of the corporation nor is he entitled to
any definite portion of the property and cannot be treated as a co-owner or tenant-in-
common (SHs of Guanzon v. RoD)
— Holders do not own any part of the assets nor are they entitled to possession
— Do not represent proprietary rights of SHs to the corporate assets or properties
Rights of the corporation with respect to shares:
a) To call for payment of unpaid subscriptions subject to contrary stipulation in the
subscription agreement (67)
b) To impose interest on unpaid subscriptions (66)
c) To refuse to issue certificates covering shares where subscription has not been
fully paid (64)
d) To refuse to recognize and register the sale or assignment of any share where
subscription is not fully paid (63)
e) To refuse to recognize a sale or assignment which has not been duly registered in
the stock and transfer book (63)
Corporation does NOT have the power to:
a) demand for the repurchase of shares unless classified as redeemable in the AOI
(Sec 8)
b) refuse to pay dividends to SHs as declared and not been declared delinquent in
order to apply to the unpaid subscription (Sec 71)
c) bid delinquent shares and obtain greater profit for itself (68)
Power to issue shares:
— Power to issue shares or sell them inherent and express in the corporation, lodged with
the board
o SH meeting not required on the issuance of unissued authorized capital stock (first
issuance from corporation to SH)
— Limitations on power to issue shares:
o 62: Cannot be issued for a consideration less than the par or issued value
§ Sec 9: except treasury shares so long as the price is reasonable
o 62: Cannot be issued in exchange for PNs or future services
o 59: if consideration not in cash: value shall be determined by the incorporators or
the board subject to SEC approval

Power to classify shares
— Sec 6: shares may be divided into classes or series or both, any of which may have
rights, privileges, or restrictions stated in the AOI
o No share may be deprived of voting rights except those classified and issued as
“preferred” and “redeemable” shares
o Any or all shares or series of shares may have par or no par value
— Code adopts presumption of equality of the rights and features of shares when nothing
is expressly provided to the contrary in the AOI or when AOI is silent
o In the absence of restrictions in the AOI, PS shall would be voting shares having
the same rights as CS
— Code provides for voting rights for all types of shares on matters of fundamental
importance; Sec 6: non-voting shares shall be entitled to vote on:
o Amendment to the AOI
o Adoption and amendment of by-laws
o Sale, lease, exchange, mortgage, pledge or any disposition of all or substantially all
corporate property
o Incurring, creating or increasing bonded indebtedness
o Increase or decrease of capital stock
o Merger or consolidation
o Investment in another corporation or another business
o Dissolution of the corporation
— All other corporate acts: non-voting shares not entitled to vote
— Minimum restrictions on classification, provided that there be a class with complete
voting rights
— NOTE: rights of PS and bondholders are a matter of contract
Trust relations on shares of stock
— A trust relationship may be created involving shares of stock of a corporation
— Sec 10: each incorporator must own or be a subscriber to at least one (1) share
— Sec 23: every director must own at least one (1) share of stock, which shall stand in his
name on the books of the corporation of which he is a director
— Nominal ownership in shares is all that is required under Sec 23 even when it is shown
that the registered SH is only a nominee or trustee of another person
— Nominee and trustee arrangements do not violate public policy but such nominees and
trustees must still comply with the applicable legal restrictions and formalities
Kinds of shares
1. Common stocks—one which entitles the owner to an equal pro rata division of
profits; one SH having no advantage, priority or preference over any other SH in
the same class
— Most common classification
— Do not have special contract rights or preferences
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— Represents the greatest proportion of the corporation’s capital structure and
bears the greatest risk of loss in the event of failure
— Represents the residual ownership interest in the corporation
2. Preferred Stocks—entitles holder to some preference either in the dividends or in
distribution of assets upon liquidation, or both, or to other preferences not
inconsistent with the code
— Designed to induce persons to subscribe for shares of a corporation
— No more a debt than CS, and until a dividend is declared the holder of PS is
not a creditor of the corporation
— Rights of PS holder are subordinate to the rights of creditors
— Entitlement to preferences:
o Cannot be deemed absolute and must be interpreted in accordance with the Code
and jurisprudence
o Under 43, stock dividends cannot be issued without approval of 2/3 OCS at a
meeting called for the purpose
— Underscores the principle that payment of dividends to SHs is not a
matter of right but a matter of consensus
o There is no guarantee that the PS will receive any dividends
— Declaration of dividends is dependent upon the availability of surplus
profit or unrestricted retained earnings
— Preferences do not give PS holders a lien upon the corporate property
— Two limitations:
o Can only be issued with a stated par value;
o Preferences must be stated in both the AOI and the stock certificate; otherwise,
each share shall be equal to every other share
(1) Preference as to dividends
— Dividends are payable only when there are profits earned
— GR: even if there are existing profits, the board has the discretion to
determine w/n to declare dividends
— Gives the holder the right to receive dividends on said shares to the
extent agreed upon before any dividends at all are paid to the holders of
CS
Types:
i. Participating and non-participating—shares in which after
getting their fixed dividend preference, they share with the CS
the rest of the dividends; unless otherwise stipulated, PS are
NON-participating shares
ii. Cumulative and non-cumulative
 — Cumulative PS: entitle the holders to payment not only of current
dividends but also of back dividends not previously paid, when and if
dividends are declared, to the extent agreed before CS are paid
— If PS dividends are not paid in full in a given year, whether or not earned,
the deficiency must be made up before any dividend may be paid on the
CS
— PS are deemed to be cumulative
— In any given year(s) where no dividends declared, the arrears for such
year have to be made up in subsequent years before dividends are paid
to CS
— Non-cumulative PS: entitle the holder to payment of current dividends
that are paid, to the extent agreed, before CS holders are paid
iii. Discretionary dividend type—right of SH to get dividends would
depend on the discretion of the board, even if the corporation
earns profits
iv. Mandatory dividend type—imposes a positive duty on directors
to declare preferred dividends every year that profits are
earned, and failure to declare would not deprive holders of his
dividend rights for a particular year (Burk v Ottawa Gas)
v. Earned cumulative or dividend credit type—gives a right to
arrears in dividends where there were profits earned during the
years when dividends were not declared
1. SH may not compel payment of dividends and must
wait until the board decides to declare
(2) Preference as to voting rights
— GR: PS are denied by contract the right to vote
— Exception: if the right is not clearly withheld in the certificate or AOI, since
voting is incidental to ownership
Ellingwood v. Wolf’s Head Oil Refining Co. F: Ellingwood is a preferred SH of the Wolf’s
Head Oil Co. At a SH meeting, the corporation was in default in the declaration and payment
of dividends for 2 years on the PS. The AOI provides that PS holders are entitled to
cumulative dividends, and gives exclusive voting power to holders of CS. PS holders have
no voting rights, but is the corporation is in default in the payment of dividends, the majority
PS holders shall have an election to exercise the sole right to vote for the election of
directors and all other purposes, to the exclusion of the CS holders, until the corporation
declares and pays dividends for a full year on the PS. Thereafter the right to vote shall revert
to the CS holders. Ellingwood contends that the clause “until the corporation pays for a one
year period dividends on the PS” restricts the above provision in the AOI as to the duration of
time when PS holders shall have the right to vote. TC ruled that PS were entitled to vote at
the SH meeting.
H: The AOI of the company evidences an intention to make provision for the protection of PS
holders. When a dividend for a full year is paid on PS, the sole right to vote reverts to the CS
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holders, notwithstanding that dividends for 2 years are still due on PS. It clearly appears
therefore that when the annual meeting of the corporation was held, dividends were accrued
and unpaid on the PS, thus the company was in default, and therefore the PS holders were
entitled to vote for the election of directors and all other purposes as stipulated in the AOI.
(3) Preferences upon liquidation (preferences as to assets)
— GR: PS holders participates pro rata with the CS holders, since each
share is presumed to be equal
— Exception: PS holder may be given preference in the distribution of
corporate assets
— Gives the holder preference in the distribution of assets of the corporation
in case of liquidation
Hay v Hay. F: The Big Bend Co. is a real estate business concern. It amended its articles,
stipulating that holders of PS are entitled to receive cumulative dividends, such that if in any
year dividends shall not have been paid, the deficiency shall be paid before dividends are
declared or paid upon the CS. It also provides: that out of any surplus profit remaining after
payment of full dividends on PS for all dividend periods and after full dividends have been
paid in full, then dividends may be paid to CS; and in the event of any liquidation of the
corporation the holders of PS shall be entitled to be paid in the full the par value thereof, and
all accrued unpaid dividends thereon before any sum shall be paid to any assets distributed
among the holders of CS. No creditors are involved. No dividends on cumulative PS have
been declared or paid. No surplus profits are available with which to pay dividends. A plan of
liquidation, distribution, and dissolution of the corporation was adopted. It appears that the
net assets were sufficient to redeem the PS at par, but if the PS holders received the
promised dividends per the amended AOI, assets instead of surplus profits would be used.
The result will be that the CS holders will get no part of such assets. The liquidating trustees,
being in doubt as to who was entitled to receive the assets upon liquidation after redemption
of the PS, sought a declaratory judgment from the court.
It is contended that the phrase “all accrued unpaid dividends” means that before there can
be a dividend, there must be surplus profits, and that since none ever existed, the right to the
dividends never accrued and therefore none are payable. A counterargument is raised that
the provisions of the amended AOI relate to the payment of dividends to PS holders out of
surplus profits while the corporation is a going concern, but that it authorizes payment of
accumulated and unpaid dividends out of assets upon liquidation of the corporation, even
though there is no surplus profits available.
I: W/N holders of cumulative PS upon liquidation of the corporation are entitled to be paid
accrued dividends from corporate assets before the common SHs become entitled to
participate in the distribution thereof, the corporation having earned no surplus or net profits.
H: The contract stating the rights of the PS has a double aspect. The provision on annual
dividends payable out of the surplus profits was founded on the hope and prospect of a
profitable business. Such dividends could be paid by a corporation financially successful.
There can be no dividends declared by a corporation in financial distress. But if there were
provision for the rights of PS holders even in the event of a business disaster resulting in
voluntary winding up or dissolution of the corporation, they would be entitled to receive in full
both the amount of their shares and the unpaid dividends accrued. In this case the words of
preference were designed to be operative even under conditions of adversity. The
advantages of holders of PS are not restricted to conditions of prosperity, but general in
scope and intended to be operative in all the hazards of business. In the present case, the
holders of PS are entitled to both the par value of their stock and to dividends which have not
been declared or paid but which would have been so, had the company experience surplus
profits.
An investor places his money in cumulative PS because it has a guaranteed dividend and
certain preferences, as set forth in the stock agreement. If this agreement gives preferences
as to dividends in the liquidation proceedings, the stock would normally be considered as a
better business risk. The clause “unpaid dividends accrued” would thus mean that it gives
preference to holders regardless of any consideration of profits or surplus.
Dissent: Differences of opinion usually arise when on liquidation, PS holders sought to have
a preference in the distribution of assets to reimburse them, because the corporation may
not have earned any net profits out of which dividends can be paid. Two schools of thought:
(1) a dividend can come into being and exist only by affirmative declaration of the
corporation, and only if there is surplus profits. No surplus profits, no right to the dividends
accrues, and thus cannot be demanded in liquidation; (2) dividends, if not regularly paid out
of available earnings, may be amassed, whether earned or not, at regular dividend rates,
and may be paid out of assets when the corporation is liquidated if the AOI so provide.
(4) Preferred stockholder is not a creditor
— PS holder is an equity holder and not a creditor
— Investment is still subject to all risks of ownership
Augusta Trust Co. v. Augusta, Hallowell & Gardiner Railroad Co et al. F: Augusta
Railroad had outstanding bonds secured by mortgage. These bonds gave the holders the
right to convert into preferred stock of the company. The corporation contends that the
certificates of PS issued in exchange for bonds were in fact certificates of indebtedness and
not stock.
I: W/N the rights of the holders of preferred shares to share in the proceeds on the sale of
mortgaged property
H: It is within the power of the legislature to prescribe that corporations may issue certificates
in the form of certificates of PS, making the holders creditors of the corporation as well as
SHs, and giving them a lien upon the corporate property with a priority over other creditors.
This is not ordinary PS, nor technically PS at all. It is sui generis, not governed by the
ordinary rules. The preferences given the holders of the PS in this case were not authorized
by statute when made. The stock was not statutory PS of the kind described.
PS may be issued in such a way as to make the certificates thereof merely evidence of
indebtedness and the holders creditors and not SHs. Here all facts and circumstances
characterize the PS issued by the corporation as PS, and not bonds. SHs voted increases in
capital stock by the creation of PS. The certificates delivered to the holders of the bonds
exchanged for it designated the stock as PS. The holders had the right to vote. The
certificates contain every essential feature of a certificate of PS and none of a contract of
indebtedness. By surrendering their bonds, and taking in lieu thereof PS, the bondholders
ceased to become creditors and became mere SHs. Those who have no made the
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exchange are entitled to the security of the mortgages, excluding the illegal conversion
agreements. The PS are not entitled to share in the assets of the corporation until all
creditors are paid in full.
3. Par and no-par shares
— Par value: the minimum issue price of a share
o Must be stated in stock certificate, which cannot be issued until paid in full by
subscriber
o Shares cannot be sold at less than par; otherwise they would be watered
stock and SH would still be liable for the difference
— No par value: issued price is not stated in the stock certificate, but may be fixed in
the AOI or by the board or in the by-laws, or by the SHs themselves
o Sec 6: no par value shares shall be deemed fully paid and non-assessable
and the holder thereof shall not be liable to the corporation or to its creditors
o Subscriber must pay its full consideration
o Such consideration shall be treated as capital and is not available for
distribution as dividends
o Delpher case: no par value share does not represent any stated proportionate
interest in the capital stock, but only an aliquot part of the whole number of
such shares issued
§ Capital stock of a corporation issuing no par shares is not set forth
by a stated sum of money, but is expressed to be divided into a
stated number of shares
§ By removing the par value, the attention of persons interested in the
financial condition of the corporation is focused upon the value of the
assets and debts
o Limitations on the issuance of no-par value shares:
a) Once issued, are deemed fully paid and therefore non-assessable
b) Consideration cannot be less than P5.00
c) Entire consideration for the issuance constitutes capital
d) Cannot be issued as PS
e) Cannot be issued by banks, trust companies, etc
f) AOI must state the fact that no-par shares were issued
4. Treasury shares
Sec 9: shares issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or through other lawful means
— No voting rights nor preemptive rights
— Not entitled to dividends
— May be sold for any amount the board may fix
— SEC: treasury shares have no effect on the stated capital of the corporation
until and unless they are cancelled or retired
— Acquisition of treasury shares does not reduce the number of issued shares
nor the amount of stated capital and their sale does not increase the number
of issued shares or amount of stated capital

5. Redeemable shares
— Sec 8: may be issued by the corporation when expressly so provided in the
AOI
— Redeeming shares: shares issued by a corporation which the corporation can
purchase or take up from holders as expressly provided for in the AOI and
stock certificates
— Redemption: repurchase, reacquisition of stock by a corporation which issued
it in exchange for property, whether or not the stock is canceled, retired, or
held in the treasury
o Corporation gets back some of its stock, distributes cash or property as
payment, and continues its business as before
— May be purchased or taken up by the corporation upon the expiration of a
fixed period, regardless of unrestricted retained earnings
— May be redeemed regardless of whether or not there are unrestricted retained
earnings, provided the corporation has sufficient assets in its books to cover
debts and liabilities
— SEC Rules: in issuing redeemable shares, corporations must set up and
maintain a sinking fund
— If the option to redeem is clearly vested in the corporation, the redemption is
an “optional” one and the SH is without right to either compel or refuse the
redemption
— Amount of unrestricted retained earnings equivalent to the cost of treasury
shares held shall be restricted from being declared and issued as dividends
6. Founder’s shares
— Sec 7: founder’s shares classified as such in the AOI may be given certain
rights and privileges not enjoyed by owners of other shares
— If it involves the exclusive right to vote and be vote for in the election of
directors, it shall not exceed 5 years
Nature of Subscription Contract
— Underpins the relationship between the SH and the corporation
— 72: holders of subscribed shares not fully paid which are not delinquent shall have ALL
the rights of a SH
o it is the subscription to shares, and not the payment, that create the legal
relationship between the SH and the corporation (Fua Cun case infra)
o full payment of the subscription value and/or issuance of the covering certificates
are not important ingredients for transfer of ownership (72)
o registration of the subscription is also not essential to constitute subscription and
issuance of shares; it is merely meant to govern the binding effects of sale and
dispositions of shares as to third persons (63)
— two ways to become a SH:
o by subscription to shares before or after incorporation
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o by acquisition of already issued shares from an existing SH
— Def’n of subscription: a contract for the acquisition of unissued stock of a corporation
whether existing or still to be formed
o subscription price need not be paid in full at the time of the contract
o once perfected, SH becomes a debtor to the corporation and may be liable to pay
any unpaid portion upon call by the board
§ no interest unless by-laws provide
§ SH personally liable for the financial obligations of the corporation to the
extent of his unpaid portion
— When shares deemed subscribed
o 60: any contract for the acquisition of unissued stock in an existing corporation or
one still to be formed shall be deemed a subscription agreement
§ even if the parties refer to it as some other contract
o The entering into any contract for the acquisition of UNISSUED stock, which shall
be deemed as a subscription agreement, would itself constitute the tradition by
which the subscriber becomes a SH of the corporation and through which he
becomes the owner of the shares and thus exercise acts of ownership
§ A subscription agreement constitutes the very mode by which shares are
thereby issued and then owned
§ It exists upon the meeting of the minds of the corporation and the
subscriber as to the number and value of the subscription of shares
§ The covered shares would then be deemed issued by the corporation at
that point in time
• The sale of unissued shares of stock may be treated wholly as
a sale of shares governed by the law on sales (Bayla)
• The entire shareholdings of a SH, even when not fully paid for,
belong in ownership to him with legal authority to sell or
mortgage the same (Fua Cun)
— Is a valid subscription agreement enforceable even when it is not reduced in writing?
o Villaneuva: yes! Corporation can adduce oral evidence on a verbal agreement
Characteristics of Subscription agreements
— There can be a subscription only with reference to UNISSUED shares of stock
o Original issuance from authorized stock at the time of incorporation
o Opening of a portion of the original but unissued authorized capital stock to
subscription
o Increase of authorized capital stock through formal amendment of the AOI and
approval of the SEC
— On ISSUED shares: any transaction thereon is NOT a subscription agreement, and is
therefore governed by the Law on Sales
— 60: agreements for the acquisition of unissued shares shall be deemed a subscription
agreement
o affords protection to corporate creditors so that any and all transactions relating to
the issuance of shares of stock is a subscription agreement
o in case of insolvency, corporate creditors may enforce even against one
denominated as a purchaser
— Stipulations in subscription agreements of unissued shares that the subscriber’s right to
be treated as a SH and enjoy the rights thereof would commence upon full payment of
the subscription would be VOID
o Affects the ability or liability of the subscription agreement
o Agreement will not be treated as a sale of shares; falls under Sec 60
o It is only when delinquency is declared that would deprive the subscriber the rights
of a SH
Sec 66
Garcia v. Lim Chu Sing. F: Lim Cuan Sy is the debtor of the Mercantile Bank of China, by
virtue of a trust account with the bank, in the form of trust receipts guaranteed by CMs and
by Defendant Lim Chu Sing as the surety of Lim Cuan. Lim Chu is also a SH of the bank iao
P10000. When the obligation became due, the bank foreclosed the CMs without the
knowledge of the surety Lim Chu. The bank also required Lim Chu as surety to execute a
PN, where in the event of Lim’s default in payment of any installment as they become due,
the entire amount or unpaid balance becomes due and demandable. Lim leaves a balance of
P9,105.17. The bank is under liquidation at the time of the action.
I: W/N it is proper to compensate Lim’s indebtedness with the sum of P10000 in shares of
stock with the Mercantile Bank of China.
H: A share of stock or the certificate thereof is not an indebtedness to the owner nor
evidence of indebtedness, and is thus not a credit. SHs are not creditors of the corporation.
The capital stock of a corporation is a trust funds to be used for the security of the creditors
of the corporation, who deal with it on the credit of the capital stock. SC ruled that Lim Chu
not being a creditor of the Bank, although the latter is a creditor of the former, there is no
sufficient ground to justify a compensation.
SIR: 60-60: pre-incorp contracts are valid & enforceable; are types of promoter’s contracts…
GR: a promoter’s contract is not necessarily binding on the corporation; EXC: when the corp
received benefits at the time of its creation
1. Pre-incorporation subscription
— Theories on the binding effect of pre-incorporation subscriptions:
o Offer theory: such subscriptions are only continuing offers to the proposed
corporation which do not ripen into contracts until accepted by the corporation
when organized
§ Thus subscribers are allowed to withdraw their subscription at any time
before the corporation comes into existence and accepts the offer
o Contract theory: becomes a binding contract and is irrevocable from the time of
subscription unless cancelled by all parties before acceptance by the corporation
§ Prevents subscribers from withdrawing unless consented to by all
subscribers
— Sec 61: Corpo Code adopts the view that when a group of persons sign a subscription
contract, they are deemed not only to make a continuing offer to the corporation but
also to have contracted with each other as well
121
— 61: GR: a pre-incorporation subscription shall be IRREVOCABLE for a period of at least
6 months from date of subscription
o Exceptions:
§ When all the other subscribers consent to the revocation
§ Incorporation fails to materialize within 6 months or longer as may be
stipulated in the subscription agreement
o Fusion of the best features of the offer and contract theories
§ Contract between subscriber and the to-be-formed corporation
§ Contract between and among the subscribers; thus it is beyond the
powers of the board to release the subscribers since the consent of all is
necessary (Velasco v Poizat infra)
o Consistent with 25% minimum requirement
o After 6 month period, a pre-incorporation subscriber may revoke his subscription
agreement without the consent of the other subscribers
o But if AOI have already been submitted to SEC, there can be no more revocation
even if other subscribers consent and even after 6 month period
o Once perfected, each subscriber has to comply with his contract and pay his
subscription; not even the corporation can release him
SIR: 60: any contract for the acquisition of unissued stock in an existing or to be formed corp
shall be deemed a subscription, notwithstanding reference by the parties as a purchase or
some other contract
Sec 13
Sec 61
Wallace v. Eclipse Pocahontas Coal Co. F: Case involves a contract entered into by
Wallace and the promoters of the Eclipse Pocahontas Coal Co. Wallace was to transfer and
assign an option for a lease to the promoters and from the promoters to the corporation, in
exchange for money to pay for the purchase price for the lease, and once the corporation is
up and running, Wallace was to have a 1/5 interest in the property fully-paid up, and a 1/5
interest in the corporation fully paid up. Wallace was also to be entitled to 50 shares of the
corporation, but only 5 shares were issued to him. Wallace alleged that the corporation and
its promoters failed to perform their part of the contract. TC ruled that Wallace was to recover
a little over $1000 from each of the defendants, or a total of $4300, which the court found to
be the value of 43 shares which he had been deprived, being 1/5 of the shares issued less 5
shares delivered to him. The corporation was not held liable. Wallace contends that he was
erroneously limited to money decrees against the promoters and seeks a judgment against
the entire property and plant of the corporation as a trust therein his 1/5 undivided interest or
a judgment to order the issuance and delivery of 43 additional shares, or a judgment for the
actual, not par value of the shares.
H: Promoters are indeed solidarily liable to Wallace for the stock to which he is entitled, and
so is the corporation. The corporation and the other subscribing SHs accepted and benefited
from the contract with Wallace. Thus, not only did the corporation have notice of Wallace’s
right but all the SHs of the corporation participating in the 1st SH meeting of the corporation
had notice that Wallace had at least some interest or claims based on his contract.
Wallace is definitely a subscriber to the stock of the corporation. His contract was to sell or
convey to the corporation the leasehold and accept payment in fully paid up stock to the
value of the property leased when fully equipped for the business purposes of the
corporation. Being entitled to this amount of stock easily ascertainable when the equipment
was completed, he became entitled to the stock, and a court of equity can compel specific
performance to deliver the shares to him. One who has paid for his subscription may sue in
court to compel the issuance of proper certificates therefor.
The TC was therefore wrong in limiting Wallace to a money decree severally against the
promoters and not including the corporation.
2. Post-incorporation subscription
— Distinction between purchase and subscription of shares erased by Sec 60
— Since anyone who acquires unissued shares is a subscriber, then he enjoys all rights of
a SH regardless of w/n he has fully paid for his subscription (unless he becomes
delinquent)
— Since he is a debtor to the corporation, the subscriber remains liable to pay the balance
of his subscription price
Bayla et al v Silang Traffic Co Inc. F: Bayla et al are SHs who file an action to recover
certain sums of money which they had paid to the corporation on account of shares of stock
they individually agreed to take and pay for under certain specified conditions. The action is
based on a resolution by the board of Silang Traffic Inc. The resolution revokes the
rescission of the agreement. Silang argues that the resolution does not apply to Bayla
because on the date thereof the subscribed shares had already automatically reverted to the
corporation, and the installments paid had already been forfeited, without need for demand,
and that the resolution itself had been revoked. TC ruled ifo Silang Traffic, invoking the ruling
in Velasco v Poizat that a corporation has no legal capacity to release an original subscriber
to its capital stock from the obligation to pay for its shares, and any agreement to this effect
is invalid. CA affirms. The parties, TC and CA treated the agreement as a contract of
subscription to the capital stock of Silang Traffic. It should be noted that the agreement is
entitled, “Agreement for Installment Sale of Shares in the Silang Traffic Co. Inc, and that
while the purchaser is designated as a “subscriber”, the corporation is described as “seller.”
The agreement took effect long after incorporation of the company.
I: W/N the contract in question is a subscription or a contract of sale.
H: Whether a particular contract is a subscription or a sale of stock is a matter of
construction and depends upon its terms and intention of the parties. A subscription to a
stock in an existing corporation is, as between the subscriber and the corporation, simply a
contract of purchase and sale. Thus the terms of the contract indicate that they are contracts
of sale and not of subscription.
A subscription is the mutual agreement of the subscribers to take and pay for the stock of a
corporation, while a purchase is an independent agreement between the individual and the
corporation to buy shares at a stipulated price. Likewise, the rule that the corporation has no
legal capacity to release an original subscriber to its capital stock from the obligation to pay
for his shares, is inapplicable to a contract of purchase of shares. The contract being one of
purchase and not subscription there is no legal impediment to its rescission by agreement of
the parties. The rescission was made for the good of the corporation and in order to
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terminate the pending civil case. Since the civil case was eventually dismissed, and that the
purchasers of stock would be able to benefit by the resolution. It would be an unjust
discrimination to deny the same benefit to Bayla. There is also no intimation that the
corporation is insolvent, or that the right of any creditor was prejudiced by the rescission.
I: W/N under the contract, the failure of the purchaser to pay any of the installments
automatically gave rise to the forfeiture of the paid installments.
H: the contract did not expressly provide for automatic forfeiture and cancellation without
necessity of demand. Under the CC persons obliged to deliver or do something are not in
default until the amount the creditor judicially demands the same, unless the obligation or the
law expressly provides that demand shall not be necessary or that by reason of the nature
and circumstances of the obligation it shall appear that the designation of the time when the
thing is to be delivered or service rendered was the principal inducement to the creation of
the obligation.
— The nature of a contract covering unissued shares after incorporation was either a
subscription contract or a purchase of shares of stock, depending on the terms of the
agreement and intent of the parties
— Subscription agreements are mutual agreements among subscribers to take and pay for
the stock of a corporation, and it is not possible for SHs to withdraw from such an
agreement without the consent of the other subscribers
— Purchase agreements are independent agreements between the individual and the
corporation to buy shares at a stipulated price
Preemptive Right to Shares
1. Basis of right; common law rule
— Preemptive right: option privilege of an existing SH to subscribe to a proportionate
part of shares subsequently issued by the corporation before the same can be
disposed in favor of others
o Common-law right granted to SHs of a corporation to be granted the first
option to subscribe to any opening of the unissued capital stock, or to any
increase from the authorized capital stock
— Economic aspect: right to invest capital—the right becomes valuable when the
enterprise has demonstrated that it will earn a higher rate of return on the capital
than the SH could get were he to invest it in the open market
— Limited to shares issued in pursuance of an increase in the authorized capital
stock; does not apply to additional issues of originally authorized shares forming
part of the existing capital stock
— An original subscriber is deemed to have taken his shares knowing that they form a
definite proportionate part of the whole number of authorized shares
— When unsubscribed shares are later reoffered, the SH cannot claim that his
interest would be diluted
— Preemptive rights are not statutory rights, but common law rights
— Preemptive rights are personal rights of the SH
o Need not be stipulated in the AOI or by-laws
 o May be removed, denied, or altered only through specific provisions in the AOI
or amendment thereto
o SEC: vote by majority of SHs to waive the right is NULL and VOID; such
waiver must be given individually by the SHs concerned
§ But unanimous vote of all will bind them
2. Extent and limitations of preemptive right under Code
Sec 39: all SHs of a stock corporation shall enjoy pre-emptive rights to subscribe to all
issues and dispositions of shares of any class, in proportion to their respective shareholdings
— Exceptions:
o If denied by the AOI or an amendment thereto
o On shares issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public
o On shares to be issued in GF, approved by at least 2/3 OCS in exchange for
property for corporate purposes
o On shares to be issued in GF, approved by at least 2/3 OCS, in payment of a
previously contracted debt
Coverage of preemptive right…
— All issues or disposition of shares of any class
— Includes issues from the existing unsubscribed portion of authorized capital stock
— Includes not only new shares but also previously unissued shares which form part
of the existing authorized capital stock
— Includes reissuance and sale treasury shares
— SEC: does not include subscription deposits; these are payments received for the
future issuance of stock which may or may not materialize
… except…
— When shares are issued in exchange for property needed for corporate purposes,
or for a debt previously contracted, the SH cannot demand his preemptive right
— Where all shares are issued by a corporation in exchange for shares in another
corporation (merger), the preemptive right does not exist, provided the issue is
made with approval of 2/3 SHs (Thom case)
— In widely held corporations, where future financing plans may be seriously hindered
by the existence of the preemptive right
— Code allows waiver or denial provided it is in the AOI, either as an original
provision or as an amendment
Effects of exercise and waiver of preemptive right
— Exercising SHs still retain their relative and proportionate voting strength, which will
not be affected thereby
— Waiving SHs’ shares may be offered to non-SHs of record on a first-come-first-
served basis
o Not necessary that the shares will again be offered on a pro-rata basis to SHs
who availed of the right
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3. In close corporations
— Balance of power in close corporations may be disturbed by an indiscriminate
issuance of new shares without regard to preemptive right of SHs
— In a close corp, exceptions in Sec 39 are not applicable
Sec 102
4. Waiver of preemptive right
— GR: Any prior waiver or denial should appear in the AOI
o Ordinary waiver agreement is not sufficient
— Exception: If all existing SHs unanimously agree to a waiver, although not in the
AOI, they will be bound by such agreement
Datu Tagoranao Benito v. SEC. F: Benito subscribed to 460 shares of the Jamiatul
Philippine-Al Islamis Inc. The corporation increase its capital stock, with an additional
issuance of worth P110,980.00. Benito files a complaint with the SEC alleging that the
issuance was made in violation of his pre-emptive right to the additional issue and that the
SHs of record were not notified of the meeting. SEC ruled that the issuance was valid, and
that his preemptive rights are inapplicable.
H: Issuance is not invalid even without notice to the SHs. The power to issue shares of
stocks is lodged in the board and no SH meeting is necessary to consider it because
additional issuance of shares does not need SH approval.
GR: preemptive right is recognized only with respect to new issue of shares, and not with
respect to additional issues of originally authorized shares. The theory is that when a
corporation at its inception offers it first shares, it is presumed to have offered all of those
which it is authorized to issue. The original subscriber is deemed to have taken his shares
knowing that they form a definite proportionate part of the whole number of authorized
shares. When the shares left unsubscribed are later reoffered, he cannot therefore claim a
dilution of interest.
5. When the issue is in breach of trust
— SHs can still object even if preemptive right does not exist or comes within
exceptions in Sec 39 if the directors acted in breach of trust or to “freeze out” the
minority (Ross Transport case)
6. Remedies when right violated
— Aggrieved SH can obtain an injunction or mandamus
— Derivate suit proper, not only in the violation of preemptive right but also where the
violation resulted in waste and mismanagement of corporate assets
Stokes v. Continental Trust Co. F: Stokes is one of the original SHs of Continental Trust
Co, owning 221 shares at the time of the controversy. Blair & Co. proposed that if the
company decides to increase the capital stock, they would purchase the new shares at a
higher price, and acquire the right to nominate their people to the board of trustees. The SH
were informed of the Blair offer, and Stokes made his demand to exercise his preemptive
right. Stokes at the SH meeting for the purpose of increasing the capital stock, demanded
the right to subscribe for 221 shares of the new stock at par, but was refused. As a result, he
now has only ½ voting power that he had before, because the number of shares had been
doubled while he still owns 221. After the sale to Blair, Stokes renewed his demand but was
again refused. At this time the stock rose in value, from 450 to 550 to 750. Stokes sued. TC
ruled that Stokes had the right to subscribe, and was entitled to recover the difference
between the market value at the time of increase and its par value. CA reversed.
I: W/n Stokes had the legal right to subscribe and take the same number of new stock he
held of the old.
H: A vote to increase the capital stock, if it was not the creation of new and disjointed capital,
was in its nature an agreement among the SH to enlarge their shares in the amount or in the
number of the extent required to effect that increase. If the right claimed by Stokes was a
right of property belonging to him as SH, he could not be deprived of it by the joint action of
the other SHs and of all directors and officers of the corporation. He has an inherent right to
his proportional share of any dividend declared, or of any surplus arising upon dissolution,
and he can prevent waste or misappropriation of the property of the corporation by those in
control. Hence the power of the individual SH to vote in proportion to the number of his
shares is vital and cannot be cut off or curtailed by the action of all other SHs even with the
cooperation of the other directors and officers.
The ownership of stock is in the nature of an inherent but indirect power to control the
corporation. The stock, when issued ready for delivery, does not belong to the corporation,
but is held by it with not power of alienation, and in trust for the SHs, who are the beneficial
owners and become the legal owner upon paying therefor. The new stock issued by the
corporation did not belong to it, but was held in trust for the SHs.
In this case, the new stock came into existence through the exercise of a right belonging
wholly to the SHs. As the right to increase belonged to them, the stock when increased
belonged to them also, as it was issued for money and not for property or for some other
purpose other than the sale for money. By the increase in stock the voting power of Stokes
was reduced ½, and while he consented to the increase he did not consent to the disposition
of new stock which belonged to them. In other words, it was a partial division of property of
the old SHs.
The corporation cannot dispose of the shares to strangers against the protest of any SH who
insists that he has a right to his proportion. Otherwise the majority could deprive the minority
of their proportionate power in the election of directors and of their proportionate right to
share in the surplus, each of which is an inherent, preemptive, and vested right of property. It
is inviolable and can neither be taken away nor lessened without consent or a waiver
implying consent.
A share of stock is a share in the power to increase stock, and belongs to the SHs the same
as the stock itself. When that power is exercise, the new stock belongs to the old SHs in
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proportion to their holding of old stock, subject to compliance with the lawful terms upon
which it is based.
A SH has an inherent right to a proportionate share of a new stock issued for money only
and not to purchase property for the purposes of the corporation or to effect a consolidation,
and while he can waive that right, he cannot be deprived of it without his consent except
when the stock is issued at a fixed price not less than par and he is given the right to take at
that price in proportion to his holding, or in some other equitable way that will enable him to
protect his interest by acting on his own judgment and using his own resources.
After the price was fixed it was the duty of the corporation to offer him his proportion at that
price, for it had notice that Stokes had not acquiesced in the proposed sale of his share, but
wanted it for himself. The directors were under the legal obligation to give him an opportunity
to purchase at the price fixed before they could sell his property to a third party, even with
the approval of a large majority of the SHs. By selling to strangers without thus offering to
sell him, the corporation wrongfully deprived him of his property and is liable for such
damages.
Thom v Baltimore Trust Co. F: Thom, owner of 6416 of 70000 shares, is a SH of the
Baltimore Trust Co who wants to exercise his preemptive right to purchase a due proportion
of a supplemental issue of its capital stock. The Baltimore Trust Co wanted to merge with the
National Union Bank of Maryland, and that the company would issue 150000 shares at $112
to acquire the 10000 shares of National Union Bank at $168/share, and would require
delivery of 70% of the stock. A resolution was passed to increase the capital stock of
Baltimore, which also stipulated that the SH shall have the pro rata preferential right to
subscribe at such price and terms as the board may fix. In any additional issuance, the
directors may issue without preferential subscription rights and on such terms as the board
may deem proper. Thom protested and voted against the merger, alleging the corporation
disregarded the proportional purchase right of SHs.
H: The preemptive right of SHs are said to be inherent in their stock ownership. The SHs of a
corporation have a preferential right to purchase new issues of its shares, to the proportional
extent of their respective interests in the capital stock then outstanding. The right adheres in
stock ownership as an essential means of enabling a SH to maintain the existing ration of his
proprietary interest and voting power in the corporation. In transactions involving the
acquisition of property by corporations in exchange for shares of stock, the determining
consideration to the owners of the property may be the advantage of sharing as SHs in the
profits of the corporation with which they are contracting. In this case, the preemptive rights
of Thom et al are recognized and protect by the amendment to its AOI. In declaring the right
as to sales of stock for cash, and in restricting it as to issues of stock for accomplishing
merger or acquisition of property, the amendment is valid.
Ross Transport Inc v Crothers. F: Derivative suit by SH Crothers to set aside the issuance
of stock dividends to 4 SHs and ordering them to repay Ross Transport Inc the dividends
received on stock declared to be illegally issued. The corporation’s business is to operate a
fleet of buses to service the transport needs of employees of the Triumph Explosives Inc.
The company was an immediate financial success. It was engaged in a special business, of
which it had a monopoly. The company then issued new stock to the family of the directors
and the president, and had the effect of increasing the outstanding stock. There was no o Creditors are legally preferred in payment from a corporation in a state of
meeting, no notice, and no offer to the other SHs. The company declared dividends 3 times, insolvency; such corporation must devote and prefer all corporate assets
and authorized salary payments to the officers. The benefit of the dividends would not only towards the payment of creditors
increase the value of the stock, but the first two declared dividends would pay back all the o Interest paid on debt securities are deductible to the corporation for
subscribers had invested, leaving any future earnings and distributions pure profit. Under income tax purposes, but generally taxable to the holder thereof
these circumstances, they took the opportunity they thought they had to increase their
investment. Crothers et al contend that changed conditions make it unnecessary to use the 1. Form of borrowings
remaining unsold stock to obtain capital. 2. Bonds and debentures
H: Existing SHs are the owners of the business, and are entitled to have the ownership 3. Convertible securities; stock options
continued in the same proportion. Therefore, when additional stock is issued, those already
having shares, are held to have the first right to buy the new stock in proportion to their — Warrants: a type of security which entitles the holder the right to subscribe to the
holdings. This is the preemptive right. An exception would be where the stock about the be unissued capital stock of a corporation or to purchase issued shares in the future,
issued is part of the original issue. This is based on the fact that the original subscribers took evidenced by a warrant certificate which may be sold or offered for sale to the public
their stock on the implied understanding that the incorporators could complete the sale of the o Who may issue? Two (2) types of issuers recognized by SEC
remaining stock to obtain the capital necessary to start the business. The exception to the § a domestic corporation duly registered
exception would be where conditions have changed since the original issue. § a person or group of persons who issues or proposes to issue warrants
o Two types of warrants:
Trustees and directors of corporations cannot purchase, directly or indirectly, at their own § Subscription warrant-- entitles the holder the right to subscribe to the
sale. Such a transaction is entirely voidable at the option of the party interested. The unissued capital stock of a corporation
transaction may not be ipso facto void, but it is necessary to establish that there had been § Covered warrant-- entitles the holder the right to purchase issued shares
actual fraud or imposition practiced by the party holding the confidential or fiduciary relation. in the future
In this case, the directors have not shown the company needed the money so badly and was — Stock options: a privilege granted to a party to subscribe to a certain portion of the
such in a financial condition that the sale of additional stock to themselves was the only way unissued capital stock of the corporation within a specified period and under terms and
the money could be obtained. On the contrary, the corporation appears to be in a very good conditions of the grant, exercisable by the grantee at any time within the period granted
financial condition. The sale must be set aside as a constructive fraud upon the other SHs. o No corporation shall grant any stock option unless approved by the SEC
o Formal board resolution + detailed statement of the stock options plan
At the time of the supposed ratification, the principal must have been fully aware of every o No exercise shall be valid unless accompanied by payment of not less than 40% of
material aspect of the transaction, the real value of the subject of the contract, and his act of the total price of shares issued
ratification must have been an independent and substantive act founded on complete § 25% for employees/officers not directors
information and of perfect freedom of volition. § initial payment not required for services already rendered
o guidelines on stock options (SEC)
Debt securities § may be granted on the basis of proportionate interests of SHs in the
capital stock
— Debt contracts one of the two basic sources by which a corporation is able to § those granted to employees/officers not directors/board members allowed
finance its operations after review of the stock options scheme
— Debt securities (bonds): do not represent an ownership interest but creates a § those granted to non-SHs allowed upon showing that the board is duly
debtor-creditor relationship between the corporation and the bondholder authorized to grant the same by its AOI or resolution of SHs 2/3 OCS
o A person who extends a loan or debt looks at the financial condition and § granted to directors/mgt groups/corporate officers must be approved in a
operations of the corporation as a means of gauging the ability to pay SH meeting, vote of at least 2/3 OCS
back the loan § exercisable within a period of 3 years from SEC approval
o Creditor (or bondholder) puts no stake on the operations of the corporate § no transfer without SEC approval
enterprise, and thus the contractual obligation of the corporation to pay
the stipulated return remains even when operations are incurring losses Merritt-Chapman & Scott Corp v. New York Trust Co. F: Stock purchase (option)
or there are no unrestricted retained earnings warrants were issued by Merritt-Chapman (MC) in bearer form. The bearer would be entitled
o Returns in a loan placement in a corporation: bondholder would only be to purchase fully-paid and non-assessable shares of CS, no par value, at $30/share. To
able to demand the stipulated fixed returns even if corporation is hugely insure that the stock to be purchased under the warrants would be available, the trust deed
profitable because of the loan requires that stock certificates for an aggregate amount of 40,000 shares be delivered to the

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trustee and made the Trust co the agent of the corporation to receive the purchase price and
deliver the stock certificates. The board of the corporation issued a resolution declaring a
stock dividend iao 40%/shares of no par CS on each legally issued and outstanding share of
CS. The resolution fixed the price at $20/share, and directed the warrant holders outstanding
and to the trust company the 60-day notice required incase the corporation shall pay any
stock dividend upon the outstanding CS. The corporation contends that the warrant holder
must exercise his warrant before a certain date in order to share in the dividend. The trustee
contends that the corporation must first deposit with the trustee, stock certificates in the
amount equal to 40% of the certificates now on deposit with the trustee, and that the holder
who wishes to exercise the warrant must pay the basic purchase price before he will be
entitled to receive 1.4 share.
H: The warrants gave the holders the privilege, unlimited in time, to purchase 40,000
authorized but unissued shares. Had the warrant holders exercise their option, they would
have acquired a definite percentage of the CS. A stock dividend does not change the
proportional interest of each SH in the corporate enterprise; it changes only the evidence
which represents that interest. It is a mere “watering” of outstanding shares. If the
corporation were at liberty to declare stock dividends without making provision for warrant
holders, the percentage of interest in the CS capital of the corporate enterprise which the
warrant holders would acquire could be reduced to practically the point of extinction. The
privilege the warrant holders originally had of acquiring a definite proportional interest in the
CS would be lost without recourse unless their contract with the corporation contained some
provision to protect it. By this covenant the corporation recognized the possibility that a stock
dividend might be declared and paid on outstanding shares before the warrants had been
exercised, and promised in that event to deposit with the trustee stock certificates
representing that proportion of dividend shares which the shares subject to the warrants bore
to all the CS, and that the trustee would deliver such dividend shares without additional
consideration.
4. Hybrid securities
— Equity securities: represent an ownership interest in the corporation and
includes both CS and PS
Jordan & Co. v. Allen. F: The Jordan Company issues “Debenture Stock.” The company
believes that the pay-outs made on the debentures were actually interest, and thus entitling
them to deductions from their taxable income. The IRS claims the pay-outs were dividends
to the holders.
I: W/N payments made to the holders of Debenture stock of the Jordan Company were
payments of interest on outstanding obligations or dividends paid on invested capital.
H: The answer rests on what the payments actually are, and not what the payments are
called. Although there is no precise formula, the usual factors considered are the ff: (1)
treatment by the parties; (2) maturity date and right to enforce collection; (3) rank/preference
during dissolution; (4) uniform rate of interest or income payable; (5) participation in the
management and right to vote.
(1) voting rights: if security holders had such rights, this would strongly indicate that
the securities were stocks; the absence or extremely limited rights is of little
probative value, because it is common both to bonds and preferred stock
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(2) treatment by the parties: in this case the company itself treated the debenture
stocks as an obligation and the payments as interest. No evidence as to how the
holders treated the same.
(3) Preference/rank in dissolution: GR holders of obligations are secured or general
creditors of the corporation and rank as such on dissolution. Here the holders
ranked ahead of the other SHs but inferior to general creditors. One of the most
important considerations is whether the right to share in the assets of the
corporation in case of dissolution is subject to the rights of creditors. If subject to
such rights, there is a strong presumption that the interest in question is that of a
SH
(4) Payment out of profits: the debentures provide for payment of interest at a
prescribed rate to paid out of the profits only. This fact loses significance when
considered in conjunction with the provision that holders should rank inferior to
general creditors
(5) Maturity date and right to enforce payment. Of utmost significance. The existence
of a fixed maturity date for the principal sum, together with the right to enforce
payment as debt in case of default, is the most essential feature of a debtor and a
creditor as opposed to a SH relationship. One of the most fundamental
characteristics of a debt is a definite determinable date on which the principal falls
due. The obligation in the debenture stock clearly had no maturity date. There was
no time when the holders could demand their money; they were at the mercy of the
company’s fortunes and payment was merely a way of distributing profit. Although
the officers considered the debenture stock as matured after 20 years, mere
opinion of corporate officers cannot override the provisions of the certificates
themselves and the charter and by-laws. It is to be noted that when the issue was
retired, after officers considered it matured, they retired it at a premium. Payment of
premiums is certainly more consistent with the retirement of stock than with
payment of past due obligations. The contention of the officers that the term of the
debenture matures upon termination of corporate existence is also untenable.
Termination of corporate existence cannot be considered the maturity of the
debenture stock as it would not be a fixed or determinable date set in advance, but
could be constantly moved forward simply by corporate action.
5. Trust indenture
Alladin Hotel Co v Bloom. F: Bloom is a minority bondholder of bonds issued by the Alladin
Hotel Co. The bonds are secured by a deed of trust by which was mortgaged certain real
estate, with the Mississippi Valley Trust Co as trustee. The deed of trust contained
provisions empowering bondholders of not less than 2/3 to modify and extend the date of
payment of the bonds. The Joneses are majority bondholders as well as the majority SHs of
the company who entered into an agreement with the company to extend the maturity date
of the bonds. The changes were certified by the trust company and has the consent of
holders of 2/3 the principal amount of the bonds. Bloom objects to the change, contending
that these were invalid for not being made in GF and that it was not for the benefit of the
minority bondholders and deprived them of their rights and property. She added that the
Joneses acted in a dual capacity as trustees for the other bondholders, being the majority,
and therefore must not act detrimental to the rights of the other holders. She also added that
the modifications are void for not giving notice to the other bondholders. TC held that the the assignee in insolvency can maintain an action upon any unpaid stock subscription in
changes did not benefit the minority bondholders and that the bondholders were entitled to order to realize assets for payment of its debts
notice. But it held that the decree should be limited to a money judgment only. The hotel
appeals.
H: the modifications were made in strict compliance with the provisions of the trust deed, Requirements under the Revised Securities Act
which did not provide for notice to the bondholders. The changes were approved by 2/3 of
the bondholders. The rights of the bondholders are to be determined by their contract and 1. Purpose and History of Revised Securities Act
courts will not make or remake a contract merely because one of the parties may become 2. Registration of securities
dissatisfied with the provisions. There is no question that the provisions in the trust deed and 3. Exempt securities and exempt transactions
the bonds were legal provisions which violated no principle of public policy or private right. 4. Registration of brokers, dealers, and salesmen
No notice was required so far as the parties to the contract were concerned. Their rights 5. Registration of stock exchange
must be determined by their contract and not by any equitable doctrine, and notice to the 6. Remedies of investor; SEC powers
other bondholders could have served no possible purpose. There is no substantial evidence
warranting BF, fraud, or corruption on the part of the Joneses. The changes made in the Underwriting Securities
provisions of the trust deed were made before Bloom acquired her bonds, and were in fact
past due when she purchased them. Bloom, with notice of the changes made, and with
knowledge that she had no notice of the application for the changes, made no effort to SIR:
repudiate it until she brought the suit, but accepted interest payable under the provisions of — Can never create preferences where SHs would have attributes of creditors over other
the contract. SHs
— Debtor-creditor= SH-corp? yes as to unpaid subscription
Trust Fund doctrine
Preemptive right: benefits orig subscriber
— A corporate theory which seeks to protect the interest of corporate creditors — Pay up, or lose whole subscription (min 25%)
o Capital stock of the corporation, especially its unpaid subscription, is a trust fund — Once paid, rights accrue
for the benefit of the general creditors of the corporation — If business is profitable, orig subscribers should have 1st crack at additional issuances
o When a corporation is solvent, the theory that its capital stock is a trust fund upon — Dilution: noone can exercise preemptive right
which there is any lien for the payment of its debts has in fact, very little foundation. o Consequences: shift in control/management
o No general creditor has any lien upon the fund under such circumstances, and the o Usually denied in listed corporations
right of the corporation to deal with its property is absolute so long as it does not o Immediate opportunity to raise funds
violate its charter or the applicable law. o Otherwise deprive corporation of opportunity
— Proper scope of the doctrine is that capital stock of a corporation (insolvent), as well as — 89: contractual arrangements
all its other property and assets are generally regarded in equity as a trust fund for the o public offering
payment of corporate debts o opportunity to corporation for financing
— In RP jurisdiction trust fund doctrine applies in four cases: — denial would also benefit SHs!
a) Where the corporation has distributed its capital among the SHs, without o Might enhance value of subscription
providing for the payment of creditors o Merger
b) Where it had released the subscribers to the capital stock from their o Bigger business, more clients
subscriptions — Read dissent in Hay: more reasonable
c) Where it has transferred the corporate property in fraud of creditors — Merritt Chapman: consideration for warrant is separate and distinct from the shares
d) Where the corporation is insolvent — Holders of stock options are not owners of the stock; no stock has been issued or
— The doctrine as applied to a corporation not insolvent, would only be up to the extent of purchased by them, thus not entitled to dividends paid
the capital stock of the corporation — Prior to exercise of warrant, there is not SH-corporation relation!
o Retained earnings not covered since it does not constitute capital stock
o Thus corporations are at liberty to declare and pay out its assets by way of
dividends up to the extent of its unrestricted retained earnings — Whether equity or loans, these funds end up ultimately as assets of the corporation
— Phil Trust v Rivera (infra): subscriptions to the capital of the corporation constitute a — Investment and credit are two separate and distinct sources of funds
fund to which the creditors have a right to look for satisfaction of their claims and that Loans/debt:

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— Creditors have a lien on corporate assets Chapter XII – Consideration for Shares
— Revenues that ff will be earmarked for payment of obligations
— SHs do not have any definite right over the amount loaned or assets earmarked Form of Consideration
— An indebted corporation is not barred from declaring dividends
— Creditor has fixed return based on interest due — Under Sec 62, stocks shall not be issued for a consideration less than the par or issued
— Lien on corporate assets price thereof, and shall not be issued in exchange for PNs or future services, but only
o w/n corporation is healthy, I still get paid for cash actually paid, property actually received and necessary to the business, or
o I get paid 1st before everyone else services actually rendered to the corporation
o Secured/unsecured= preference is undistinguished as to SHs o Whenever a corporation issues shares, it must receive a consideration equal to or
Equity: at least their par or issued value
— Expectancy/inchoate: no guarantee to SHs o Such consideration need not be paid in full at the time of issuance, but the unpaid
— Risk involved; be prepared to lose portion shall be a debt and must be paid
— Recoverability of investment depends on viability of business — Consideration may be in any two or more of the ff forms:
— But SHs can get dividends resulting from revenues o Actual cash paid to the corporation
— SHs: not fixed return, so long as company is healthy § Villanueva: it is not required that there be actual payment of cash
— Depends on profitability= unrestricted retained earnings consideration in order to make the subscription agreement valid and
— Dividends, but more onerous risk binding
— Preferences: control (board seats, voting), or economic benefits (depends on extent of § Subscription agreement is a consensual contract, which is perfected and
contribution and unrestricted retained earnings) valid and binding upon meeting of the minds on the subject matter—the
Givens: shares itself—and the consideration
— No guarantee on investment § Non-payment of the consideration does not render the subscription
— Cannot be same stature among them contract void
Consideration § Only upon call by the board or when the terms of the subscription
— Proprietary rights agreement makes payment due and demandable, would the SH be
— Money legally required to pay actual cash to the corporation
o SH prerogative of paying in full or hope that the business will be good and pay • Failure to do so would subject the shares to a delinquency
dividends to take care of business declaration and suspend the rights of the SH
o Min paid up: 25% § Notes receivable vs. subscription receivable as consideration: notes
o If I don’t pay and business is bad (i.e. no dividends), I am suspended, I cannot would be counted as an asset by the corporation, subscription
exercise my rights as SH receivables as deductions from SH’s equity
Sec 7: founder’s shares: “mayayabang lahat” o Property, tangible or intangible, actually received by the corporation and necessary
— Market price may be higher than issued value or convenient for its use and lawful purposes
— For those who want control, economic benefits, and bragging rights § Requisites:
Sec 6: classifications • must lawfully acquired and held
— CS: control through common shares • must be necessary and proper for it to own in carrying on its
— Voting for BOD and corporate acts business
— Same or different par values • must be of substantial nature, having pecuniary value capable
— Same voting rights regardless of value
of being ascertained
— PS: Preference on dividends
• must be real and tangible
— Coupon returns/year
• must be of a nature that it can be delivered instead of being
— 10-redeemable
merely communicated to the officers
— convertible—right to convert at a certain time preferred to convertible (changes the
§ includes services which have already been performed as long as they are
control structure significantly)
capable of valuation and are fairly valued
§ receivables may be accepted as valid payment
• must be subject to verification by the SEC
• shares to be held in escrow until actual payment of the amount
o Labor performed for or services actually rendered to the corporation

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 § Must be actually rendered and value ascertainable
§ Must be in GF and no fraud is perpetrated
§ Future services not allowed as consideration and such agreement is
VOID (62)
• Villanueva: Corporation should not be estopped to deny that the
services constituted payment of the stock subscription even
though it has received the benefit thereof
§ a corporation under a management contract may be issued shares in
payment for the reasonable value of its services; but since it is not a SH
of the managed corporation, such shares must come from the unissued
shares of the latter’s original authorized capital stock and not in the form
of stock dividends (Nielson case)
o Previously incurred indebtedness by the corporation
§ May either be accounts payable or notes payable
§ Valuation must have been established prior to even negotiating on the
subscription agreement
§ Set-off of corporate indebtedness: also covered by 62
o Amounts transferred from unrestricted retained earnings to stated capital
§ Covers the declaration of stock dividends and has the effect of
capitalizing unrestricted retained earnings
§ Consideration therefor is merely book entries
o Outstanding shares exchanged for stocks in the event of reclassification or
conversion
§ Changes the composition or manner of classification of the capital stock
and should not affect its integrity
Liability on watered stocks
— Watered Stocks: Shares issued as fully paid when in truth no consideration is paid, or
the the consideration received is known to be less than the par value or issued value of
the shares
o Includes bonus shares and discount shares issued at a discount or under an
agreement to pay less than par value in money
o Shares issued as fully paid up but no consideration is actually paid in form or
consideration is inadequate because it is not equal to the par or issued value, the
SH is liable to the corporation and its creditors for the unpaid portion
o Shares issued as fully paid up in consideration of property at an overvaluation
— Stock watering prohibited because:
o Corporation is deprived of needed capital and the opportunity to market its
securities to its own advantage
o Existing and future SHs who are also injured by the dilution of their proportionate
interests in the corporation
o Present and future creditors who are injured as the corporation is deprived of the
assets or capital and reduces the value of the corporate assets which stand as a
substitute for the SHs personal liability to them
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o Persons who deal with it or purchase its securities who are deceived because
stock watering is invariable accompanied with misleading corporate accounts and
financial statements
— Code makes directors liable for watered stocks under Sec 65
o If he consents to the issuance, or…
o … having knowledge thereof, does not forthwith express his objection in writing
and file it with the corporate secretary
§ directors become solidarily liable
§ liability will be to ALL directors, whether they became such prior or
subsequent to the issuance of watered stock
§ reliance of the creditors is immaterial and fraud is not an element of
liability
§ even no-par stocks can be watered stocks where they are issued for less
than their issued value
— Three theories for the liability
o Subscription contract theory—the subscription contract is the source and measure
of the duty of a subscriber to pay for his shares; if the contract releases him from
further liability, the subscriber ceases to be liable
§ Prohibited in RP jurisdiction
o Fraud or misrepresentation theory—holds a SH liable for watered stock on the
basis of tort or misrepresentation. The wrong done to the creditor is fraud or deceit
in falsely representing that the par value has been paid or agreed to be paid in full
o Trust fund doctrine—all corporate creditors would have legal basis to recover
against SHs and guilty officers
§ Prevailing view in RP
Triplex Shoe Co v Rice & Hutchins Inc.
F: Triplex’ authorized capital stock totaled $150K, broken down into $75000 PS (par value
$100), and $75000 no par CS.
Directors meeting: Albert Dillman – Pres; Solly – VP and Sec, and Louis Dillman – Treasurer
….. agreed to receive lower compensation and in consideration of other services to be
rendered and for managing the co., additional stocks were to be given as follows: A Dillman
– 376 CS, L Dillman – 114 CS, Solly – 50 CS. (Solly transferred stock to 2 Dillmans).
An amendment was proposed, 2375 PS and 175 no-par CS. Rice and Hutchins purchased
249 shares of PS and 83 shares CS (as bonus). The Dillman’s own 540 CS shares. During
election of directors, the “B” ticket of the Dillmans were elected. Rice questions the election,
saying the there was no consideration for the CS at the incorporation of Triplex.
Issue: WON there was any CS voted for the B Ticket at the 1929 election that was legally
issued and outstanding at that time?
H: No, there was none. (Chancellor’s decision: No outstanding Cs and PS stocks were
voted).
The no par value CS issued before and after the amendment was invalid because
consideration was never fixed.
The certificate must state the total number of shares authorized that are without nominal or
par value. The provision in the articles that a certain part of capital is in shares of CS no par
and without stating the number of shares is not authorized and is meaningless in the eyes of
the law. Thus the CS in the original AOI was invalid stock.
The consideration of the shares issued to Dillman were alleged to have been for services
rendered in organizing the company, and in agreeing to serve at a smaller compensation
that they would get otherwise. Clearly the consideration mentioned, consisting of services,
was not of such as the law contemplates. The services do not appear to be essentially
different or greater than the services ordinarily rendered in the promotion and organization of
the corporation. (also, services still to be rendered are not lawful consideration) -- Hence,
no proper and lawful consideration was for the CS at the 1st Board Meeting.
McCarty v Langdeau: F: Langdeau is the receiver of Estate Life Insurance Co, and McCarty
is the President of the company. Langdeau sues McCarty for the unpaid balance of his stock
subscription, iao $387,380 (he paid only $20) representing 19, 370 shares of no par stock.
The contract between the corporation and McCarty was that he would:
-- pay a minimum of $20/month for the balance not exceeding 30 months, evidenced by a
note, payable w/o interest.
--that the company will have a lien on his shares until the note is paid.
-- He was to receive as much stock as his actual payments , but the company would be able
to vote the stock while the contract is in force (to be voted by McCarty)
-Yet despite his default (only made a total payment of $8,120), the company did not elect to
terminate the contract. He claims that the contract is void for it violates the constitution of
Texas (“no corp. shall issue stock or bond except for money paid, labor done or property
actually received, and all fictitious increase of stock or indebtedness shall be void.”)
H: --the contract is enforceable
No declaration in the consti prohibition that a transaction in w/c something other than money,
labor or property shall be received in payment of the stock is utterly void. If a security is to
be accepted in payment for the stock, e.g. a subscriber’s note, w/c is not property for such
purpose, the Consti doesn’t say that it, or the stock issued for it, shall be void. The word
“void” is used only once and has reference to the distinct clause w/c says that all fictitious
increase of stock or indebtedness shall be void.
--the affairs of the corporation in this case are in the hands of a receiver who represents not
only the SHs, but also the creditors, and the rights of creditors have now intervened. The
constitution of Texas prohibits such a transaction and makes it unlawful
. It was aimed against his acquiring stock except upon lawful payment. It was designed for
the protection of the corporation and its creditors. In such a case as this where the SH has
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paid nothing for his stock and deceived the public, he cannot be permitted to take shelter
under the constitutional prohibition, which protects the corporation and its creditors.
--Purpose is to give integrity to the corp’s capital. It is to prevent false pretense at its hands,
and avoid imposition upon the public. None of these objects would be promoted by
declaring a note given by a subscriber for stock subscription in the hands of a bonafide
stockholder.
Rhode v Dock-Hop Co. F: Judgment creditors of a corporation sues the original SHs or
incorporators of the Dock-Hop Co, seeking to collect on the unpaid balances on the par
value of their shares. Complaint alleged that only 25c on the dollar had been paid in on the
par value of their shares (watered stocks). Defendants deny however, that they are
subscribers, or that the full value of their stock had not been paid.
I: W/n SHs are required to make up any difference which may exist between what was
actually paid on their stock and its par value.
Yes -- but NOT as to the transferee of the watered stocks, which are the defendants herein.
(lower court ruling is reversed)
H: Court found that only 5/12 of the par value had been paid. At the lower court, it ruled for
the plaintiff on the theory that it made no difference WON the defendants were subscribers:
the mere fact that that they were SHs and the shares they held , although issued as fully
paid were in fact issued for property w/c the directors didn’t believe was equal in value,
were enough to warrant judgment against them.
Where a person accepts the ownership of stock which purports to be fully paid, it cannot be
said of him that he accepts the stock and enters upon the relation of SH for the corporation.
On the contrary, he accepts the ownership of the stock and enters upon the relationship of
SH with the contrary understanding. What then is the principle upon which the holder of
watered stock is under any circumstances held obligated to supply substance and make
good what it pretended the corporation received by did not?
The SH is held upon the principle that one giving credit to the corporation is entitled to rely
upon its ostensible capitalization as the basis for the credit given, and that, when the
corporation issues watered stock, and thereby assumes an ostensible capitalization in
excess of its real assets, the transaction necessarily involves the misleading of subsequent
creditors, and whether done with that purpose actually in mind or not, is at least constructive
fraud upon such creditors. In other words, the essence of the right of the creditor to brush
aside the issuance of stock as fully paid, and to show that it was not such and to compel
payment, is that its issuance as fully paid was as to him a fraud.
--the transferee of watered stock who takes it in ignorance of its real character is not
required, even at the suit of the of a creditor of the company, to pay anything more upon it.
Campos: The innocent purchaser of watered stocks is thus treated like the holder in GF of o date, time, place of the sale (30-60 days)
nego instrument, based on the policy of encouraging the free transferability of shares as a o notice of sale with copy of resolution sent to every delinquent SH either personally
means of enhancing the growth of commerce and industry. Apparently the remedy of the or by registered mail
defrauded creditor would be against the original owner of the watered stocks. — When delinquent? Sec 67
o Unpaid subscription shall be made on the date specified in the contract or on date
How payment of Shares enforced stated in the call
o No payment within 30 days from said dates= all stocks covered shall become
— Under 66, subscribers for stock shall pay to the corporation, interest on all unpaid delinquent
subscriptions from date of the same, if so required and fixed in the by-laws — How do shares become delinquent?
o No rate= legal interest o Failure to pay upon call
o Any unpaid balance would be a debt owed by the subscriber to the corporation o Failure to pay on date specified in subscription agreement
o Lingayen Gulf v Baltazar: He may not be released from such obligation to pay the — 69: no action to recover delinquent stock sold can be sustained on the ground of
unpaid balance, unless it is with the consent of all the SHs, without prejudice to irregularity or defect in the notice or in the sale itself
creditors, and upon adequate consideration — amount of subscription may be payable in installments and may specify the date or
§ but a corporation may enter into a bona fide compromise with a dates when payments are to be made
subscriber who is unable to pay his shares which he has surrendered to o if unpaid still, balance becomes automatically due and demandable without need
the corproation for a call
— Under 67, board may at any time, declare due and payable to the corporation unpaid o until such date arrives, no demand or call for payment may be validly made by the
subscriptions to the capital stock and may collect the same or such percentage thereof, board
with accrued interest in each case and subject to the provisions of the contract of o Call by the board: the board may at any time declare all or any part of the
subscription subscription due and payable where there is no date fixed in the subscription
— How payment is applied? contract
o Full payment for corresponding number of shares, par value covered by such § Power to make a call discretionary with the board
payment, or… § Once made, call must operate uniformly on all SHs in order to prevent
o … payment pro-rata to each and all the entire number of shares subscribed favoritism or oppression (Lingayen Gulf v. Baltazar)
— Under 13: 25% of total subscription must be paid, paid-up capital not less than § No payment despite call, whole balance of subscription becomes due and
P5,000.00 payable
o Balance payable on dates fixed in the subscription contract o 68: If not paid within 30 days from date fixed in subscription contract or date stated
o No fixed dates, upon call by the board in the call, ALL stocks covered by the subscription, become AUTOMATICALLY
— Call on unpaid subscriptions delinquent and may be sold by the corporation at a delinquent sale
o Resolution of the board § notice of sale and copy of resolution must be given to all delinquent SHs
o Notification of the resolution on the SHs § publication at least 2 weeks prior to sale
o The time when subscriptions become payable § lacking any of these requirements, delinquent sale would be VOIDABLE
— When call not necessary at the instance of the delinquent SH within 6 months from the sale and
o The subscription contracts expressly states that it shall be payable not upon call, tenders payment to the purchaser
but immediately or on a specified day or upon installments § if corporation acquires delinquent shares, they become treasury shares
o Corporation becomes insolvent, regardless of any contrary stipulation in the which may be disposed of by the corporation at such reasonable price as
subscription contract the board may fix
— The corporation has two (2) alternatives for the enforcement of a subscription contract:
(1) The sale of delinquent stocks 2. court action
(2) Court action
— Under 70: nothing in the Code prevents the corporation from collecting by action in a
1. delinquency sale; requisites court the amount due on any unpaid subscription with accrued interest, costs, and
expenses
— Under 68 the board may, by resolution, order the sale of delinquent stock and — If corporation chooses to sue in court, a valid call would still be a requisite to liability (Da
specifically state: Silva v Aboitiz)…
o the amount due and all accrued interest

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— …unless the corporation becomes insolvent—all unpaid subscriptions become payable
and are immediately recoverable in a court action by the assignee in insolvency for the
benefit of the creditors (Velasco v Poizat)
Velasco v Poizat. F: Velasco is the assignee in the insolvency of Philippine Chemical
Product Company and is seeking to recover from Jean Poizat the unpaid subscription made
by him to the stock of the corporation.
Poizat, one of the incorporators and once the treasurer and manager of the corporation,
subscribed for 20 shares and paid in the par value of 5 shares (P500).
While in this capacity he called in and collected all subscriptions except 15 shares
subscribed by him and another 15 by Jose Infante.
2 resolutions were adopted by the board: (1) proposal that the directors or SHs make good
by new subscription the 15 shares w/h had been surrendered by Infante, and that the latter
would be released from his obligation to the corporation; (2) as to Poizat, who was absent,
he should be required to pay the amount of his subscription upon the 15 shares he owes to
the corporation. Poizat, in a letter states that he was also to be relieved from his
subscription, and that he prefers “to lose the whole of the 25% rather than continue investing
more money in a… ruinous proposition.”
Soon the company became insolvent, and Velasco as assignee sues Poizat for his unpaid
subscription.
H: Poizat is still liable on his subscription. A stock subscription is a contract between the
corporation on one side, and the subscriber on the other. It is a rule that a subscription for
shares of stock does not require an express promise to pay the amount subscribed, as the
law implies a promise to pay on the part of the subscriber. A stock subscription is a
subsisting liability from the time the subscription is made, since it requires the subscriber to
pay interest quarterly from that date unless he is relieved from such liability by the by-laws.
There are two (2) remedies for the enforcement of stock subscriptions: (1) the first is a
special remedy which consists in permitting the corporation to put up the unpaid stock for
sale, and is merely a remedy in addition to that which proceeds by action in court; (2) the
other is an action in court, which exists even though no mention thereof is made in statute.
Under the Insolvency Law, the assignee of the insolvent corporation succeeds to all the
corporate rights of action vested in the corporation prior to its insolvency, and the assignee
therefore has the same freedom with respect to suing upon a stock subscription as directors
themselves would have had under Sec 49 above cited.
Another reason: When insolvency supervenes upon a corporation and the court assumes
jurisdiction to wind it up, all unpaid stock subscriptions become payable on demand, and are
at once recoverable in an action instituted by the assignee in court.
It evidently cannot be permitted that a subscriber should escape from his lawful obligation by
reason of the failure of officers to perform their duty in making the call; and when the original
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mode of making the call becomes impracticable, the obligation must be treated as due upon
demand.
As to the Infante release, it is not prejudicial to the right of the corporation or its assignee to
recover from Poizat, although in releasing Infante, the board overstepped its bounds and
should still be liable on shares that were not taken up and paid for by the corporation.
— Poizat continued to be liable on his subscription
— When insolvency supervenes and court assumes jurisdction to wind up, unpaid stock
subscriptions become payable on demand and are at once recoverable in an action by
the assignee in insolvency
Lingayen Gulf Electric v Baltazar. F: Baltazar subscribed for 600 shares (P100 par value)
of Lingayen Gulf and paid P15000, plus another payment leaving a balance of P18500
unpaid.
In a SH meeting it was agreed to call the balance of all unpaid subscribed capital stock, the
first 50% payable within 60 days, remaining 50% payable within 60 days hence. All unpaid
subscription after due dates of both calls would be subject to 12% interest. All remaining
unpaid shares would revert to the corporation.
Baltazar offered to withdraw completely from the corporation by selling out all his shares of
stock. Another resolution (No. 17) was adopted rescinding the previous resolution because
the corporation was not in a financial position to absorb the unpaid balance of the subscribed
capital stock. Yet another resolution (No. 4) was adopted to revalue the stock and assets of
the corporation to attract outside investors.
Although Baltazar was informed of the demand for payment the call however was not
published in a newspaper of general circulation. Another demand was made upon Baltazar,
who ignores the same upon the grounds that 1. action is premature because there was no
valid call, and 2. granting there was a valid call, he was released from liability thru SH Res.
Nos. 17 and 4. . The corporation sues. TC rules ifo Baltazar, holding that the resolution was
null and void for lack of publication.
H: TC was correct that the law requires that notice of any call for the payment of unpaid
subscription should be made not only personally but also by publication. The publication
requirement is mandatory, and the reason is because it is not only to assure notice to all
subscribers, but also to assure equality and uniformity in the assessment on SHs. Not only
must personal notice be given in one of these matters, but the notice must also be published
once a week, for 4 consecutive weeks in some newspapers.
The court reiterated the ruling in Velasco v Poizat, where the corporation involved was
insolvent, in which case all unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee. But when the corporation
is a solvent concern, the rule is that the suit demanding for payment of unpaid
subscriptions must be preceded by a call or assessment against the subscribers, and only
then will there be a right of action.
As to claim of Baltazar that Resolution 17 released him from obligation to pay, in order to
effect the release, there must be unanimous consent of the SHs (here, 7 SHs were absent
when said Res was made) . The GR is that a valid and binding subscription cannot be
cancelled so as to release the subscriber from liability thereon without the consent of all the
SHs. Furthermore, a subscription cannot be cancelled by the company, even under a secret
or collateral agreement for cancellation made with the subscriber at the time of the
subscription, as against persons who subsequently suebscribed or purchased without notice
of such agreement.
Exceptions: pursuant to a bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be effectual as against dissenting
SHs and subsequent and existing creditors. A release which might originally have been held
invalid may be sustained after a considerable lapse of time. In the present case, the release
claimed by the Baltazar does not fall under the exceptions referred to, because it was not
given pursuant to a bona fide compromise or to set off a debt due from the corporation and
there was no consideration for it.
(held: not indivisible)
— Reason for mandatory provision that call should be strictly complied with: to assure
notice to all subscribers, and to assure equality and uniformity in the assessment on
SHs
— A contract of subscription is at least in the sense that it creates an estoppel, a contract
among the several subscribers, and thus none of the subscribers can withdraw from the
contract without the consent of the rest and thereby diminish the common fund which all
have an interest in
— Notice for call of payment for unpaid subscriptions must be published, except when the
corporation is insolvent—payment is immediately demandable
— GR: A valid and binding subscription for stock of a corporation cannot be cancelled so
as to release the subscriber from liability thereon, without the consent of all the SHs
— Exceptions in Lingayen really do not constitute a gratuitous release since a valuable
consideration is actually received by the corporation such as the cancellation of
corporate debt
Da Silva v Aboitiz & Co Inc. F: Da Silva subscribes for 650 shares (par value of P500) of
Aboitiz. He pays only for 200 shares, as there are remaining 450 shares unpaid (P225,000).
Thru a Res., the board declared and informed all subscribers and SHs that all shares unpaid
by 31 May shall be declared delinquent and to be sold at a delinquency sale on the following
June 16. Ad was published as announced in the notice.
Da Silva sued Aboitiz Co., contending that in prescribing another method for payment of
subscription different from that in the by-laws, the corporation had exceeded its authority. He
claims that in Art 46 of the by-laws, all shares subscribed shall be paid out of the 70% of the
profit obtained, to be distributed among the subscribers and said Res., violates the said by-
law.
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I: W/N under the by-laws the corporation may declare the unpaid shares delinquent or collect
their value through another method.
H: YES> The by-law also authorizes and empowers the board to collect the value of
the shares subscribed and unpaid by deducting from the 70%, distributable in equal parts
among the SHs, to be applied on the payment of the shares. It also authorizes the creation
of a special emergency fund, applying the 70% of the profit on the payment of shares not
fully paid. Thus it is discretionary on the corporation to do whatever is provided in the said
article relative to the application of a part of the 70% of the profit distributable. It also shows
that it is the board and not he delinquent subscriber that may and must judge and decide
whether or not such value must be paid out of the 70% of the profit. It lies therefore, within
the discretion of the board to make use of such authority.
If the board opts not the make use of such authority, it has two other remedies to accomplish
the same purpose, as declared by the Court in Velasco v Poizat: (1) put up the unpaid stock
for sale; or (2) direct action in court. In this case the board elected to avail of the first remedy,
and complying strictly with the requirements of law, the directors made use of the
discretionary power granted by the law and declared that the payment of the subscription to
450 unpaid shares was due and demandable, and that said shares were delinquent.
— The Board has absolute discretion to choose which remedy it deems proper in order to
collect the unpaid subscriptions
— Two other remedies: delinquency sale and action in court
National Exchange v Dexter. F: IB Dexter subscribed to 300 shares of CS Salmon & Co.,
which shall be “payable from the first dividends declared on any and all shares of said
company owned by me at the time dividends are declared, until full amount of subscription
has been paid.” The subscription was initially paid P15,000, from a dividend declared by the
company, supplemented by Dexter’s own money.
Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on his subscription.
The assignee of Salmon, National Exchange Co, sues Dexter to recover the balance. TC
ruled ifo National Exchange.
I: w/n the subscription is payable from the first dividends declared has the effect of relieving
the subscriber from personal liability in an action to recover the balance
H: Of course not. A corporation has the power to accept subscriptions upon any special
terms not prohibited or contrary to law or public policy, provided it does not require the
performance of corporate acts beyond the powers conferred, and do not constitute a fraud
upon other subscribers, SHs, or creditors. If it is unlawful to issue stock otherwise than as
stated it is self-evident that a stipulation in a stock subscription that obligates the subscriber
to pay nothing for the shares except as dividends may accrue upon the stock is illegal. This
is discriminatory ifo the subscriber, to the detriment of the others. Nor has a corporation the
power to receive a subscription such terms as will operate as a fraud upon the other
subscribers or SHs by subjecting them to lighter burdens, or by giving greater rights and
privileges, or as a fraud upon creditors. As a general rule, an agreement between a
corporation and a subscriber, by which the subscription is not he be payable, or is to be
payable in part only… is illegal and void as in fraud of creditors or other SHs.
Campos: …Besides assuring equality among SH, the law seeks to protect corporate
creditors. Making payment of subscription dependent on the existience of profits or
dividends would be contrary to the policy behind the law.
Lumanlan v Cura. F: Lumanlan subscribed for 300 shares (par value P50) of Dizon & Co.,
paying only P1500 of the P15000 par value of the shares. Creditors sued the company, and
prayed for a receiver as it appears that the corporation had no assets except credits against
those who had subscribed for shares of stock.
Tayag was appointed receiver for the purpose of collecting the unpaid subscriptions. Tayag
sues Lumanlan for the unpaid shares. TC orders Lumanlan to pay the corporation (plus
interest). Pending Lumanlan’s appeal, he agreed to assume the obligation of the corporation
to Valenzuela (P8,000), and that if he withdraws his appeal, the corporation would collect
only 50% of the amount subscribed by him. Lumanlan then paid Valenzuela and was
subrogated in place of Valenzuela (P11,840 incl. interest).
Disregarding the agreement and notwithstanding payment made to Valenzuela, the
corporation asked for the execution of the judgment in the previous suit and his properties in
Tarlac were levied upon. BPI as creditor of the corporation intervenes as the assignee in the
insolvency case of the corporation.
H: As it is evident that there are other creditors of the corporation, the corporation has a right
to collect all unpaid stock subscriptions and any other amounts due it. Subscriptions to the
capital of the corporation constitute a fund to which creditors have a right to look for the
satisfaction of their claims and that the assignee in insolvency can maintain an action upon
any unpaid stock subscription. A stock subscription is an existing liability from the time
subscription is made.
Thus the TC ruling is modified and that the corporation is ordered to credit Lumanlan P13840
against the judgment previous (P15109), and to issue to Lumanlan 300 shares of its capital
stock upon payment of the difference of the amount (P1269).
Effect of Delinquency
— Effects of delinquency: (Sec 71)
o Cannot be vote for or be entitled to vote or to representation at any SH meeting
o Holder not entitled to any rights of a SH
§ Except right to dividends (restricted by law)
§ Cash dividends would first be applied to the unpaid balance
§ Stock dividends are withheld until payment of unpaid balance
o Not entitled to notice of any of the meetings
o Shares not included in the determination of a quorum
— 43: Once stocks become delinquent due to nonpayment, the holder loses all his rights
as SH except only the right to dividends, which will not be paid to him but will be applied
to the unpaid balance of his subscription plus costs and expenses
o SH cannot vote at the election or at any meeting on any matter
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o SH cannot even be counted as part of the quorum
o SH cannot be vote for as director
Rights and Obligations of holders of Unpaid, but Non-delinquent Stock
— Enjoy all privileges of a SH:
o the right to vote
o the right to receive dividends
o But liable to pay interest if in by-laws
§ Interest is not due unless by-laws provide so
§ By-laws provide for interest but silent as to rate: legal interest applies
o But SH cannot register shares transferred
§ Although valid between the parties, it cannot affect the corporation
§ But corporation can allow registration, but it cannot issue a stock
certificate until it is fully paid
Fua Cun v Summers. F: Chua Soco subscribed for 500 shares (P100 par) of China Banking
Corporation, paying ½ and leaving a balance of P25,000.
He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the shares of
stock, and endorsing the receipt of the stock purchase). Chua Soco was also indebted to
China Bank (P37,731.68), and upon default his interest in the 500 shareas was attached and
the receipt seized by the sheriff. The attachment was levied after the bank knew of the fact
that the receipt had been endorsed to Fua Cun.
Fua Cun then sued, contending that by virtue of payment of ½ the subscription price of the
shares, Chua Soco in effect became the owner of 250 shares and sought to have his lien on
the shares be declared to hold priority over the claim of the bank. China Bank argued that
the interest of Chua Soco was merely an equity which cannot be made the subject of a CM.
TC ruled ifo Fua Cun.
H: TC erred in holding that Chua Soco became owner of 250 shares. Fua Cun’s rights
consist in an equity of 500 shares and upon payment of the unpaid portion, he becomes
entitled to the issuance of the certificate for 500 shares in his favor.
As to the CM, the CM would not prevail over liens of third persons without notice; an equity
in shares is of such an intangible character that is somewhat difficult to see how it can be
treated as chattel and mortgaged in the same manner that the recording of the same will
furnish constructive notice to third parties.
There can be no doubt that an equity in shares of stock may be assigned and that the
assignment is valid as between the parties and as to person to whom notice is brought
home. Such an assignment exists here, though it was made for the purpose of securing a
debt. As against the rights of fua cun, the bank had no lien unless by virtue of the
attachment, but the attachment was levied after the bank had received notice of the
assignment of Chua Soco’s interest to fua Cun and was therefore subject to the rights of the
latter.
Baltazar v Lingayen Gulf Electric. F: Baltazar and Rose were incorporators of the
Lingayen Gulf Electric Power Co. and subscribed to:
Baltazar = 600 shares (paid 535 shares – after transfers, owned 341 shares w/ cert. plus 65
shares w/o certificate)
Rose = 400 shares (paid 375 shares w/ certs)
à leaving unpaid a certain portion thereof. It is the company practice to issue certificates of
stock to its individual subscribers for unpaid shares of stock. Defendants Ungson et al are
small SHs ( <100 shares) of the corporation, and are the majority of the board. Co-defendant
Acena is the largest single SH with 600 shares and was responsible for election to the board
of two of the 4 majority board members (Ungson Group). Baltazar was responsible for the
election of the other 2 (Baltazar Group).
Ungson Group which controlled the corporation passed 3 resolutions which threatened to
expel the plaintiffs and prevent them from exercising their voting rights: (1) declaring watered
stocks issued to Acena, Baltazar, Rose and Jubenville of no value and cancelled the same;
(2) all unpaid subscriptions to bear interest, and all payments to be credited to interest first,
capital debt second, and ; (3) all stock declared delinquent on the accrued interest are
incapacitated to avail of voting power.
Baltazar and Rose sought to allow them to vote their fully paid-up shares and to declare the
resolutions invalid. A compromise deal was executed, but enforcement by the TC was
enjoined by the Ungon Group and asked for amendment. TC amended but was opposed by
Baltazar. The Court then reversed the amending decision, ruling that all shares of the capital
stock of the corporation covered by fully paid shares are entitled to vote in all meetings.
Baltazar claims that once a SH has subscribed to a certain number of shares, although he
has made partial payments, but is issued a certificate for the paid-up shares, he is entitled to
vote the whole number of shares subscribed, whether paid or not. The corporation counters
that under the doctrine in the Fua Cun case, a partial payment of a subscription does not
entitle the SH to a certificate for the total number of shares subscribed by him, and his right
consists only in equity to a certificate of the total number of shares subscribed for, upon
payment of the remaining portion of the subscription price.
I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the latter
H: YES> The present case does not come under the principle in Fua Cun because it was
the practice of the company since its inception, to issue certificates of stock even for unpaid
shares and gave voting power to stocks fully paid. The present law requires as a condition
before a SH can vote that his full subscription be paid in the case of no par value shares,
and with respect to par value shares, the SH can vote the shares full paid, irrespective of the
unpaid delinquent shares. A corporation may now, in the absence of provisions in their by-
laws to the contrary, apply payments made by subscribers either as full payment for the
corresponding number of stock or as payment pro-rata to each and all the entire number of
shares subscribed. In this case, corporation chose to apply payments by the SHs to definite
shares of stock and had full paid-up shares certificates for the payments. Its call for
payments of unpaid subscription and its declaration of delinquency only affecting the
remaining number of shares.
Here the corporation applied the payments made to the full par value of shares subscribed,
instead of the accrued interest. This being the case, the application of payments must be
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deemed to have been agreed upon by the corporation and the SHs and cannot now be
changed without the consent of the SHs concerned. It would therefore result that a
corporation may, upon the request of an interested SH, apply payments by them to the full
par value of subscribed capital stock.
— Since it was the practice of the corporation to issue stock certificates to not fully paid
subscribers, it may not take away the right to vote granted by the certificate
— Stock certificates may be issued for less than the number of shares subscribed for
o Provided the par value of each represented by the certificate has been paid
o And it is not prohibited by the by-laws
Nava v Peers Marketing Corp. F: --Po was an incorporator of Peers Marketing and
subscribed to 80 shares (P100 p.v.) paying 25% of the amount of subscription. No certificate
of stock was issued.
--Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was the
absolute and registered owner of the 20 shares sold.
-- Nava requested the corporation to register the sale, but was denied because Po had not
fully paid the amount of subscription. (was informed that Po was delinquent in payment of his
subscription and that corp had the claim to his entire subscription of 80 shares). Nava filed a
mandamus action to compel the corporation to register the shares in the books. TC
dismissed petition.
--Nava contends the ruling in Fua Cun is not applicable in affirming corporation’s refusal to
register in the books the sale to him of 20 shares. Nava relies on the ruling in Baltazar v
Lingayen Gulf Electric, which held that the corpo law requires as a condition before a SH can
vote his shares that his full subscription be paid in the case of no par stock; but in par value
stocks, the SH can vote his shares fully paid by him, only, irrespective of the unpaid
delinquent shares.
I: W/N the corporation can be compelled to enter in its books the sale made by Po to Nava of
20 shares
H: NO>> The Nava transfer is not the alienation sale or transfer of stock contemplated in
the old Law. As a rule, shares which may be alienated are those which are covered by
certificates of stock.
As prescribed in the corpo law, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. However, that cannot be followed in the
instant case because the 20 shares are not covered by any stock certificate in Po’s name.
Moreover, a corporation has a claim on the said shares for the unpaid balance of the
subscription.
A stock subscription is a subsisting liability from the time the subscription is made. The
subscriber is as much bound to pay his subscription as he would be to pay any other debt.
The right of the corporation to demand payment is no less contestable. A corporation cannot
release an original subscriber from paying for his shares without valuable consideration,
without the unanimous consent of the SHs.
There is no clear duty here on the part of the officers of Peers to register the 20 shares in
Nava’s name. The court also ruled that there is no parallelism between Nava and the
Baltazar case. In the latter, the SH-incorporator was the holder of a stock certificate, and the
issue was whether the said shares had voting rights although the incorporator had not fully
paid the subscription, which is not the issue in this case. There is no stock certificate issued
to Po, and without it—which is the evidence of ownership of the stock—the assignment of
corporate shares is effective only between the parties to the transaction. The delivery of the
stock certificate is essential for the protection of both the corporation and its SHs.
— Fua Cun, Lingayen Gulf and Nava cases were all decided before the Code
— Fua Cun: a contract of subscription is INDIVISIBLE, unless the contrary is provided
o Partial payment DOES NOT entitle the SH to the issuance of a certificate covering
shares corresponding to the amount paid
o Payment is in effect PRO-RATED among all the shares, so that no one share is
fully paid
— Lingayen Gulf: shares may be deemed fully paid for the amount paid that corresponds
thereto
o It was the practice of the corporation in Lingayen to issue certificates for stocks it
considered to be fully paid, although the subscription has not been paid
— SEC: in interpreting the two cases, a corporation has two (2) alternatives in applying
payment for subscriptions:
o Either apply the amount paid as full payment for the corresponding shares,
(Lingayen) or…
§ Certificate of stock would then be issued
o … as payment pro-rata on each of the entire number of shares subscribed for (Fua
Cun and Nava)
§ no certificate of stock may be issued until the subscription is full paid
— 64: no corporation can issue a certificate of stock until the subscriber has paid his
subscription in full
o applies to par and no-par shares
o Lingayen gulf case no longer applies
o Speaks of only of subscription
Issuance of Certificate
— Under 63: capital shall be divided into shares for which certificates signed by the Pres
or VP, countersigned by the Secretary, sealed with the seal of the corporation
— Under 64: no certificate of stock shall be issued until the full amount + interest has been
paid
o But an unpaid subscription NOT declared delinquent can be voted upon in
meetings and are entitled to collect dividends
— Issuance is not necessary to constitute the subscriber of shares as a SH of the
corporation
o But delivery is an essential element of the issuance itself (an endorsement for
negotiability)
— Nature of certificate:
o The best evidence of the acquisition of rights and status of a SH, but NOT required
for rights to vest
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o Convenient for purposes of transfer by way of collateral or absolute sale
§ But SH not entitled to certificate until he has fully paid the subscription
o Certifies that the person named is a holder or owner of the stated number of shares
in the corporation
§ Indicates the kind of shares issued to him, date of issuance and par value
or no par value of the shares
§ Signed by the proper officers of the corporation and bears the corporation
seal
o Should not be issued for more than the number of shares authorized by the AOI
§ Any stock certificate which represents an over-issue of shares would be
void and no rights or liabilities can arise therefrom in favor of or against
holders thereof
§ Bona fide purchasers would only have the right to damages for
misrepresentation against the corporate but cannot acquire the rights of
SHs
o Not a negotiable instrument (De Los Santos v Atty General supra)…
o … but quasi-negotiable; endorsement and delivery of certificate may be for any of
three purposes:
§ sale and assignment of shares
§ pursuant to a trust or nominee agreement
§ pledge or encumbrance of the shareas
o Sale of shares, even with endorsement and delivery of the certificates, shall not be
valid, except as between the parties, until it is entered and noted in the books and
the sale is not absolutely void
— 63: every SH has a right to demand the issuance of a proper certificate when
requirements of 64 have been complied with
— Remedies available to a SH for wrongful non-issuance by the corporation:
o Suit for specific performance
o Alternative relief by way of damages
o Petition for mandamus to compel the issuance
Loss or Destroyed Certificate
Sec. 73 Lost or destroyed certificates. - The following procedure shall be followed for the
issuance by a corporation of new certificates of stock in lieu of those which have been lost,
stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal
representative shall file with the corporation an affidavit in triplicate setting forth, if
possible, the circumstances as to how the certificate was lost, stolen or destroyed,
the number of shares represented by such certificate, the serial number of the
certificate and the name of the corporation which issued the same. He shall also
submit such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of
the corporation, said corporation shall publish a notice in a newspaper of general
 circulation published in the place where the corporation has its principal office, § … unless there are unrestricted retained earnings the payment comes
once a week for three (3) consecutive weeks at the expense of the registered out of his pocket!
owner of the certificate of stock which has been lost, stolen or destroyed. The § SHs/subscriber is NOT a creditor!
notice shall state the name of said corporation, the name of the registered owner — GR: cannot piecemeal assign rights to the shares, if subscription not paid in full
and the serial number of said certificate, and the number of shares represented by o SHs as a whole benefits
such certificate, and that after the expiration of one (1) year from the date of the o Corporation and creditors also benefit…
last publication, if no contest has been presented to said corporation regarding said o … but rights of creditor conditioned upon solvency of corporation
certificate of stock, the right to make such contest shall be barred and said — Sec 43 allows unpaid subscriptions to be paid out of dividends
corporation shall cancel in its books the certificate of stock which has been lost, — Exceptions: delinquent shares; cannot pay out as stock/property dividends
stolen or destroyed and issue in lieu thereof new certificate of stock, unless the — Fua Cun and Nava: indivisibility of shares
registered owner files a bond or other security in lieu thereof as may be required, o Payments applied to all shares covered by the subscription
effective for a period of one (1) year, for such amount and in such form and with — Fua Cun: contract of subscription is indivisible, but partial payment doe not entitle SH to
such sureties as may be satisfactory to the board of directors, in which case a new issuance of certificate
certificate may be issued even before the expiration of the one (1) year period o Payment is pro-rated among all the shares
provided herein: Provided, That if a contest has been presented to said corporation — Lingayen: exception
or if an action is pending in court regarding the ownership of said certificate of o “chopped up” shares
stock which has been lost, stolen or destroyed, the issuance of the new certificate o payment would be applied to the corresponding shares
of stock in lieu thereof shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock which has been lost, stolen or
destroyed. — Money or property rights
o Ownership/title
Except in case of fraud, bad faith, or negligence on the part of the corporation and its o Use
officers, no action may be brought against any corporation which shall have issued certificate o Proper valuation, but subject to SH approval and SEC approval to eliminate
of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. watered stock
(R. A. 201a) — Who determines if money or property dividends
— Default of unpaid subscribers? Liability of corporation and other subscribers as well
SIR: — Beneficiaries of subscription: corporation, SHs, creditors
— I pay subscription due: I am not a creditor/debtor
— Dock-Hop: the transferee of watered stock who takes it in ignorance of its real character o In no way will my rights be impaired
cannot be compelled, even at a suit of the creditor, to pay anything more upon it… o Limited liability
o Holder in GF o Stock certificate; can be disposed/transferred (cf Fleischer)
o Transferee steps in the shoes of the transferor as to benefits, but not to liability o Right to dividends
o Creditors clam that the alleged SHs have shares, issued as fully paid, but were — All these are not enjoyed by subscriber NOT paid fully
issued for property not equal in value to the par value; property was overvalued o Partial payment: cannot get any part of shares
o 2 contracts are involved: o Delinquency sale: all of the subscriptions
§ corporation-transferor § What should be bought? Only what is due.
§ transferor-transferee § Purchaser would appear to have bought at a discount
o transferees not liable to corporation if in GF § Delinquent party gets a free ride…
— Lingayen Gulf: I cannot dispose of any unsubscribed shares if I still have unpaid shares § … but in reality, it never really happens that way!
o There would be a rescission similar to Bayla… — Inimical effects of non-paying subscriber:
— Dexter & Aboitiz: no guaranteed profits in any business! o suspension of voting and economic rights
— Dexter: payment of subscriptions came from dividends o Danger that he loses everything
— Aboitiz: payment of subscription came from a fund o No bidder: shares go back to corporation
o Is this violative of the principle that SHs only have an inchoate right over corporate o No incentive for corporation in delinquency sale
property? — Sec 73: obscure provision
§ Cannot negate obligation of subscriber to pay for his unpaid subscription o Holding period
§ It should be unconditional… o Benefits stems from issuance of stock certificate; can assert ownership rights

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 o Negotiable instruments rules apply Chapter XIII – Dividends/Purchase by Corporations of Shares

Delinquency sale : covers unpaid subscription; seeking for the delinquent SH to cough up the Sec 43. Power to declare dividends. - The board of directors of a stock corporation may
balance. declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stock held by them:
Provided, That any cash dividends due on delinquent stock shall first be applied to the
Property Cash unpaid balance on the subscription plus costs and expenses, while stock dividends shall be
Valuation Yes No need withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided,
Payment In full Partial; installment further, That no stock dividend shall be issued without the approval of stockholders
Warranties Yes None representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or
Subject to dispute Yes No special meeting duly called for the purpose. (16a)
Necessary/essential to Yes No necessary
business Stock corporations are prohibited from retaining surplus profits in excess of one hundred
Registration of property in Ownership of shares (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate
corporate name expansion projects or programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends without its/his consent, and such consent
has not yet been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as when there is
need for special reserve for probable contingencies. (n)

— Sec 43: power of the corporation to declare dividends—-only the board may declare
dividends and only out of unrestricted retained earnings, payable in cash, property, or
stock to SHs of OCS
— Most important rights of a SH:
o Right to vote
o Right to proportional share of the corporate assets upon liquidation
o Right to share in the corporate profits

— Concept of Dividend
o A dividend is that portion of the profits of a corporation set aside, declared and
ordered by the directors to be paid ratably to the SHs on demand or at fixed time.
o It is payment to the SHs as a return upon their investment
o All SHs of the same class share in it is proportion to the respective amounts of
stock which they hold
— Defn of Dividend: portion of corporate profits which is set aside for distribution to the
SHs in proportion to their subscription to the capital stock of the corporation
— Power of the corporation to declare a dividend only out of unrestricted retained earnings
on the basis of outstanding capital stock held by SHs

Form of Dividends

Cash, property, or stock dividend

— Cash: most common form

138
 o May be declared by the board under a formal resolution and does not require the
approval or ratification of the SHs
o Amount to be received by SH as his share of the dividends would depend on the
amount of stock held by him, regardless of whether or not he has paid his full
subscription
§ But if shares become delinquent, any cash dividends due will first be
applied to the amount of the delinquency (if stock dividends, he cannot
get them until he has fully paid his subscription)
§ Cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses
o Revocable before the announcement to the SHs of the declaration of dividends; as
soon as cash dividends are publicly declared, SHs have the right to their pro rata
shares
o No par shares: must be fully paid to be considered as issued
§ Thus holders of no par shares not fully paid are not entitled to dividends
— Property: SEC rules
— Stock: distribution to the SHs of the company’s own stock
o Stock dividends are in the nature of shares of stock, the consideration for which is
the amount of unrestricted retained earnings converted into equity in the
corporation’s books
o It is actually two (2) things:
§ A dividend, and…
§ … the enforced use of dividend money to purchase additional shares of
stock at par
o stock dividends require:
§ board resolution
§ ratification of SHs representing 2/3 OCS
o Villanueva: stock dividends, unlike cash or property dividends, may be declared out
of premium surplus or paid-in capital
o Corporate profits are transferred to capital stock and shares representing the
increase in capitalization are distributed
o Stock dividends cannot be declared without first increasing the capital stock, unless
there are still unissued shares
o Although number of shares increase, their investment and proportional interest
remain the same
o Cannot be issued ifo persons not SHs
— Liquidating dividends: form part of the capital, and cannot be declared from the
unrestricted retained earnings
Nielson & Co v Lepanto Consolidated Mining Co. F: MR filed by Lepanto Corp which
involves an agreement subsequently extended, as to the compensation of Nielson (a
promoter?) which provides that he is entitled to receive 10% of any dividends declared and
paid by Lepanto.
Nielson is not a SH of the corporation. During the extension period the corporation declared
dividends worth P3M. SC ruled that Nielson was entitled to the 10% of the dividends paid
and declared and Lepanto was ordered to issue and deliver to Nielson shares of stocks as
139
well as fruits or dividends accruing to the same. Lepanto contends that payment to Nielson
of stock dividends as compensation violates the Corporation Law.
I: W/n the corporation can be compelled to issue and deliver to Nielson shares of stock and
the fruits thereof
H: Under the Code stock dividends cannot be issued to a person who is not a SH in payment
of services rendered. Nielson cannot be paid in shares of stock which form part of the stock
dividends of Lepanto.
The understanding between Lepanto and Nielson was simply to make the cash value of the
stock dividends as the basis for determining the amount of compensation that should be paid
to Nielson.
R: Consideration for shares of stock: (1) cash; (2) property; (3) undistributed profits.
A corporation may legally issue shares of stock in consideration of services rendered by a
person not a SH, or in payment of indebtedness, which is equivalent to issuing a stock in
exchange for cash. But a share of stock thus issued should be part of the original capital
stock of the corporation, or part of the stocks issued when the increase in capitalization was
properly authorized. In other words, it is the shares that are originally issued by the
corporation and forming the part of capital that can be exchanged for cash or services
rendered, or property—if the corporation has original shares of stock unsold or
unsubscribed, either coming from the original capitalization or from the increased
capitalization—these may be issued to a person already a SH.
But a share of stock coming from stock dividends cannot be issued to one who is not a SH of
a corporation.
A stock dividend is any dividend payable in shares of stock of the corporation declaring or
authorizing it—a distribution of shares among SHs, as dividends. It is actually 2 things: (1) a
dividend; (2) the enforced use of dividend money to purchase additional shares at par. When
a corporation issues stock dividends, it shows that the corporation’s accumulated profits
have been capitalized instead of distributed to the SHS or retained as surplus. Far from
being a realization of profits, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from the surplus to the assets and are
thus no longer available for actual distribution. It really adds nothing to the interest of each
SH; the proportional interest remains the same. It is the civil fruits of the original investment,
and to the owners of the shares go the fruits.
Although Lepanto says that the value of the dividends declared should be the basis for
determining the amount of compensation due to Nielson, it does not mean that the
compensation should be taken from the amount actually declared as cash dividends to be
distributed to the SHs. Otherwise there would be a dilution of the dividend that corresponds
to each share of stock held by the SHs.
Decision modified….Nielson to get P300,000 in cash, as equivalent to 10% of thew value of
the 3M stock dividend.
Source of Dividends
— Source: unrestricted retained earnings

— Def’n of unrestricted retained earnings: the undistributed earnings of the corporation
which have not been allocated for any managerial, contractual, or legal purposes and
which are free for distribution to the SHs as dividends
— (property or cash)
§ Any and all items included in retained earnings—income of all types, prior
period adjustments, net income, special distribution to SHs—can be
declared as dividends, unless restricted
§ All other items not falling within the term “retained earnings” are
necessarily included in “capital” and are unavailable for dividend
declaration—donated assets or funds, paid-in surplus arising from
issuance of no-par stock, premium paid on par value shares, revaluation
surplus created to write-ups of assets, etc
o Difference between the total present value of its assets after deducting losses and
liabilities and the amount of its capital stock
o Balance of net worth or net assets after deducting the value of the corporation’s
outstanding stock
o Refer to the undistributed earnings or profits realized by the corporation from its
business
o If not reserved or not set aside by the board for some corporate purpose or for
some other legal or contractual purpose, such retained earnings are unrestricted
o There must be an actual bona fide surplus to justify declaration of dividends
— Def’n of retained earnings: the net accumulated earnings of the corporation out of
transactions with individuals or firms outside of the corporation; sometimes referred to
as earned surplus. Includes:
o earnings from sales of goods and services of the corporation in the ordinary course
of business
o earnings from sale of corporate property other than stock trade
o does not include premium on par value stock
§ where par value shares are issued and SHs pay a premium therefor over
par, a paid-in surplus results.
§ RP law does not allow paid-in surplus to be declared as dividends either
as cash or property, because 43 requires dividends be paid out of
unrestricted retained earnings
§ Paid-in surplus is considered paid-in capital
o does not include treasury stock—considered as contractions or expansions of paid-
up capital
o does not include donations
— Sec 6: consideration for no-par value stock must be treated as capital and is not
available for distribution as dividends
o This is because SHs intended that the consideration for no par value shares shall
constitute the basic business fund of the corporation to be permanently devoted to
the corporate business
o Retained earnings = Assets – (Liabilities + Legal capital)
— If subscribed shares have not been fully paid, the unpaid portion is a receivable and is
an asset of the corporation
140
o Any excess would be surplus or earnings for dividend declarations
o Net assets(+unpaid portion of subscribed shares) – total par value of subscribed
shares = earnings =dividends
— If watered stock exists, subscriber would be liable for the difference between what he
paid and the par value
o This liability of the SH is a receivable of the corporation
o Net assets (+receivable from SH) - total par value of subscribed shares = earnings
= dividends
o
— Board has discretion to appropriate retained earnings for designated purposes
— Agreements with creditors may also provide for restrictions on dividends distributions
Berks Broadcasting v Craumer. F: Craumer et al together with one Landis (4 people), are
the incorporators and directors of the Berks Broadcasting Company. The books indicate that
the stock is fully paid (auth. Capital stock = $100K) , through cash ($5K each) and the fixing
of a value of $80K upon an asset denominated “Franchise and Promotion Expense.”
A year later, this was written off and in its place were substituted 1) $50K as an amount “Due
on Unpaid Stock Subscriptions” -- (each SH paid $4.2K reducing the item to $23,300.
Then it was cancelled altogether and was replaced w/ the entry “Goodwill and Promo
Expense) and 2) “write-ups” or increases in the valuation of fixed assets over and above
depreciation costs, totaling $30K.
Balance sheet showed assets in excess (“surplus”) of liabilities iao $2,545.94. However, the
existence of that alleged surplus depended on the inclusion of the assets of the write-ups of
$26K; otherwise, there would be a deficiency to the extent of almost $24K. Directors sold
their stock, and declared a series of dividends totaling $13K based on the earnings of the
company of 12K+ plus the “surplus.”
The corporation, now under the control of new SHs, sued the directors to recover the $13K
which was allegedly unlawfully declared and paid out as dividends.
H: GR: Capital of a corporation must not be impaired in any manner
Exception: impairments involuntarily made through losses resulting from business
operations. It is illegal to declare and pay dividends from other than a surplus consisting of
an excess in the value of the assets over the aggregate of the liabilities and the capital stock.
The object of this prohibition is to afford a margin of protection for creditors in view of the
limited liability of the SHs, and to protect the interest of the SHs themselves by preserving
the capital so that the purposes of the corporation will be carried out.
The surplus must be a bona fide and not an artificial or fictitious one; it must be founded
upon actual earnings or profits and not be dependent for its existence upon a theoretical
estimate of an appreciation in the value of the company’s assets. Such appraisals and
conjectural valuations cannot be considered for the purpose of dividends because are
subject to market fluctuations, and are merely anticipatory of future profits, and may never be
actually realized as an asset of the company.
It is thus clear that since the “write-ups” of $26,000 represented an unrealized appreciation in
the value of the fixed assets, their inclusion in determining the existence of a surplus from
which dividends might be declared was unlawful, and since when eliminated there would be
not a surplus, but a deficiency in capital.
---Sir: so long as the assets (even if they appreciate in value) are not yet disposed, dividends
cannot be declared based on the appreciated value (because it is still an expectancy).
CAMPOS: Since our Corpo Code allows dividends only out of unrestricted retained
earnings, an increase in the value of existing assets cannot be a source of even a stock
dividend.
Lich v US Rubber. F: Lich is a holder of 300 non-cumulative PS of United States Rubber
Company. She seeks to enjoin payment of a dividend on common stock declared.
During 3 fiscal years (1935-37), the corporation experienced a deficit of close to $24M, $17M
and $10M for each of the 3 years, and a corresponding impairment of capital. In each of
these years, the annual net earnings were applied to the deficit, and no dividends were
declared.
The company underwent a reconstruction of its capital structure. It issued, in lieu of no-par
value CS, CS of par value $10. In the next 3 years the deficit was reduced and cancelled and
net profts were made available for dividends for non-cumulative PS, but not common shares.
The company then declared a dividend, from the net profits for the current year and from no
other fund, on both PS and CS. In the deficit years, the company maintained adequate
reserves, which remain intact even when dividends were declared. Lich contends that the
preference of PS holders as to dividends extends not only to the current year, but to the prior
deficit years, and dividends cannot be paid out to CS holders until dividends are paid to PS
on the years in question and the arrearages must be paid in full.
H: the doctrine of the Cast Iron Pipe Cases, based on sound equitable principles, is a
departure from the GR that holders of non-cumulative preferred stock lose with the close of
the fiscal year all rights in the undistributed net profits of that year. It preserves to the holders
of the non-cumulative PS their right in the undivided net profits withheld from them and
retained in the business, but otherwise available for the payment of dividends. The right to
earned dividends is not extinguished upon the mere passing of the fiscal year. The doctrine,
however, cannot be extended by implication beyond its clear intendment.
It may be generally stated that as to the payment of dividends the holders of PS are in no
better position than the holders of CS except as to priority of payment. Dividends on PS are
not payable absolutely and unconditionally, but only out of the sources designated by law.
The payment of dividends on non-cumulative PS is further circumscribed by the certificate of
incorporation and stock certificate; dividends on such stock are payable only out of net
profits and for the years in which the same were earned.
Thus the right of non-cumulative PS is conditional upon: (1) accrual of net profits (2)
retention of the same in the business. If there are no net profits, the deficiency is not
chargeable against the net profits of succeeding years. The test of applicability is W/N there
were in the years in which dividends were not declared, net profits available for the lawful
declaration and payment of dividends, but withheld from non-cumulative PS and retained in
the business. Net profits connotes clear pecuniary gain remaining after deducting from gross
earnings the expenses incurred. It is not synonymous with annual net earnings, which may
be productive of net profits, or reductive of the deficit.
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In this case there were in 1935-37 no net profits to which the inchoate right to dividends
could have attached. There was a substantial deficit in each of the three years which greatly
exceeded the annual net earnings of the corresponding year. It is manifest therefore that the
annual net earnings of each year resulted, not in a profit, but in a reduction of the deficit.
There was no source from which dividends could be paid out lawfully; the payment of
dividends under such circumstance would have been unlawful. The corporation is charged
with the duty of maintaining the integrity of the capital, on the faith of which credit was
extended, as a trust fund for the security of creditors.
When a man buys stock instead of bonds, he takes a greater risk in the business. No one
suggests that he has a right to the dividends if there are no net earnings. But the investment
presupposes that the business is to go on, and therefore even if there are net earnings, the
holder of stock is entitled to have a dividend declared only out of such part of them as can be
applied to the dividends consistently with a wise administration of a going concern. If the
annual net earnings of a corporation are justifiable applied to legitimate corporate purposes,
such as payment of debts, reduction of deficits, and restoration of impaired capital, the right
of non-cumulative preferred SHs to the payments of dividends is lost. The payment of
dividends from annual net earnings, when the liabilities of a corporation exceed the assets,
would be in derogation of the rights of creditors. The payment of dividends under such
circumstances, while debts accrue, would be contrary to sound business practice.
Dividend Declaration discretionary with Board
— GR: The decision to declare dividends are matters addressed to the business judgment
of the board
o The fact that profits have accrued does not necessarily impose upon the directors
the duty to declare them as dividends
o Courts have no power to compel them to make the distribution of dividends in the
absence of BF or fraud or clear abuse of discretion
o Unless tainted with BF, fraud, or gross negligence, courts will not interfere, and
SHs will be bound
§ If for expansion of business, SH cannot complain
§ If board capitalizes profits instead of distributing them (i.e. issues stock
dividends), requires approval of at least 2/3 OCS
o But the board cannot abuse their discretion and accumulate profits unreasonably
o Remedy of SH: file an action in court to compel payment of dividends
§ Burden of proof lies with the SH
§ Mandamus is not a proper remedy since the SH has no individual interest
in the profits of a corporation until and unless a dividend is declared
Retention of excess profits
— 43: stock corporations are prohibited from retaining surplus profits in excess of 100% of
their paid-in capital stock
— Exceptions:
o When justified by corporation expansion projects approved by the board
o When corporation is prohibited under any loan agreement with any financial
institution or creditor and without the latter’s consent
o When such retention is necessary under special circumstances

Keough v St Paul Milk. F: Action to compel corporation to declare a cash dividend, on the
ground that those in charge of the corporate affairs (the Ryans) are wrongfully and
needlessly withholding profits available for cash dividends and conspiring to retain them for
their benefit and to the prejudice of the majority. The business, assets, liabilities of the
partnership were exchanged for 597 shares of the St Paul Milk Co. The 597 shares
represent the only stock issued until the stock dividend. By amendment, the authorized
capital was increased to $300K. A 6-to-1 stock dividend was declared and the amount
necessary to cover the issued shares was transferred from the surplus account to the capital
account. When the corporation paid out its first dividend, a total of $169,470 was distributed
to SHs or about a 335% return. There were no mortgages or liens or any other substantial
indebtedness. Sales are predominantly cash basis. Fixed assets were in good condition.
Wages were paid. The corporation had investments in bonds, CS in a wholly-owned
subsidiary, but the merchandise inventory was small. TC held that a liberal and reasonable
capitalization and surplus was the sum equal to the original outstanding stock plus 2/3 of the
accumulated surplus, and that all sums in excess were unreasonable and constituted a
violation of the fiduciary relation. Keough et al claims that the capitalization in 1936 by the
Ryans of a large percentage of the accumulated surplus without reason or necessity other
than to keep it within the corporation under the dominating control of the Ryans. The Ryans
contend that the capitalization was for avoiding possible federal taxes upon undistributed
surplus. TC found that the capitalization was to strengthen control of the Ryans over the
corporation and surplus to prevent a distribution of earnings.
Issue: WON corp can be compelled to declare dividends.
H: In this case, YES> The determination of w/n to declare a dividend is essentially a matter
of internal management. It is primarily for the corporate directors in their sound discretion to
decide, and judicial review may be secured when abuses contravening the SHs rights
manifest themselves. A court will not compel a dividend unless the directors act fraudulently,
unjustly, or unreasonably so as to impair the rights of the complaining SHs to their just
proportion of the corporate profit. Generally the mere fact that a large corporate surplus
exists is not enough to warrant equitable intervention. Ultimately the test is an examination of
the GF and reasonableness of the policy of retaining that which is otherwise available for
dividends.
The corporation did not have a reasonable need for the large surplus accumulated and held
as bonds or other easily liquidated assets. Inventory was small, cash turnover was liquid, no
substantial obligations, no expansion program, accounts for depreciation were set up—in
short, the surplus was easily available for dividends, if the directors so elected to do so. The
large surplus existed at the time the Ryans were receiving salaries in excess of their worth
and draining from the corporation money otherwise available for dividends. The capitalization
of the surplus did not serve a corporate need; it was referable only to the desires and
purposes of those in control to keep it under their control and subject to their machinations.
Furthermore, fraudulent expense items and other anomalies point to the intent of the
directors. Generally directors are proper parties to determine whether a divided shall be in
cash of stock, and a court will not interfere with the exercise of their discretion; but where it
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appears that the object was to primarily benefit those in whom the discretion rests, equitable
powers can be called into operation. Directors and officers of the corporation owe SHs the
active duty of honesty and GF in the transaction of the business and in their dealings. While
it is true that the court cannot ordinarily compel a corporation to declare a dividend at the suit
of a minority SH, yet where dividends are withheld for an unlawful purpose—to deprive a SH
of his rights—he may have the aid of equity for adequate protection.
A stock dividend really takes nothing from the property of the corporation, and adds nothing
to the interest of the SHs. Its property is not diminished, and their interests are not increased.
Where profits clearly warrant payment would be proper, the SHs cannot be cut off by a stock
dividend when it purpose is wrongfully to keep the profits of the business with the control of
those dominating the affairs so as to be available to them. Such action is oppressive and
evinces BF sufficient to justify equitable intervention.
Dodge v Ford Motor Co. F: Action by John Dodge, a minority SH, against the Ford Motor
Company to compel the declarations of dividends.
--TC granted motion and ordered the payment of dividends.
-- At this time, Ford Motor Co had just concluded its most prosperous year of operations.
Demand for Ford cars continued. It could make and market 500,000 cars. Sales of parts and
repairs increase. It had assets of more than $132M, COH $54M, surplus of $112M.
-- Liabilities continue the corporation as a semi-eleemosynary institution, and not as a
business concern. Henry Ford himself testified that the company he built had made too much
money, had too large profits, and that a sharing of profits with the public, by reducing the
prices. It expected a profit upwards of $60M. Ford’s defense was that its policy was to
reduce the selling price of Ford cars while improving their quality, with the goal of producing
1M cars per year.
There was a general plan for expansion of the productive capacity of the business.
Management decided not to reduce in the meantime the price, but to maintain the same and
accumulate a large enough surplus to pay for the proposed expansion of plant and
equipment. There was a large daily, weekly, monthly, receipt of cash. The output was
practically continuous and within a few days, turned into cash.
-- Dodge et al contend that the plan was to the selling price of cars should be attained. Ford
argues that although a manufacturing corporation cannot engage in humanitarian works as
its principal business, the fact that it is organized for profit does not prevent the existence of
implied powers to carry on with humanitarian motives such as charity as are incidental to the
main business of the corporation.
H: the plan does not call for and is not intended to produce immediately a more profitable
business but a less profitable one, with the apparent immediate effect to diminish the value
of shares and return to SHs. There is no doubt that certain sentiments, philantrophic and
altruistic, creditable to Ford, had largely influenced the policy to be pursued by the company.
There is an obvious difference between an incidental humanitarian expenditure of corporate
funds for the employees, and a general purpose and plan to benefit all mankind at the
expense of others. There should be no confusion of the duties Mr Ford conceives as owed to
the general public and the duties which in law he and his directors owe to the protesting
minority SHs. A business corporation is organized for the benefit and profit of the SHs. The
powers of directors are to be exercise to that end. Discretion of directors is to be exercised in
the means to attain that end, and does not include the end itself, through the reduction of
profits or nondistribution thereof. It is not within the lawful powers of the board to shape and
conduct the affairs of a corporation for the incidental benefit of SHs and for the primary
purpose of benefiting others.
The Court however did not interfere in the proposed expansion of the business of Ford
Motor. It is recognized that plans must often be made for a long future, for expected
competition, for continuing as well as an immediately profitable venture. The experience of
FMC is evidence of capable management of its affairs. But it noted that the company took
from the public money required for its plan but that the considerable salaries of Mr Ford were
not diminished.
--It is true that a considerable cash balance must be at all times carried by such a concern.
But, cash is coming in and output immediately converted into cash… So, it would appear
that, accepting and approving the plan of the directors, it was their duty to distribute a very
large sum of money to stockholders.
Preference as to Dividends (SEE CHAP XI—FINANCING)
— AOI may provide for stocks with preferences in the distribution of dividends
o Voting
o Non-voting
§ Cumulative
§ Non-cumulative
Burk v Ottawa Gas & Electric Co. F: Suit by preferred SHs of Ottawa Gas, demanding an
accounting of all property and assets and declare and payment of dividends. Burk claims
that earnings of the business were such that the directors owed them an imperative duty to
declare a dividend.
--Ottawa Gas maintain that the corporate has been unable to declare a dividend because its
funds were exhausted by expenditures which it was obliged to make, which was for the
extensions of the company’s plant. TC ruled the extensions necessary and for the
betterment of the plant and its patrons.
H: Reversed and remanded to TC. Under the certificate of PS, the conditions which the
holder may demand a dividend depend on the precise terms of the contract upon which it is
issued.
The fair interpretation of the contract between the corporation and the PS holder is that if in
any year net profits are earned, a dividend is to be declared. To hold that the board has a
discretion to declare or not a dividend when it has funds it can use is to hold that one of the
parties to a contract has the option to pay something to the other or not, at its own election
since, if the dividend is not declare, the benefits of accumulated profits are practically lost to
these SHs. Such a construction should be avoided.
The directors owe a positive duty to pay a dividend to the PS whenever in any year there
were net profits available. Inasmuch as the only possible source of profit to the preferred SH
from his investment is the distribution of earnings in the year in which they accrue, he has
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the right to insist that an accounting be taken annually, and that the surplus of one year,
available for a dividend, shall not be carried over to meet a possible deficiency of the next.
The holder of PS, is however not generally a creditor until a dividend is declared, but if a
dividend ought to have been declared in a certain year to such SHs, they should be regarded
as creditors to such extent from such time or times. The company’s contract with the PS is
not to pay him at all events the amount of 6% of the net profits, but to declare a dividend on
that basis. The obligation of the corporation to pay dividends on the PS out of the yearly net
profits is subordinate to whatever obligation it owes to the public. Therefore if it was
necessary for the corporation to use the surplus in any year to make extension to which
patrons were entitled, a dividend for that year would have been excused.
When Right to Dividends Vests; Rights of Transferee
— Right vests as soon as the dividends have been lawfully declared by the board; from
that time on, it becomes a debt owing by the corporation to each SH and no revocation
can be made
— Whenever such dividend is declared, or the declaration of dividends is made, the
corporation becomes a debtor and the right of the SH to distribution, unless a record
date is specified, becomes fixed by the declaration.
o The amount due to a SH belongs to him and it cannot without his consent be
reverted to the surplus account of the corporation
— Whoever owns or is the SH-of-record of the stocks at the time of declaration also own
the dividends
o GR: Subsequent transfer would not carry with it the right to dividends
McLaran v. Crescent Planning Mill Co. F: McLaran is the administrator of the estate of
Humber, owner of 57 paid-up shares of stock of the Crescent Planning Mill Co. and director
of the company as well as President. The company declared a dividend of 6%, divided into 4
payments of 1/1/2% each. No other action taken to set apart a fund out of which to pay the
dividend although the company was solvent and had adequate surplus. Nonetheless the
officers proceeded to pay Humber and other SHs the 1st installment of the dividend. The next
installment was not paid, the board having discovered an error in the financial statements of
the company such that its assets were overstated by $6000. The board then voted to rescind
and recall the order paying out the dividends and defer the payment indefinitely. The
company was still perfectly solvent and had amply funds to pay the dividend. Humber
demanded payment of his dividend but was refused on account of the recent action by the
board. The corporation contends that there was no declaration because the board failed to
set aside funds for the purpose, and that by virtue of the resolution its former action was
rescinded and the payouts were recalled and put on hold.
I: W/n the mere declaration of a dividend by a solvent corporation creates a debt in favor of
the SH
I: W/n the corporation, having declared a dividend and paid one installment, turn around and
rescind installments yet unpaid
H: Case concerns the declaration of a cash dividend by a solvent corporation possessed of
ample undivided profits and surplus. The corporation contends that a resolution declaring a
dividend is not sufficient to create a dividend or create a debt from the corporation in the
absence of further action in setting apart a fund for the purpose. The court held that if the
declaration of the dividend is fairly and properly made, out of profits existing at the time it
was declared, the relation of debtor and creditor is thereby established between the
corporation and the SHs for the payment of the dividend to the SH. The declaration of
dividends operates as a severance thereof from the stock in the general mass of the
corporate property, and raises an implied promise on the part of the corporation to pay the
SH the amount of the dividend. Action on the part of the corporation in setting aside the fund
for the specific purpose constitutes such moneys as a trust fund in the hands of the
corporation for the use of the SHs and in the event of bankruptcy of the corporation, the SHs
are not required to go in pro rata with the general creditors for such unpaid dividends, but
may proceed as against a trustee on account of such trust fund. Mere declaration of the
dividend, without more, by competent authority under proper circumstances, creates a debt
against the corporation ifo the SHs the same way as any other general creditor of the
concern. The setting apart of a fund thereafter, passes one step further toward securing the
payment of the debt to the SH.
Thus the mere declaration of the dividend itself, without the setting aside of the fund, creates
a debt, and the act of declaring a dividend from the stock and corpus of the corporate
property is ipso facto, in and of itself, the setting apart, setting aside and segregating such
dividends and it creates an immediate right of the SH to demand and recover the same when
due.
Liability for Illegal Dividends
1. Directors
— GR: not liable personally
— Exception: BF, negligence, willful violation of the law
— If liable: liable to corporation and creditors upon insolvency
31
2. SHs
— GR: in the absence of an express provision of law, an innocent SH is not liable
to return the dividends received by him out of capital, unless the corporation
was insolvent at the time of payment
— SHs who received wrongfully or illegally declared dividends can be held liable
to refund them to the corporation or its creditors
o Why? In receiving the dividends, they do not act in a corporate capacity
and is not a ratificatory act of the SHs
Steinberg v Velasco: In determining the legality of declared dividends, the existence of
unrestricted retained earnings alone cannot be the test. The existence of “surplus profits”
alone does not suffice; the corporation should have an actual bona fide surplus from which
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the dividends could be paid, and the payment in full at the time would not affect the financial
condition of the corporation
Remedy in case of illegal distribution of dividends: directors in BF may be held solidarily
liable for the reimbursement of the amount declared as dividend
Purchase by corporation of its own shares
Sec 41: expressly empowers the corporation to acquire its own shares for a legitimate
corporate purpose, provided it has unrestricted retained earnings to cover the shares to be
purchased.
o So long as the acquisition of shares does not exceed the unrestricted retained
earnings, the corporate creditors are deemed protected
o Equivalent to subjecting dividend declaration to the extent of unrestricted retained
earnings
o Acquired shares by the corporation become treasury shares
Corporate purposes:
— To eliminate fractional shares
— To collect or compromise an indebtedness to the corporation arising out of an unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold
— To pay dissenting or withdrawing SHs entitled to payment (appraisal right)
1. Limitations on power: proper purposes and existence of surplus
— A corporation has the power to purchase its own stocks, provided…
o … that payment is made out of surplus profits, i.e. unrestricted retained
earnings, and…
o … it is for a legitimate purpose…
o … subject to appraisal right of SH under 81
— shares reacquired by the corporation become treasury shares, which may be
declared as property dividends to be issued out of retained earnings
previously used to support their acquisition, provided that the amount of the
retained earnings has not be impaired by losses
— reasons for purchase of own shares:
o deadlocks in close corporations (no need for unrestricted retained
earnings)
o SHs may want to keep the corporation close and prevent unwelcome
strangers
o Corporation may want to exercise contractual right to redeem PS or
bonds, regardless of URE (Sec 8)
Sec 41 Power to acquire own shares. - A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
— stock: deferring dividends; plowed back as corporate funds; cannot yet be enjoyed and
possibility that it can never be realized
— property: same as stock divs; risk that it could be 0% book value
— Berks: relate to Strong v Repide; psychic return? Must be realized first!
— Mandatorily declare dividends when unrestricted retained earnings are 10% of paid-in
capital stock; does not include unpaid and outstanding stocks
— St Paul Milk: earmarking for benefit of directors: illegal
— St Paul-Dodge-Burk: comparable cases involving declaration of dividends and right to
compel declaration by the SHs; expansion, nondeclaration, board discretion
— After declaration: debtor-creditor relationship created…
— … but conditions in 43 must still be satisfied!

3. To pay dissenting or withdrawing stockholders entitled to payment for —

their shares under the provisions of this Code. (n)
2. Remedies in case of improper purchase
— As to creditors: those prejudiced by the repurchase by an insolvent
corporation can recover against the selling SHs by recovering the
consideration paid
o Directors can be personally liable for approving the repurchase in BF or
with negligence (Sec 31)
— As to SHs: it reduces what is due them as dividends
o Repurchase can be discriminatory to the other SHs
o Shift in voting control
o Remedy: right of action against the directors under Sec 31
SIR:
Prior to declaration, verify if any retained earnings form part of the assets of the
corporation
— GR: disposition of corporate assets= authority of the board
— Reasonable exercise of judgment= board may opt not to declare
— Remedy of SH: mandamus
— Burden of proof: SH to prove corporate does not need it
— Declaration of dividends: once declared, SH does not obtain shares of ordinary creditor
— Cash: results in recovery of investment
— SH need not wait for dissolution…
— … but does not guarantee that it will be paid
— non-cash: SH conformity must be secured
— why? Deferring payment of cash prolongs exposure to risk of SHs dividends
— stock dividends: plowed back into corporation

— Dividends: cash—director’s approval sufficient; stock/property—2/3 approval OCS

— GR: only those who contributed are entitled to dividends;
— contributions become part of corporate assets; no declaration of dividends, still
corporate property
— GR: dividend declaration discretionary with the board (23)
— Why? Unrestricted retained earnings are owned by the corporation
— Cash v stock/property dividend; willing to risk a stock dividend (more often than not,
stock prices drop when stock dividends are declared)
— Unrestricted retained earnings represent fruits of the investment money; corporation
doesn’t need the money.
— As an investor, I am entitled to return!
— Services rendered can be used as consideration for subscription
— If 100% paid up capital, declare dividends! But it does not mean that the capital stock is
fully-paid up (could only be 25%)
— 43: limitations—needs of company, contractual obligation (ex IPO)
— but need not comply w/ 43; other ways to do it…
— … but corporation has to contend with an opposing SH
— cash: just board approval required

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 Chapter XIV – Amendments to Charter
Amendment by Legislature
— Charter of a private corporation:
o AOI
o Corpo Code
o Special laws (ex General Banking Act, Insurance Code, etc)
— Corporate charter is a contract between SHs and also between the State and the
corporation
— The legislature has the power to make changes in existing corporations through an
amendment to the Corpo Code
o Subject to the limitation that no accrued rights or liabilities be impaired (AMS: and
non-impairment of contracts in Consti)
Sec 145 Amendment or repeal. - No right or remedy in favor of or against any corporation,
its stockholders, members, directors, trustees, or officers, nor any liability incurred by any
such corporation, stockholders, members, directors, trustees, or officers, shall be removed or
impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof. (n)
Amendment by Stockholders
— Power expressly granted by law to all corporations
— Grant of power to 2/3 of capital stock to change the basic agreement between the
corporation and its SHs
o Including those who vote against it subject to right of appraisal where proper
o Subscribers are deemed to have accepted this power to amend as part of their
contract
Sec 36 Corporate powers and capacity. - Every corporation incorporated under this Code
has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions
of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
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6. In case of stock corporations, to issue or sell stocks to subscribers and
to sell stocks to subscribers and to sell treasury stocks in accordance
with the provisions of this Code; and to admit members to the corporation
if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for purposes of partisan
political activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of incorporation.
Sec 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.
— Sec 16 clearly implies that SH meeting is not necessary to effect an amendment of AOI;
mere referendum sufficient
— In all other corporate matters where ultimate decision rests with the SHs, a meeting is
required
— 2/3 vote is on outstanding capital stock which INCLUDES non-voting stock
3. Limitations on power
(1) Must be for a legitimate purpose
(2) Must be with vote or written assent of 2/3 of capital stock or members. No
meeting is required
(3) Appraisal right must be recognized if amendment
— changes rights of SHs or class of shares or
— authorizes preferences superior to those of outstanding
shares or
— extends or shortens corporate term
(4) Extension of corporate term cannot exceed 50 years in any one instance
(5) Certified copy of amended articles be filed with the SEC
(6) Original and amended AOI should contain all matters required by law
(7) Amendment to increase/decrease capital stock or extend/shorten
corporate term cannot be made under Sec 16, but under Sec 38 and
37—requires a meeting
(8) Amendment must be in the prescribed form
— Sec 16 in relation to Sec 42 implies power to add a purpose entirely different
from the original one
o Amendment to AOI + approval of SHs required
4. Grounds for rejection of amendment
Sec 17 Grounds when articles of incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance with the
requirements of this Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
147
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.
5. Amendment changing SHs rights
Sec 81 Instances of appraisal right.- Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or
of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code; and
3. In case of merger or consolidation. (n)
— Power of self-amendment is quite extensive and has been held to include the power of
changing, restricting, or abrogating preemptive rights as well as voting rights
o must be exercised in GF and not merely to defraud or prejudice the minority
o must be for a legitimate purpose
o burden of proving BF on the dissenting SH
— No vested rights of SHs are impaired by the power of self-amendment: one who
becomes a SH is presumed to have accepted his contract with the corporation subject
to the power of self-amendment
— Remedy: exercise appraisal right
Marcus v. RH Macy & Co Inc. F: Marcus is registered owner of 50 shares of common stock
of RH Macy.
--Resp had auth capitalization of 500K shares of cumulative PS ($100 pv) and 2.5M CS no
par. Issued: 165K PS and 1.656M CS
--PS had no voting rights except for specified contingencies.
--A proposal was approved during the SHs meeting that the articles be amended as to add
voting rights—equal share for share—as enjoyed by holders of the common stock, to the
rights of preferred SHs.
--Marcus objected to the proposed amendment and notified the corporation. She also
demanded payment for the common stock then owned by her. During the said meeting, her
common stock was voted against such amendment.
--She then sues to determine the value of her stock as a basis of the enforcement of
payment therefor. Her application for the appointment of appraisers having denied, and
affirmed by the Appellate court.
I: WON Marcus can invoke her appraisal right and to enforce payment of the value of her
stock.
H: YES.
--The amendment granted to the PS additional rights which increased their voting privileges
from a right to vote only in specified contingencies to voting rights equal share for share to
those which CS are entitled. The result was that the aggregate number of shares having
voting rights equal to those of the CS was substantially increased and thereby the voting
power of each common share outstanding was altered or limited by the resulting prorata
diminution of its potential worth as a factor in the management of the corporation.
--Such alteration or limitation in the voting power of the CS held by Marcus, considering that
she objected to the amendment, notified the company, and the corporation caused her
shares to be voted against the proposal to amend, was sufficient to qualify her to invoke the
statutory procedure which is the basis for her present action.
-- By thus limiting the voting power of Marcus’ common shares to a proportionate extent, the
corporate action to which she objected was of such a character as to afford her a legal basis
to invoke the procedure as a means to accomplish the appraisal of her stock and payment
therefor.
--Even if she owns only 50 shares, which the corporation argues as de minimis compared to
the entire universe of shares of the corporation, and even if it is claimed that she is not in
GF, as argued that if she did have a bona fide desire to sell her CS she could have done so
during the said meeting for 3X the amount of her investment, the court ruled that since the
law does not mention a minimum percentage or value of stock which must be owned by a
non-consenting SH to qualify him to invoke the statutory procedure, it should be applied as
is.
6. Effectivity of amendment
— GR: Amendment takes effect only upon approval by the SEC
o Made within 6 months from filing of amendment
o Exception: beyond 6 months, it takes effect even without approval, on the date of
filing
§ Exception to exception: delay is due to some cause attributable to the
corporation
148
7. Special amendments (four kinds)
— Meeting is required in all these cases
— SEC approval is required
— Grounds for rejection applicable
(1) Increase of capital stock
— Corporation may be organized with an authorized capital stock in excess of what may
be intended to cover shares presently issued (Sec 97[2])
o Board may dispose of unissued shares to obtain more capital
o But amendment needed if authorized capital stock is fully subscribed and
corporation needs to issue shares for more capital
o Overissuance or issuance of shares beyond authorized limit is void
— Power to increase capital stock must be substantially in accordance with the grant of
power in the Code
Sec 38 Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur, create
or increase any bonded indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or increasing of any
bonded indebtedness and of the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the names,
nationalities and residences of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to
 each stock-holder if such increase is for the purpose of making effective — Certificate of increase or decrease + Treasurer’s affidavit must be attached to original
stock dividend therefor authorized; AOI; no need to file copy of amended AOI
o At least 25% of increased capital stock subscribed
(4) Any bonded indebtedness to be incurred, created or increased; o At least 25% of subscription to increased capital stock paid in
— SH meeting required: 2/3 OCS
o Includes transfer of profits to capital stock for distribution as stock dividends
(5) The actual indebtedness of the corporation on the day of the meeting; § Consideration in this case must be in cash or property
§ No increase allowed on the basis of mere revaluation of corporate assets
(6) The amount of stock represented at the meeting; and — Three ways to effect the increase in capital stock:
o Increase in par value of each share, but no increase in number of shares
o Increase in number of shares, but no increase in par value
(7) The vote authorizing the increase or diminution of the capital stock, or
o Increase in both par value and number of each share
the incurring, creating or increasing of any bonded indebtedness.
— GR: No appraisal right in any of the three
o Except: where preferences were subsequently created superior to the existing
Any increase or decrease in the capital stock or the incurring, creating or increasing of any shares, SHs have appraisal right
bonded indebtedness shall require prior approval of the Securities and Exchange § Covers special amendments under Sec 38, and general amendment to
Commission. create new classes of shares in Sec 16
§ Requirements in both must be met
One of the duplicate certificates shall be kept on file in the office of the corporation and the § SH meeting indispensable
other shall be filed with the Securities and Exchange Commission and attached to the — Existing SHs have pre-emptive right to the new shares issued
original articles of incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of filing, the capital stock (2) Reduction of capital stock
shall stand increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That the — No reduction will be approved by the SEC if it will prejudice the rights of corporate
Securities and Exchange Commission shall not accept for filing any certificate of increase of creditors
capital stock unless accompanied by the sworn statement of the treasurer of the corporation — Can an over-reduction of capital, resulting in a capital surplus, be declared and
lawfully holding office at the time of the filing of the certificate, showing that at least twenty- distributed as dividends?
five (25%) percent of such increased capital stock has been subscribed and that at least o No. a distribution of corporate assets other than actual profits, is prohibited until
twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to after dissolution of the corporation.
the corporation or that there has been transferred to the corporation property the valuation of o Exception: decrease of capital stock
which is equal to twenty-five (25%) percent of the subscription: Provided, further, That no — Reasons for decreasing capital stock:
decrease of the capital stock shall be approved by the Commission if its effect shall prejudice o Prevent or arrest a capital deficit
the rights of corporate creditors. o Creation of a capital surplus, against which declines in the value of fixed assets
may be charged
o Retire of eliminate treasury shares instead of reissuing them
Non-stock corporations may incur or create bonded indebtedness, or increase the same, o When the corporation does not need any more additional capital
with the approval by a majority vote of the board of trustees and of at least two-thirds (2/3) of — Appraisal right is available if the reduction has the effect of altering the rights of any
the members in a meeting duly called for the purpose. SH/SHs

Bonds issued by a corporation shall be registered with the Securities and Exchange
Commission, which shall have the authority to determine the sufficiency of the terms thereof.
(17a)
— Increase/decrease cannot retroact to the date of SH approval but takes effect only upon
issuance of certificate
o Subscription to the increase does not vest subscriber with right to vote
Philippine Trust Co. v. Rivera. F: PhilTrust is the assignee in the insolvency case of La
Cooperativa Naval Filipina. It sues Marciano Rivera, an incorporator who subscribed for
450 shares of the insolvent, to recover the balance of P22,500, alleged to have been due on
his subscription to the stock of the insolvent. (Orig capitalization of Naval = P100,000, at
P100 par or 1,000 shares.
Rivera subscribed to 450 shares ((P45K)

149
--Rivera claims that during a SHs mtg, it was agreed that the capital of the company be
reduced by 50% and the subscribers released from the obligation to pay any unpaid balance
of their subscription in excess of 50% of the total subscribed shares.
--There was no compliance with the formalities of the statute relative to the reduction of
capital stock. TC ruled that the resolution was without effect and that Rivera was still liable
for his unpaid subscription.
H: Resolution invalid. subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of debts.
A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his unpaid shares without a valuable consideration for such a
release. Strict compliance with the requirements of law is necessary.
The resolution releasing the SHs from their obligation to pay 50% of their respective
subscriptions was an attempted withdrawal of so much capital from the fund which the
company’s creditors are entitled to rely and, having been effected without statutory
compliance, was wholly ineffective.
CAMPOS: As a practical matter, even if requirements to reduce capitalization are complied
with, if creditors would be prejudiced by the reduction, it is most unlikely that the SEC will
approve it.
— Resolution releasing the SHs from their obligation to pay the 50% of their subscriptions
was an attempted withdrawal of so much capital from the fund upon which the
company’s creditors were entitled ultimately to rely on and having been effected without
compliance with the statutory requirements, was wholly ineffectual.
— The subscription to the capital of a corporation constitute a fund to which creditors have
a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the
payments of its debts
— Subscriptions payable can be cancelled if there is a reduction in capital stock:
o Which is possible if done with the consent of the creditors, or…
o If they will not prejudiced by such move, in which case their consent is not
necessary
(3) Change in corporate term
— Shortening of term:
o When corporation desires to dissolve itself before expiration of term
o as soon as shortened term expires, corporation is ipso facto dissolved
— Extension of term:
o When business is prosperous
— Procedural requirements: Sec 37
— Conditions required: Sec 11
150
Sec 37 Power to extend or shorten corporate term. - A private corporation may extend or
shorten its term as stated in the articles of incorporation when approved by a majority vote of
the board of directors or trustees and ratified at a meeting by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the
members in case of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise his appraisal right
under the conditions provided in this code. (n)
Sec 11 Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years
from the date of incorporation unless sooner dissolved or unless said period is extended.
The corporate term as originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an amendment of the articles
of incorporation, in accordance with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the Securities and
Exchange Commission.
— Any change in corporate term must be approved at SH meeting
— Dissenting SH has appraisal right
— Sec 37: appraisal right in extension of term
— Sec 81: appraisal right both in extension and shortening
— When does change take effect?
o Must be governed by general provisions on amendment in Sec 16
§ Certified copy of amended AOI filed with SEC, etc…
§ Takes effect upon SEC approval
§ Does not act within 6 mos: approved as of date of filing
o Amendment to extend must be approved and filed prior to expiration of original
term
§ But cannot be made earlier than 5 mos prior to expiration
8. Amendments in close corporations
— Secs 16, 17, 37, 38 also apply to close corporations
— Sec 103: applies only to close corporations
Sec 103 Amendment of articles of incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any provision required by this Title to be
contained in the articles of incorporation or to reduce a quorum or voting requirement stated
in said articles of incorporation shall not be valid or effective unless approved by the
affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or
without voting rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
 — Appraisal right: “my investment covered by a contract, thus any change would affect
— Provisions required to be in the AOI of a close corp: SHs rights, giving rise to appraisal rights or pre-emptive rights
o All issued stock of all classes held by not more than 20 persons — If amendment impairs SHs rights, 81 grants a remedy
o All issued stock subject to one or more specific restrictions on transfer — 81 also includes corporate acts not covering amendments to charter
o Corporation shall not be listed in stock exchange or make any public offering — if SH dissents, 81 provides an exit
— If any of the above are deleted, it will cease to be a close corp and will lose special — but note which rights are affected
privileges in Title XII — does the change affect SH rights?
— Non-voting stocks are given a voice in the decision — appraisal rights in:
— 2/3 OCS vote is required — changing primary purpose? Yes
— deadlocks, such that business can no longer be conducted to the advantage of SHs — decreasing no. of directors ? yes. Affects cumulative voting;
generally: SEC may arbitrate the dispute and order cancellation or alteration of AOI or — changing classification of shares? Yes. Economic rights
by-laws if necessary — increasing no of directors? Yes. Control and management
— increase/decrease in capital stock? Yes!
SIR:

Appraisal Right (81) — Existence of unrestricted retained earnings

— Nature of right o 81: no payment shall be made to a dissenting SH unless corp has unrestricted
o Refers to a SH’s right to demand payment of the fair value of his shares, after retained earnings; if not paid, 83 would then apply
dissenting from a proposed corporate action involving a fundamental change in the — when right to payment ceases:
corporate setting o GR: dissenting SH cannot withdraw demand for payment Exceptions:
o Granted where there is a radical change in the contractual relationship presumably § Corporation consented to withdrawal
agreed upon bet the SH and corp § Proposed corporate action is abandoned or rescinded
— Entitled to exercise § Proposed corporate action is disapproved by SEC
o A prejudiced SH is one who dissented in the meeting where the proposal or § SEC rules that SH is not entitled to the right
proposed amendment was approved; mere absentation or silence, does not entitle — Who bears cost? Corporation
such SH to exercise the right — Denial/waiver of right
— 37, 42, 81: instances when aprraisal right may be exercised: o GR: corporation cannot deny/deprive appraisal right of SH in AOI or by-laws
o any amendment to the AOI that changes/restricts rights of SHs o Exception: SH can waive, but individually and in some cases for consideration
o any authorization of preferences superior to outstanding shares of any class — Exercise of appraisal right has the direct effect of diverting resources from corporate
o extending/shortening of corporate term coffers and may have serious financial implications
o sale, lease, exchange, transfer, mortgage, pledge, disposition of all or substantially — An alternative remedy would be to dispose of SHs shares
all corporate assets — But appraisal right is preferred over suits to enjoin corporate acts
o investment of funds in another corp or business outside its primary purpose
o merger or consolidation
— how exercised
o written demand within 30 days after date of vote
o failure to make demand is deemed waiver
o surrender stock certificate for notation as dissenting stock; otherwise, corporation
may terminate appraisal right
— Effect of demand
o All rights of dissenting SH suspended
o 83: If not paid fair value within 30 days after award, voting and dividend rights must
be immediately restored

— Look at Sec 6 vis-à-vis Sec 81

— If the change is under 81, it becomes mandatory for the corporation to grant/recognize
SHs appraisal right

151
 Chapter XV – Transfer of Shares
— Free transferability of units of ownership in a corporate setting is one of the attractive
features of the corporation
— Shares of stock in a corporation are personal property and the owner thereof has an
inherent right, as an incident of his ownership, to transfer the same at will
— SEC has allowed reasonable restrictions on transfer of shares in the AOI if the
restrictions comply with Section 93:
o that the restriction must appear in the AOI, by-laws and certificates of stock
o restrictions must not be more onerous than granting the existing SHs or the
corporation the option to purchase the shares under reasonable terms
Manner and effectivity of transfer
— Shares of stock, though intangible, are personal property, and are freely transferable by
the owner thereof
Sec 63 Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vice
president, countersigned by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the by-laws. Shares of stock so issued
are personal property and may be transferred by delivery of the certificate or certificates
endorsed by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)
— Endorsement and delivery of the certificate and the registration of the transfer in the
book of the corporation is only one of the modes recognized by law by which to legally
and effectively sale and assign shares that would be binding not only on the parties but
also to the corporation and to third parties who will deal with the covered shares
— Magsaysay-Labrador case: the sale or assignment must be registered in the stock and
transfer book of the corporation in order to be binding on third parties. A transferee
cannot claim a right to intervene as SH in corporate issues on the strength of the
transfer of shares allegedly executed by a registered SH
The Stock Certificate
— 63: capital shall be divided into shares for which certificates signed by the president or
VP, countersigned by secretary, sealed with the corporate seal shall be issued in
accordance with the by-laws
152
— 64: no certificate shall be issued until the full amount of his subscription + interest +
expenses shall be paid
o therefore a subscriber must pay his subscription totally before a certificate can be
issued to him…
o … but an unpaid and not declared delinquent subscription can be vote for and
upon in corporate meetings
o delinquent shares, however, are entitled to dividends subject to the rules in Sec 43
Nature of stock certificate
— De los santos: stock certificate is not a negotiable instrument, but is considered quasi-
negotiable:
o it may be transferred by endorsement + delivery but…
o … is not negotiable because the holder take it without prejudice to such rights or
defenses as registered owners or transferor’s creditor may have under the law,
subject to limitations imposed by law on estoppel
— SEC: evidence of ownership of shares and that a person may own shares without
possessing a stock certificate, provided as he is duly recorded in the books as a
subscriber and owner, he is entitled to all the rights of a SH
Probative value
— The stock certificate, once issued, is a continuing affirmation or representation that the
stock described is valid and genuine and is at least prima facie evidence of ownership
of stock
o as long as the subscriber is duly recorded in the books as the owner of the shares,
he is considered a SH of record and entitled to all rights of a SH
Issuance of the stock certificate
— Issuance of shares must have the signature of the president or VP, countersigned by
the corporate secretary or assistant secretary, and sealed with the corporate seal
— Issuance is NOT necessary to constitute the subscriber a SH of the corporation…
— … but delivery of the certificate is an essential element of the issuance
— 63: Every SH has the right to have a proper certificate issued to him upon demand:
o provided he complies with the requirements/conditions in 64 i.e. FULL payment of
subscription
— SEC: remedies available to a SH if a corporation wrongfully refuses to issue a
certificate:
o File a suit for specific performance
o File for alternative relief by way of damages
o File a petition for mandamus to compel the issuance
o Rescind the contract of subscription and sue to recover payment
Negotiation of the certificate of stock
— Endorsement + delivery = quasi-negotiability
o Endorsement: essential requisite
o SEC: AOI cannot do away with the endorsement requisite for a valid negotiation
o 63 is mandatory
— Three (3) purposes:
o Sale and assignment
o Pursuant to a trust or nominee arrangement
o Pledge or other encumbrance of the shares
1. Indorsement of stock certificate; registration in corporate books
— At the back of ever stock certificate is a transfer form with blank spaces for the
transferee’s name
— When a SH wants to transfer his shares, all he has to do is to sign the form. He need
not fill the blanks as this may be done by the transferee
— Sec 74: The stock and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be open for inspection to
any director or SH at reasonable hours on business days
2. Effect of lack of registration
— Until registration is accomplished, the transfer, though valid between the parties, cannot
be effective as against the corporation
— Unrecorded transferees cannot enjoy the status of a SH—he cannot vote or be voted for
and will not be entitled to dividends
— Until challenged in a proper proceeding, a SH of record has the right to participate in
any meeting
— In order to be recognized as SH for voting purposes, his transfer must be recorded on
the books
— If refused, he can go to court to prove his right
— Until transfer is registered, transferee is not a SH but an outsider, and any action he
may wish to bring against the corporation must be brought before the regular courts and
not the SEC
— An unregistered transfer, not being effective against persons other than the parties
thereto, cannot prevail over the rights of a subsequent attaching creditor
Uson v Diasomoto. F: Unson is the creditor of Diosomoto, who is original owner of 75
shares of North Electric which were levied by a writ of attachment to satisfy the judgment
creditor. Uson obtained judgment against Diosomoto and the shares were sold at public
auction to the judgment creditor Uson.
--Diosomoto sold the shares attached to Barcelon and delivered the corresponding
certificates. The transfer to Barcelon was not registered and noted on the books of the
corporation until after 9 months after the attachment was levied and later (9 months after)
transferred to HPE Jollye. HPL Jollye claims to be owner of the 75 shares and presents a
certificate of stock issued by North Electric.
I: W/n a bona fide transfer of shares of a corporation, not registered or noted on the books, is
valid as against a subsequent lawful attachment of said shares, regardless of whether the
attaching creditor had actual notice of the transfer or not .
153
H: GR: NO> No transfer is valid except as between the parties unless it is duly registered.
All transfers of shares must be entered on the books of the corporation. All transfers not so
validly entered are invalid as to attaching or execution creditors of the assignors, of the
corporation, and as to all subsequent purchasers in GF, and even to all parties interested. All
transfers not so entered on the books are absolutely void, not because they are without
notice or fraudulent in law, but because they are made void by the statute. Courts in the
Phils adhere to the principle that the right of the owner of the shares to transfer to same by
delivery of the certificate, whether it be regarded as statutory or common law right, is limited
and restricted by the express provision that “no transfer shall be valid except as between the
parties, until the transfer is entered and noted upon the books of the corporation.
The right of the owner of the shares of a corporation to transfer the same by delivery of the
certificate, whether it be regarded by the express provision that “no transfer however shall be
valid except as between the parties, until the transfer is entered and noted upon the books of
the corporation.”
--The transfer of 75 shares in the NEC, made by Diosomito to Barcelon was not valid as to
Uson, on Jan 18, 1932, the date on w/c they still stood in the name of Diosomito on the
books of the corp.
Nautica Canning Corp v Yumul. F: Roberto C. Yumul was appointed COO/General
Manager of Nautica. On the same date, First Dominion Prime Holdings, Inc., Nautica’s
parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase
up to 15% of the total stocks it subscribed from Nautica. A Deed of Trust and Assignment
was executed between First Dominion Prime Holdings, Inc. and Yumul whereby the former
assigned 14,999 of its subscribed shares in Nautica to the latter. The deed stated that the
14,999 “shares were acquired and paid for in the name of the ASSIGNOR only for
convenience, but actually executed in behalf of and in trust for the ASSIGNEE.” After
Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter to Dee requesting the
latter to formalize his offer to buy Yumul’s 15% share in Nautica on or before August 20,
1996; and demanding the issuance of the corresponding certificate of shares in his name
should Dee refuse to buy the same. Dee, through Atty. Fernando R. Arguelles, Jr., Nautica’s
corporate secretary, denied the request claiming that Yumul was not a stockholder of
Nautica. Yumul requested that the Deed of Trust and Assignment be recorded in the Stock
and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books
and records. Yumul’s requests were denied allegedly because he neither exercised the
option to purchase the shares nor paid for the acquisition price of the 14,999 shares. Atty.
Arguelles maintained that the cash dividend received by Yumul is held by him only in trust for
First Dominion Prime Holdings, Inc. Nautica et al contend that Yumul was not a stockholder
of Nautica; that he was just a nominal owner of one share as the beneficial ownership
belonged to Dee who paid for said share when Nautica was incorporated. They also allege
that Yumul was given the option to purchase shares of stocks in Nautica under the Option to
Purchase, and since he failed to exercise the option, there was thus no cause or
consideration for the Deed of Trust and Assignment, which makes it void for being simulated
or fictitious.
H: The SEC and CA correctly found Yumul to be a stockholder of Nautica, of one share of
stock recorded in Yumul’s name, although allegedly held in trust for Dee. Nautica’s Articles
of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC
indicated that Yumul was an incorporator and subscriber of one share. Even granting that
there was an agreement between Yumul and Dee whereby the former is holding the share in
trust for Dee, the same is binding only as between them. From the corporation’s vantage
point, Yumul is its stockholder with one share, considering that there is no showing that
Yumul transferred his subscription to Dee, the alleged real owner of the share, after
Nautica’s incorporation. Other than petitioners’ self-serving assertion that the beneficial
ownership belongs to Dee, they failed to show that the subscription was transferred to Dee
after Nautica’s incorporation. The conduct of the parties also constitute sufficient proof of
Yumul’s status as a stockholder. On April 4, 1995, Yumul was elected during the regular
annual stockholders’ meeting as a Director of Nautica’s Board of Directors. Thereafter, he
was elected as president of Nautica. Thus, Nautica and its stockholders knowingly held
respondent out to the public as an officer and a stockholder of the corporation.
The SC refrained from ruling on whether or not Yumul can compel the corporate secretary to
register said deed. It held it to be a question which is civil in nature and thus beyond the
ambit of the SEC, the court of origin of the current action. It is only after an appropriate case
is filed and decision rendered thereon by the proper forum can the issue be resolved.
Razon v IAC. F: Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for
the arrastre services in South Harbor. Vicente Chuidian is the administrator of the intestate
estate of Juan Telesforo Chuidian. A stock certificate for 1,500 shares of stock of E Razon
Inc was issued in the name of Juan T. Chuidian. On the basis of the 1,500 shares of stock,
the late Juan T. Chuidian and after him, Vicente Chuidian, were elected as directors of E.
Razon, Inc. Enrique Razon had not questioned the ownership by Juan T. Chuidian of the
shares of stock in question and had not brought any action to have the certificate of stock
over the said shares cancelled. The certificate of stock was in the possession of defendant
Razon who refused to deliver said shares to the plaintiff, until the same was surrendered by
defendant Razon and deposited in a safety box in Philippine Bank of Commerce. 1,500
shares of stook under Stock Certificate No. 003 were delivered by the late Chuidian to
Enrique because it was the latter who paid for all the subscription on the shares of stock in
the defendant corporation and the understanding was that he (defendant Razon) was the
owner of the said shares of stock and was to have possession thereof until such time as he
was paid therefor by the other nominal incorporators/ stockholders. Since then, Enrique
Razon was in possession of said stock certificate even during the lifetime of the late
Chuidian, from the time the late Chuidian delivered the said stock certificate to Razon. By
agreement of the parties delivered it for deposit with the bank under the joint custody of the
parties. TC ruled Razon owns the shares, IAC reverses.
Razon claims that the shares of stock were registered in the name of Chuidian only as
nominal stockholder and with the agreement that the said shares of stock were owned and
held by the petitioner but Chuidian was given the option to buy the same. Vicente B.
Chuidian insists that the appellate court's decision declaring his deceased father Juan T.
Chuidian as owner of the 1,500 shares of stock of E. Razon, Inc. should have included all
cash and stock dividends and all the pre-emptive rights accruing to the said 1,500 shares of
stock.
154
I: Who owns the shares? Does ownership of the said shares include all cash and dividends?
H: (1) Chuidian owns the shares. For an effective, transfer of shares of stock the mode and
manner of transfer as prescribed by law must be followed. As provided under the
Corporation Code of the Philippines, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in the transferee by the
delivery of the duly indorsed certificate of stock. However, no transfer shall be valid, except
as between the parties until the transfer is properly recorded in the books of the corporation.
In the instant case, there is no dispute that the questioned 1,500 shares of stock of E.
Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation.
Moreover, the records show that during his lifetime Chuidian was elected member of the
Board of Directors of the corporation which clearly shows that he was a stockholder of the
corporation. From the point of view of the corporation, therefore, Chuidian was the owner of
the 1,500 shares of stock. In such a case, the petitioner who claims ownership over the
questioned shares of stock must show that the same were transferred to him by proving that
all the requirements for the effective transfer of shares of stock in accordance with the
corporation's by laws, if any, were followed or in accordance with the provisions of law.
Razon however did not present any by-laws which could show that the 1,500 shares of stock
were effectively transferred to him. In the absence of the corporation's by-laws or rules
governing effective transfer of shares of stock, the provisions of the Corporation Law are
made applicable to the instant case.
The law is clear that in order for a transfer of stock certificate to be effective, the certificate
must be properly indorsed and that title to such certificate of stock is vested in the transferee
by the delivery of the duly indorsed certificate of stock. (Section 35, Corporation Code) Since
the certificate of stock covering the questioned 1,500 shares of stock registered in the name
of the late Juan Chuidian was never indorsed to the petitioner, the inevitable conclusion is
that the questioned shares of stock belong to Chuidian. The petitioner's asseveration that he
did not require an indorsement of the certificate of stock in view of his intimate friendship with
the late Juan Chuidian can not overcome the failure to follow the procedure required by law
or the proper conduct of business even among friends. To reiterate, indorsement of the
certificate of stock is a mandatory requirement of law for an effective transfer of a certificate
of stock. The preponderance of evidence also supports the findings that the shares of stock
were given to Juan T. Chuidian for value. Juan T. Chuidian was the legal counsel who
handled the legal affairs of the corporation. We give credence to the testimony of the private
respondent that the shares of stock were given to Juan T. Chuidian in payment of his legal
services to the corporation. Razon failed to overcome this testimony.
(2) The cash and stock dividends and all the pre-emptive rights are all incidents of stock
ownership. The rights of stockholders are generally enumerated as follows: [F]irst, to have a
certificate or other evidence of his status as stockholder issued to him; second, to vote at
meetings of the corporation; third, to receive his proportionate share of the profits of the
corporation; and lastly, to participate proportionately in the distribution of the corporate
assets upon the dissolution or winding up.
— Oral testimony to show that one is the principal or beneficial owner of shares
for which he has allowed a certificate of stock to be issued in the name of his
alleged nominee will not be sufficient basis to claim rightful ownership over the
 shares of stock.
— The law is clear that in order for a transfer of stock certificate to be effective,
the certificate must be properly indorsed and that title to such certificate of
stock is vested in the transferee by delivery of the duly indorsed stock
certificate.
3. No registration of transfer of unpaid shares
— Any unpaid balance on the subscription—there can be no stock certificate on which an
indorsement may be made. Shares are thus not transferable on the books
— The words “unpaid claim” in Sec 63 does not necessarily mean that there should have
been a previous call by the board
o As long as any portion remains unpaid, a corporation has a claim on the shares,
and may demand for the same
— Corporation may agree to record a transfer even if there is still an unpaid balance,
provided the transferee assumes the obligation to pay the balance
— Under 63 no shares of stock against which the corporation hold any unpaid claim shall
be transferable in the books of the corporation
o A corporation may refuse to register a sale or assignment of shares not fully paid
o China Banking Corp case: principle of non-registration of unpaid shares not
applicable in pledged shares sold at public auction
o Unpaid claims refers to any unpaid claims arising from unpaid subscription, and not
to any indebtedness which a subscriber may owe a corporation from other
transactions
— Baltazar: since it was the practice and procedure of the corporation to issue certificates
of stock to its individual subscribers, it may not take away the right to vote granted by
the certificates
o 64: provides a legal basis for the corporation through its board to refuse any claim
by a subscriber to issue stock certificates covering the extent of share as that have
been paid-up while leaving the remaining balance unpaid
o 64 does not prohibit the corporation from dividing the subscription of a subscriber
by considering the portion thereof as fully paid and issuing a corresponding
certificate over the paid-up shares; such option is only granted to the corporation
o Thus a corporation may apply payments made by subscribers on their
subscriptions either as:
§ Full payment for the corresponding number of shares, the par value of
which is covered by such payment, (Baltazar) or…
§ Payment pro-rata to each and all the entire number of shares subscribed
for (Nava and Fua Cun)
— Sale of portion of not fully paid shares
o SH cannot transfer part of his subscription—indivisibility of subscription of contract
(Nava and Fua Cun)
o Difficult to determine whether or not partial payments made should be applied as
full payment
— Sale of entire not fully paid shares
o Entire subscription not fully paid may be transferred to a single transferee
155
§ Must secure the consent of the corporation since the transfer
contemplates a novation of contract
§ But cannot be forced upon the corporation
— When shares fully paid
o Shares of stock issued with stock certificates become personal property and may
be transferred by deliver of the certificate endorsed by the owner
4. Remedy if registration refused
— Transferee may petition the court for a writ of mandamus to compel registration or the
issuance of a new certificate
o There must be no other plain, speedy and adequate remedy
o There are no unpaid claims against stocks whose transfer sought to be recorded
— Right to have transfer registered exists from the time of the transfer and it is to the
transferee’s benefit that the right be exercised early
— Mere blank indorsement of the certificate of stock by itself does not clearly and
unequivocally indicate that the registered owner’s wish to have the certificate cancelled
and a new one issued in the name of the holder.
Rural Bank of Salinas v. CA. F: Clemente G. Guerrero, President of the Rural Bank of
Salinas, Inc., executed a Special Power of Attorney in favor of his wife, private respondent
Melania Guerrero, giving and granting the latter full power and authority to sell or otherwise
dispose of and/or mortgage 473 shares of stock of the Bank registered in his name.
Pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as
Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in
favor of private respondents, and executed a Deed of Assignment for the remaining one (1)
share of stock in favor of private respondent Francisco Guerrero, Sr. Melania Guerrero
presented to petitioner Rural Bank of Salinas the two (2) Deeds of Assignment for
registration with a request for the transfer in the Bank's stock and transfer book of the 473
shares of stock so assigned, the cancellation of stock certificates in the name of Clemente
G. Guerrero, and the issuance of new stock certificates covering the transferred shares of
stocks in the name of the new owners thereof. However, petitioner Bank denied the request
of respondent Melania Guerrero.
I: W/n the courts can compel by Mandamus the Rural Bank of Salinas to register in its stock
and transfer book the transfer of 473 shares of stock to private respondents.
H: Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to
hear and decide cases involving intracorporate controversies. An intracorporate controversy
has been defined as one which arises between a stockholder and the corporation. There is
no distinction, qualification, nor any exception whatsoever. The case at bar involves shares
of stock, their registration, cancellation and issuances thereof by petitioner Rural Bank of
Salinas. It is therefore within the power of respondent SEC to adjudicate. Said Section (Sec.
35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no restriction as to
whom the stocks may be transferred. It does not suggest that any discrimination may be
created by the corporation in favor of, or against a certain purchaser. The owner of shares,
as owner of personal property, is at liberty, under said section to dispose them in favor of
whomever he pleases, without limitation in this respect, than the general provisions of law,
the only limitation imposed by Section 63 of the Corporation Code being any unpaid claim
held by the corporation against the shares intended to be transferred, which is absent in this
case. The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. Whenever a corporation refuses to
transfer and register stock in cases like the present, mandamus will lie to compel the officers
of the corporation to transfer said stock in the books of the corporation" (Fleisher vs. Botica
Nolasco). The corporation's obligation to register is ministerial. In transferring stock, the
secretary of a corporation acts in purely ministerial capacity, and does not try to decide the
question of ownership. The duty of the corporation to transfer is a ministerial one and if it
refuses to make such transaction without good cause, it may be compelled to do so by
mandamus. For the petitioner Rural Bank of Salinas to refuse registration of the transferred
shares in its stock and transfer book, which duty is ministerial on its part, is to render
nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code.
Restrictions on transfer; close corporations
Underlying doctrine on transfer restrictions
— Public policy against “restraint of trade”; shares of stock are considered species of trade
and occupation through the participation in the business enterprise of the corporate
entity
o A contract “in restraint of trade” is valid provided there is a limitation upon either
time or place; restraint must be reasonable necessary for the protection of the
contracting parties (Villa Rey v Ferrer)
o Reasonable restrictions recognized by the SEC:
§ Not more onerous than granting existing SHs or the corporation the
option to purchase the shares
§ Not valid if absolute prohibition against sale or transfer of shares without
consent of the existing SHs
§ Reasonable option period: 30-60 days
§ After expiration, SH should be free to dispose his shares to anyone
— Non-competition clause
o SEC: valid stipulation in the AOI or BLs as a condition for being a SH
§ Based on the inherent right of the corporation to preserve and protect
itself by excluding competitors or hostile interests
1. general rule: free transferability of shares
— free transferability: one of the most important advantages of the corporation over a
partnership
o furnishes a SH a convenient means of raising funds whenever the need arises (i.e.
can sell or use shares as collateral)
o when SH is dissatisfied with management, he can get out of the business by selling
his share subject to no restriction
2. exception: in close corporations
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— reason: ownership and management are vested in the same peoplem and there is
wariness about any stranger coming in
— restrictions on transfer a means for SHs of close corporations to protect themselves
from future conflicts so that outsiders cannot come in
Sec 96-99
Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of
this Code, is one whose articles of incorporation provide that: (1) All the corporation's issued
stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (2) all the issued stock of all
classes shall be subject to one or more specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights
is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest in accordance with the provisions of
this Code.
The provisions of this Title shall primarily govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply suppletorily except insofar as this Title
otherwise provides.
Sec. 97. Articles of incorporation. - The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of the
corporation shall be managed by the stockholders of the corporation rather than by a board
of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
 2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying
the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees or that
specified officers or employees shall be elected or appointed by the stockholders, instead of
by the board of directors.
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right to
transfer shares must appear in the articles of incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in
good faith. Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated therein. If upon the
expiration of said period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any third person.
Sec. 99. Effects of issuance or transfer of stock in breach of qualifying conditions. -
1. If stock of a close corporation is issued or transferred to any person
who is not entitled under any provision of the articles of incorporation to
be a holder of record of its stock, and if the certificate for such stock
conspicuously shows the qualifications of the persons entitled to be
holders of record thereof, such person is conclusively presumed to have
notice of the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the number
of persons, not exceeding twenty (20), who are entitled to be holders of
record of its stock, and if the certificate for such stock conspicuously
states such number, and if the issuance or transfer of stock to any person
would cause the stock to be held by more than such number of persons,
the person to whom such stock is issued or transferred is conclusively
presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the
stock is conclusively presumed to have notice of the fact that he has
acquired stock in violation of the restriction, if such acquisition violates
the restriction.
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4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section
to have, notice either (a) that he is a person not eligible to be a holder of
stock of the corporation, or (b) that transfer of stock to him would cause
the stock of the corporation to be held by more than the number of
persons permitted by its articles of incorporation to hold stock of the
corporation, or (c) that the transfer of stock is in violation of a restriction
on transfer of stock, the corporation may, at its option, refuse to register
the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall not applicable if the transfer of
stock, though contrary to subsections (1), (2) of (3), has been consented
to by all the stockholders of the close corporation, or if the close
corporation has amended its articles of incorporation in accordance with
this Title.
6. The term "transfer", as used in this section, is not limited to a transfer
for value.
7. The provisions of this section shall not impair any right which the
transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
— can a corporation not closed place restrictions on the transfer of its stocks?
o Campos: transfer restrictions are exceptions to the general rule of free
transferability; thus would only apply to closed corporations because of their
peculiar nature
3. intrinsic validity of various kinds of restrictions
— dual nature of the share of stock as both a contract and property
o as property: stock transfer restrictions invalid since alienation of property cannot be
subjected to any restriction
o as contract: parties should have freedom to impose such terms and conditions
deemed fit
— Fleischer v Botica Nolasco: SC held a by-law giving the corporation an option to buy
such shares which a SH wished to transfer as ultra vires because it is violative and in
restraint of property rights of SHs
— Restrictions on transfer must be reasonable under the circumstances to justify their
exception to the rule of free transferability
— An absolute prohibition to transfer shares, even when contained in the AOI, would be
void since it would violate 63
(1) consent restriction or right of prior consent
— def’n: restriction which requires consent of the directors or of other SHs before
any transfer may be made
— would not be valid under the Corpo Code because it is more onerous than the
option restriction allowed by the Code
(2) option restriction or right of first refusal; valid if reasonable
— right of first refusal: provides that a SH who may wish to sell or assign his
shares must first offer the shares to the corporation or to the other existing
SHs of the corporation under reasonable terms and conditions
o when corporation or the other SHs fail to exercise can the offering SH
dispose of his shares to third parties
— def’n: restriction which requires a SH who wishes to sell or transfer his shares
to first offer the same to the corporation or to the other SHs and give the latter
an opportunity to acquire the same should they wish to do so
— basis: share of stock are not mere property, but contracts which create
personal relations between the parties thereto
— may be ifo the corporation (right of first option), or of the other SHs or of both
successively
o Campos: must be ifo corporation and SHs successively to be more
effective
o Option ifo corporation cannot be enforced if it has no unrestricted retained
earnings (Sec 41)
— allowed under Sec 98
— may also apply to non-voting stocks
— length of time during which option may be exercised must be reasonable
— must justifiable and reasonable under the circumstances
o SEC policy: option period limited to one (1) month
o When its terms are ambiguous or not specific or vague, construction
should be ifo free transferability
— Not limited to transfer for value under Sec 99
o May include donation
— Transfer price: may be fixed by the transfer stipulation
(3) prescribing qualifications of SHs, a transfer restriction
— AOI of a close corp may provide that only persons meeting specified
qualifications may become SHs
o Would prevent a transfer of stocks to anyone who does not qualify under
its articles
o “Subject to the provisions of the ff section” in Sec 97(1) should be
interpreted to qualify only “restrictions on their transfers” and not
“qualifications for owning or holding the same”
— “buy-back agreements”: shares are given or assigned to officers or employees
under the condition that should they resign or be terminated from employment,
the corporation shall be granted the right to buy-back the shares; these are
valid provided the terms and consideration therefor are reasonable
158
(4) redeemable common stock
— gives the corporation the power to redeem common stock
— allowed under Section 8 of the Code
(5) formal validity of restrictions
— Code requires restrictions on transfer to appear in the ff:
o AOI
o By-laws
o Stock certificate
— Fleischer v Botica Nolasco: If only in AOI or only in by-laws: binding only on
the corporation and the SH
o SC voided the by-law provision which granted to SHs an RFR over
shares sought to be disposed by other SHs
o RFR in by-laws not void per se, but that it is not the function of by-laws to
take away or abridge the substantial rights of SHs
o By-laws are essentially intramural documents not binding upon the public
— Salinas case: the only limitation imposed by Sec 63 is when the corporation
holds any unpaid claim against the shares to be transferred, and that the
corporation through its board, by-laws, or officers, cannot create restrictions in
stock transfers, because restrictions must have their source in legislative
enactments
o By-laws are merely for the protection of the corporation, and prescribe
relation, not restriction, and are always subject to the AOI or charter of
the corporation
— If certificate of stock conspicuously shows restriction and is in AOI: transferee
is presumed to have notice
— If it does not conspicuously appear in stock certificate: transferee may be
presumed to have notice of the restriction
o Where presumption of notice arises: corporation may refuse to register
the transfer, unless all SHs consent thereto or AOI is amended
o In any case, transferee has the right to rescind the transfer to him
— If restriction is not in AOI or in by-laws but appears in a private agreement
between the SHs: should be binding among them but not anyone not a party
to the agreement
— Restriction may be done away with by amendment to the AOI and the by-laws:
2/3 vote of OCS
— SH agreement will be binding on all parties to it and cannot be changed
against the objection of even only one of them
unauthorized transfers
1. certificates indorsed in blank; when quasi-negotiable
 — stock certificate possess certain attributes of quasi-negotiability based on the policy
to give stability to transactions to encourage their commercial use
— if certificate indorsed in blank and places it in the hands of another for purposes
other than transfer, such possessor may transfer good title to a bona fide
purchaser who relied on the indorsement and believed him the be the real owner
— real owner is estopped from claiming shares as against such bona fide purchasers
which he has clothed the possessor with apparent authority (Santamaria case)
— negotiable character is limited to the situation where the owner is guilty of estoppel
in making other persons believe that the possessor has the right to transfer the
same
o if not entrusted to anyone: not guilty of estoppel
o ex finder or thief
2. forged transfers
— GR: stock certificates, since they are only quasi-negotiable, do not afford the same
protection to a holder in GF and for value who receives them in the course of their
being negotiated, and that the true owner will be preferred
— Exception: when the true owner was guilty of negligence in causing the loss
— if corporation issues a new certificate in pursuance of a forged transfer: no liability
incurred
o if it comes into the hands of a bona fide purchaser for value: corporation will
be estopped from denying validity thereof
o but corporation will have right of action against the person who made false
representations and in whose favor it issued a new certificate
— duty of purchaser to determine that indorsement of the owner is genuine
J Santamaria v HSBC. F: Josefa Santamaria is the owner of 10000 shares of Batangas
Minerals Inc thru the offices of the Woo stockbrokerage firm. She then placed an order for
10000 shares of Crown Mines thru RJ Campos & Co stockbrokerage firm and delivered the
certificate of stock of her shares in Batangas Minerals as security. Her name was penciled
on the certificate she delivered. The certificate then came into the possession of HSBC by
virtue of a document of hypothecation, wherein Campos pledged all shares and securities in
its possession to HSBC because of an overdraft account it had with the bank. The certificate
was indorsed by Campos to HSBC. HSBC then requested the Batangas Minerals to cancel
the same and a new certificate was issued in the name of HSBC’s nominee Robert Taplin.
Mrs Santamaria then tendered payment for the Crown Mine shares with Campos, but the
latter was now prohibited from transacting business due to its insolvency proceedings. She
demanded that HSBC return her certificate, but Taplin replied that the bank did not know
anything about her transaction with Campos. She sues HSBC.
I: W/n Santamaria could be charged with negligence for failing to take necessary precautions
in negotiating her stock certificate.
H: In making deposit of her certificate, Santamaria did not take any precaution to protect
herself against the possible misuse of shares. She could have asked Batangas Minerals to
cancel it and issue another in her name to apprise the holder that she was the owner of the
certificate. This she failed to do so, and instead she delivered the certificate to Campos and
159
clothing the latter with apparent title to the shares represented by said certificate, including
apparent authority to negotiate it by delivering it to HSBC. HSBC had no knowledge of the
circumstances under which the certificate of stock was delivered to Campos and had the
perfect right to assume that Campos was in lawful possession, in view of the fact that it was
a street certificate, which is transferable by mere delivery. Santamaria made the negotiation
of the certificate to other parties possible and the confidence she placed in Campos made
the wrong done possible. This was the proximate cause of the damage suffered by her. She
is thus estopped from claiming further title to or interest therein as against a bona fide
pledgee or transferee thereof. The certificate was delivered by Campos to HSBC in the
ordinary course of business, together with many other securities, and at the time of delivery,
HSBC had no knowledge that the shares belonged to Santamaria. She was thus chargeable
with negligence in failing to take the necessary precautions upon delivering the certificate to
her broker.
I: w/n HSBC was obligated to inquire who was the real owner of the shares, and w/n it could
be charged with negligence for failure to do so.
H: Upon its face, the holder of the certificate was entitled to demand its transfer into his
name from the issuing corporation. HSBC was not obligated to look beyond the certificate to
ascertain the ownership of the stock because it was given pursuant to its contract of
hypothecation. A stock certificate, indorsed in blank, is deemed quasi-negotiable, and as
such the transferee thereof is justified in believing that it belongs to the holder and transferor.
The fact that her name was penciled on the certificate cannot be considered sufficient
reason to indicate that she was the owner, considering that certificate was indorsed in blank
by her brokers and guaranteed by indorsement in blank by Campos.
— a bona fide pledgee or transferee of a stock from the apparent owner is not
chargeable with knowledge of the limitations placed on said certificates by the
real owner, or of any secret agreement relating to the use which might be
made of stock by the holder.
— When a stock certificate is endorsed in blank, it constitutes what is termed as
a “street certificate” so that upon its face, the holder is entitled to demand its
transfer into his name from the issuing corporation. Such certificate is quasi-
negotiable.
— Santamaria could not recover the certificates since she could have asked that
the corporation that issued it to cancel and issue another. Her negligence was
the immediate cause of the damage, since the certificate was endorsed be her
to constitute as a street certificate.
A De Los Santos v. JH McGrath, Atty General of the US. F: Involves the true ownership
of 1,600,000 shares of Lepanto Mining. The original owner was the Mitsui Co, a Japanese
corporation, and was held in trust by Vicente Madrigal, in whose name the shares were
registered in the books of Lepanto. Madrigal delivered the certificates to the Mitsui office in
the RP, which kept the same until the liberation of Manila by the US. The Mitsuis nor
Madrigal had never sold or disposed of the shares, which was alleged to have been looted or
stolen during the liberation. By virtue of vesting order P-12, title in the shares was ordered
vested in the Alien Property Custodian of the US, which was succeeded in this action by the
US Atty General. De Los Santos and Astraquillo however claim to be owners of 1,600,000
shares of Lepanto Mining, alleging that they bought 1,100,000 from Carl Hess and 500,000
from Juan Campos. All evidence and persons who could testify as to their ownership of the
shares no longer existed. Hess was executed by the Japanese and Campos killed during the
liberation. A receipt made in a purported sale by Astraquillo of the shares was curiously
destroyed by fire.
I: Who owns the certificates?
H: Under the Code, a share of stock may be transferred by endorsement of the certificate
coupled with delivery. The transfer is not valid except as between the transferring parties,
unless it is entered and noted upon the books of the corporation. No such entry in the name
of de los Santos and Astraquillo having been made, it follows that the transfer allegedly
effected by Hess and Campos is not valid, except as between themselves. It does not bind
the Madrigals or the Mitsuis who are not parties to the alleged transaction. Although a stock
certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred
by endorsement, coupled with delivery, it is well-settled that the instrument is non-negotiable,
because the holder thereof takes it without prejudice to such rights or defense as the
registered owner or credit may have under the law. If the owner of the certificate has
endorsed it in blank, and it is stolen from him, no title is acquired by an innocent purchaser
for value. The doctrine that a bona fide purchaser of shares under a forged or unauthorized
transfer acquires no title as against the true owner does not apply where the circumstances
are such as to estop the latter from asserting his title. Where one of two innocent parties
must suffer by reason of a wrongful or unauthorized act, the loss must fall on the one who
first trusted the wrongdoer and put in his hands the means of inflicting such loss. But
negligence which will work an estoppel of this kind must be the proximate cause of the
damage and must be in or immediately connected with the transfer itself.
Moreover, delos Santos and Astraquillo were aware of sufficient facts to put them on notice
of the need of inquiring into the regularity of the transactions and the title of supposed
vendors. The certificates were in the name of Madrigal. Obviously therefore, the alleged
sellers were not the registered owners of the certificates and shares of stock. They must
have been conscious of the infirmities in title. The purported sales were also admittedly
hostile to the Japanese, who had prohibited it, and plaintiffs had actual knowledge of these
facts and of the risks attendant. In other words, they assumed those risks and cannot validly
claim against the registered SH, the status of purchasers in GF.
— A stock certificate is not a negotiable instrument, but it is regarded as quasi-negotiable
in the sense that it may be transferred by endorsement coupled with delivery
— A transferee under a forged assignment acquires no title which can be asserted against
the true owner, unless the true owner’s own negligence has been such as to create an
estoppel against him
— The doctrine that a bona fide purchaser of shares under a forged or unauthorized
transfer acquires no title as against the true owner does not apply where the
circumstances are such as to estop the latter from asserting his title
— It is not negotiable because the holder takes it without prejudice to such rights or
defenses as registered owners or transferor’s creditor may have under the law, except
insofar as such rights or defenses are subject to the limitations imposed by the
principles governing estoppel
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Collateral transfers
— As personal property, shares may be the subject matter of pledge and chattel mortgage
(CM)
o Collateral transfers are not covered by the registration requirement in Sec 63
(applies only to absolute transfers per SC in Monserrat v Ceron)
o If certificate is delivered as security for the performance of an obligation, it is a
pledge and governed by CC
o If not delivered, transaction must be registered in the CM registry of the province
o If SHs domicile is in a different province, registration must also be made in such
province
Chua Gan v Samahang Magsasaka Inc. F: Chua Gan is the assignee of all rights and
interests of mortgagee Chua Chiu, in whose favor a mortgage upon shares of corporation
Samahang Magsasaka Inc owned by debtor Cotoco was entered into, delivered, and
registered in the RoDs. Cotoco defaults, Chua Gan forecloses mortgage and after public
auction, certificate of shares were entered in his favor. Chua Gan then tendered the
certificates to the corporation for cancellation and the issuance of new certificates in his
name. Officers of Samahang Magsasaka refused, contending that 9 attachments had been
issued and served against the shares of Cotoco in the books. 8 of the writs were served and
noted in the books before the corporation knew of the mortgage of Chua Chiu. Chua Gan
sues. (The registered owner mortgaged the shares and the mortgagee not only registered
the mortgage with the registry of deeds, but also in the books of the corporation. When the
mortgagee foreclosed on the mortgage, the officers of the corporation refused to issue the
new certificates in the name of the mortgagee as the winning bidder thereof in the auction
sale, on the ground that before the mortgagee made his demand upon the corporation, writs
of attachments had been served upon and registered in the books of the corporation against
the mortgagor, which the mortgagee refused to have annotated in the new certificate to be
issued to him)
I: w/n the registration of the CMs in the ROD is constructive notice to the attaching creditors
(w/n the mortgage took priority over the writs of attachment)
H: GR: for purposes of execution, attachment, and garnishment, it is not the domicile of the
owner of the certificate but the domicile of the corporation which is decisive. By analogy, and
considering that the ownership of shares in a corporation as property distinct from the
certificates which are merely the evidence of such ownership, the property in the shares may
be deemed to be situated in the province in which the corporation has its principal office or
place of business. If this province is also the province of the owner’s domicile, a single
registration is sufficient. If not, the CM must be registered both at the owner’s domicile and in
the province where the corporation has its principal office or place of business. In this sense
the property mortgaged is not the certificate but the participation and share of the owner in
the assets of the corporation.
The transfer by endorsement and delivery of a certificate with intention to pledge the shares
covered thereby should be sufficient to give legal effect to that intention and to consummate
the juristic act without necessity for registration. Thus the attaching creditors are entitled to Under 43.3 of the SRC: transfers of securities, including uncertificated ones, may be validly
priority over the defectively registered mortgage of Chua Gan. made and consummated in any of the ff ways, which would have the effect of delivery of a
security in bearer form or duly indorsed in blank, representing the unrestricted negotiability of
— Considering the ownership of shares in a corporation as property distinct from the such delivery:
certificates which merely evidence the ownership, then the property in the shares may
be deemed to be situated in the province which the corporation has its principal office or — By appropriate book entries in the securities accounts maintained by
place of business. In this sense property mortgaged is not the certificate but the securities intermediaries
participation and share of the owner in the assets of the corporation. — In the stock and transfer book held by the corporation or stock transfer agent
— Although under 63 the surrender of the certificate is necessary to effect the transfer of *The transfer shall only be valid—as to the corporation—when it is recorded in the books of
shares, it does not exclude the possibility that a transfer may be made in a different the corporation
manner; meaning that the execution of a deed of assignment can be a valid mode of
transferring title covering shares of stock. Transfer or conveyance Remitting of transfer
1 Payment or consideration Presentation of original stock certificate
non-transferability and termination of membership in non-stock corporations 2 Delivery of stock certificate (indorsed— Recording of transfer
manner of indorsement)
— GR: shares are freely transferable 3 Presentation of document of conveyance Cancellation
— Exception: in close corporations 4 Issuance of certificate

Sec. 90-91 SIR:

Sec. 90. Non-transferability of membership. - Membership in a non-stock — See table above

corporation and all rights arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws otherwise provide. (n)
Sec. 91. Termination of membership. - Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-laws.
Termination of membership shall have the effect of extinguishing all rights of a
member in the corporation or in its property, unless otherwise provided in the
articles of incorporation or the by-laws. (n)
Special rules on registered or listed shares
Under Sec 43.1 of the SRC: a corporation whose shares are listed in the PSE or registered
pursuant to the Corpo Code may:
— Issue shares to or record the transfer of some or all its shares in the form of
uncertificated securities, to investors or securities intermediaries, upon
resolution of the board and agreed by a SH
— Use of said uncertificated securities shall be without prejudice to the rights of
the securities intermediary to subsequently require the issuance of the
certificate
— Issue all of the shares of a particular class in the form of uncertificated
securities, subject to the condition that the investors may not require the
corporation to issue a certificate
— One without the other: short of ownership of transferred shares
— Short of having transfer recorded: kulang pa rin!
— Cases show that it is NOT sufficient that you have the stock certificate
— Problems arise when:
— Not all requirements for valid transfer are met
— Considerable delay in satisfying requirements of the Code
— Parties not original owner/transferor could assert proprietary rights
— Stock certificate: evidence of ownership of shares
— Whoever owns/holds the certificate is only presumed to be the owner
— Can be used to confirm conveyances made
— Similar to a check/negotiable instrument; all you do is endorse, even in blank:
mere signature of endorser
— Without this certificate: NO voting rights, NO economic rights; these would not
materialize until all requirements are satisfied
— Ideally, transfer and recording are done on the same date
— Both should happen one after the other
— Books recognize only one owner
— Code ensures that corporation recognizes only one SH of record (see Portland
case)
— Transferee has way out if transfer or conveyance is imperfect
— If you do not comply, you expose yourself to risk!
— Unless transferee does not intend to be a SH of record (Chuidian: he has to be a SH
because he wants to be director!)
— Corporation is not a party at the time of the transfer; becomes party only when recorded
(see Abejo: recording is a ministerial duty)

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 Chapter XVI – Dissolution o number of extensions= unlimited
o extension may be accomplished by amending the AOI before expiration of
Sir: term
o attempted extension after term has expired: renewal of charter which is clearly
Why was there a dissolution? beyond corporate powers
Does dissolution result in application of 81? — corporation can amend its AOI to shorten its term
Key: who initiates the proceedings? o should follow procedure in Sec 37 and 16
3 parties: State, creditor, SHs § notice to each SH or member
creditors rights: satisfied during winding up period of 3 years when board undertakes action § holding of meeting
only one purpose during liquidation: to wind up § vote of 2/3 OCS
§ filing certified copy of amended AOI with SEC
Nature of dissolution § approval of amendment within 6 mos by SEC
Sec 120 Dissolution by shortening corporate term. - A voluntary dissolution may be
— Signifies the extinguishment of its franchise and the termination of its corporate effected by amending the articles of incorporation to shorten the corporate term pursuant to
existence or business purpose. the provisions of this Code. A copy of the amended articles of incorporation shall be
— May be either de jure or de facto submitted to the Securities and Exchange Commission in accordance with this Code. Upon
o De jure: one adjudged and determined by administrative or judicial sentence or approval of the amended articles of incorporation of the expiration of the shortened term, as
brought about by an act of the sovereign power the case may be, the corporation shall be deemed dissolved without any further
o De facto: one which takes place in substance and in fact when the corporation by proceedings, subject to the provisions of this Code on liquidation. (n)
reason of insolvency, cessation of business, or suspension of all its operations,
goes into liquidation, still retaining its primary franchise to be a corporation — 120: corporation automatically dissolved upon the happening of either of two
events:
Cause of dissolution o approval of amended AOI or
o expiration of shortened term
— Defn of dissolution: the corporation ceases to be a juridical person and consequently — no need of further proceedings
can no longer continue transacting its business, but may continue its corporate o expiration before SEC approval: no automatic dissolution
existence for a period of 3 years from such dissolution for the purpose of winding up o expiration after SEC approval: dissolution can take effect only upon the
and liquidation expiration of sich shortened term
— Defn of winding up: collection of all assets, payment of all creditors, distribution of all — SH has appraisal right if he dissents to either the extension or shortening of term
remaining assets (if any) among the SHs
— Defn of liquidation: the settlement of the affairs of the corporation which consists of 2. voluntary dissolution when no creditors affected
adjusting the debts and claims, that is, of collecting all that is due the corporation, the
settlement and adjustment of claims against it and the payment of its just debts (China Sec 118 Voluntary dissolution where no creditors are affected. - If dissolution of a
Bank v M Michelin) corporation does not prejudice the rights of any creditor having a claim against it, the
— Ways in which a corporation is dissolved: dissolution may be effected by majority vote of the board of directors or trustees, and by a
resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds
1. expiration of original, extended or shortened term (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members of a
meeting to be held upon call of the directors or trustees after publication of the notice of time,
— life of corporation= not exceed 50 years place and object of the meeting for three (3) consecutive weeks in a newspaper published in
— once the period in the AOI expires, the corporation is automatically dissolved the place where the principal office of said corporation is located; and if no newspaper is
without any further proceeding; corporation is deemed dissolved by such expiration published in such place, then in a newspaper of general circulation in the Philippines, after
without need for further action on the part of the corporation or the State sending such notice to each stockholder or member either by registered mail or by personal
— In Sec 11: corporate term may be extended by an amendment of the AOI but delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the
cannot be made earlier than 5 years prior to the original or subsequent expiry date dissolution shall be certified by a majority of the board of directors or trustees and
o cannot even be considered a de facto corporation countersigned by the secretary of the corporation. The Securities and Exchange
o original term cannot be more than 50 years Commission shall thereupon issue the certificate of dissolution. (62a)
o each extension= 50 years

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 — voluntary dissolution requires an act of state to be effective
— a corporation can be dissolved voluntarily where no creditors are affected, through
an administrative application for dissolution filed with the SEC
o process is equivalent to an application for amendment of the AOI, except that
dissolution should be published
— Summary of procedural requirements
o Majority vote of the board adopting a resolution
o Sending of notices to each SH
§ By registered mail or special delivery
§ Time, place, object of meeting
§ At least 30 days prior to meeting
o Publication of notice of meeting for 3 consecutive weeks
§ Newspaper published where the principal office is located
§ Newspaper of general circulation
o Resolution duly approved by vote of 2/3 OCS
o Certified copy of the resolution filed with SEC
o SEC issues certificate of dissolution
— SEC will generally not deny an application for dissolution where no creditors are
involved
— Sec 130 on the other hand does not require publication for the shortening of the
corporate term
— Certificate of dissolution issued by SEC is the act of State which will legally effect
the dissolution
o Mere resolution not sufficient without the certificate
o Except: expiration of term (no need for certificate)
3. voluntary dissolution where creditors affected
— basis: creditors must be given the opportunity to present their claims and
objections to protect their interests and rights
Sec 119 Voluntary dissolution where creditors are affected. - Where the dissolution of a
corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed
with the Securities and Exchange Commission. The petition shall be signed by a majority of
its board of directors or trustees or other officers having the management of its affairs,
verified by its president or secretary or one of its directors or trustees, and shall set forth all
claims and demands against it, and that its dissolution was resolved upon by the affirmative
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members
called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an order reciting
the purpose of the petition, fix a date on or before which objections thereto may be filed by
any person, which date shall not be less than thirty (30) days nor more than sixty (60) days
after the entry of the order. Before such date, a copy of the order shall be published at least
once a week for three (3) consecutive weeks in a newspaper of general circulation published
in the municipality or city where the principal office of the corporation is situated, or if there
163
be no such newspaper, then in a newspaper of general circulation in the Philippines, and a
similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such
municipality or city.
Upon five (5) day's notice, given after the date on which the right to file objections as fixed in
the order has expired, the Commission shall proceed to hear the petition and try any issue
made by the objections filed; and if no such objection is sufficient, and the material
allegations of the petition are true, it shall render judgment dissolving the corporation and
directing such disposition of its assets as justice requires, and may appoint a receiver to
collect such assets and pay the debts of the corporation. (Rule 104, RCa)
— a corporation can be dissolved voluntarily where creditors are affect, through a
petition for dissolution filed with the SEC, with due notice and hearing
o quasi-judicial in nature
o SEC is not mandated to dissolve
— Summary of procedural requirements:
o File petition for dissolution:
§ Signed by majority of the board or corporate officers
§ Verified by president or corporate secretary or a director
§ Set forth all claims and demands against it
§ Resolved upon by vote of 2/3 OCS at a meeting
o SEC determines whether the petition is sufficient in form and substance
o If satisfied, SEC shall issue an order fixing the date on or before objections
may be filed by any person
§ 30 days<date<60 days
o order published in a newspaper of general circulation at least once a week for
3 consecutive weeks
o SEC hears petition and try any issue upon 5 days notice
§ If no objections and material allegations are true…
§ …SEC renders judgment dissolving the corporation and directing
disposition of its assets
§ may appoint a receiver to collect assets and pay the debts
— SEC may direct the manner in which liquidation of corporate assets should be
made by assigning the task to the corporation itself or to a receiver
o SEC retains supervision in either case
— Vote of 2/3 OCS is required to signify corporation’s intent to dissolve
o GR: No member may prevent such dissolution
o Exception: majority SH acted in BF or for the purpose of “freezing out” the
minority
Sec 122 Corporate liquidation. - Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in interest,
all interest which the corporation had in the property terminates, the legal interest vests in
the trustees, and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment
of all its debts and liabilities. (77a, 89a, 16a)
4. dissolution by minority in close corporations
— Code requires vote of 2/3 OCS
— Two special rules on dissolution of close corporations:
o Deadlocks; in its exercise of power to arbitrate, SEC is authorized to order
dissolution
o Sec 105:
Sec 105 Withdrawal of stockholder or dissolution of corporation. - In addition and
without prejudice to other rights and remedies available to a stockholder under this Title, any
stockholder of a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any stockholder of a close corporation may, by
written petition to the Securities and Exchange Commission, compel the dissolution of such
corporation whenever any of acts of the directors, officers or those in control of the
corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are being misapplied or
wasted.
— Can the minority group in a non-close corporation petition for dissolution under the
grounds in 105?
o Campos: express grant of such right of the minority in close corporations
should not be interpreted to preclude the right to the minority in non-close
corporations
Financing Corporation v Teodoro. F: Lizares et al, minority SHs of the Financing Corp of
the Phils, sued the corporation and J Amado Araneta, its president and GM, alleging gross
mismanagement and fraudulent conduct of the corporate affairs by Araneta and asking that
the corporation be dissolved and Araneta be declared personally accountable for the
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unauthorized and fraudulent disbursements of the corporate assets. Judge Teodoro granted
petition for appointment of a receiver (Yulo). The corporation contends that the appointment
is merely an auxiliary remedy; that the principal remedy was the dissolution of the
corporation, and that the minority SHs have nor right and personality to maintain an action
for dissolution, that right belonging only to the State.
H: GR: minority SHs of a corporation cannot sue and demand dissolution. Exception: if they
are unable to obtain redress and protection of their rights within the corporation (Hall v
Piccio). Even the existence of a de jure corporation may be terminated in a private suit for its
dissolution by SHs without the intervention of the State. The question of the right of minority
SHs to ask for dissolution in Hall was held not to affect the court’s jurisdiction over the case,
and that the remedy by the party dissatisfied was to appeal.
GR: minority SHs cannot ask for dissolution in a private suit, and that action should be
brought by the government through its legal officer. Exception: cases wherein the
intervention of the State cannot be obtained because the complaint is a matter strictly
between the SH and the corporation and does not involve issues which involve
acts/omissions warranting a quo warranto. When such action is brought, the TC has
jurisdiction and has discretion to grant the prayer or not. Having such jurisdiction, the
appointment of e receiver pendent elite is left to the sound discretion of the TC. In Angeles v
Santos, it was held that it is within the power of the court upon proper showing to appoint a
receiver pendente lite once the action is properly brought and court acquires jurisdiction.
The appointment of a receiver upon petition by the minority SH is a power that must be
exercised with great caution, and should be exercised when necessary to protect their rights,
especially when they cannot obtain redress through or within the corporation. SC ruled that
the TC had jurisdiction and properly entertained the original case and had jurisdiction to
appoint a receiver pendente lite.
5. failure to organize and commence business; cessation of business for 5
years
— “organize”: involves the election of officers, providing for subscription and payment
of capital stock, adoption of by-laws, and other such steps as necessary to endow
the legal entity with the capacity to transact the legitimate business for which it was
created
— “organization”: the systematization and orderly arrangement of the internal and
managerial affairs and organs of the corporation
— “commence business”: perform preparatory acts geared towards the fulfillment of
the purposes for which it was established such as but not limited to:
o entering into contracts or negotiations for lease or sale of properties
o making plans for and the construction of the factory
o taking steps to expedite construction
Sec 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 a. Does not formally organize and commence business within 2 years from
incorporation, its corporate powers cease and the corporation shall be deemed dissolved. date of incorporation—corporate power ceases and corporation is
However, if a corporation has commenced the transaction of its business but subsequently deemed dissolved
becomes continuously inoperative for a period of at least five (5) years, the same shall be a b. Subsequently becomes continuously inoperative after commencing
ground for the suspension or revocation of its corporate franchise or certificate of business for at least 5 years
incorporation. c. Failure to adopt by-laws
d. Offended against a provision of law for its creation or renewal
This provision shall not apply if the failure to organize, commence the transaction of its e. Commission/omission of an act tantamount to a surrender of corporate
businesses or the construction of its works, or to continuously operate is due to causes rights and privileges
beyond the control of the corporation as may be determined by the Securities and Exchange f. Misuse of a right, privilege, franchise conferred by law or the exercise of
Commission. the same in contravention of law
g. Continuance of business would not be feasible or profitable nor work to
— by-laws must be adopted within one month of receipt of notice of the issuance of the best interests of SHs, parties, creditors, general public
the certificate of incorporation, otherwise the certificate may be suspended or i. Based on findings and recommendations of a management
revoked committee or receiver
— corporate business must be commenced within 2 years, otherwise corporation h. Guilty of fraud in procuring certificate of registration
deemed dissolved and corporate powers will cease i. Guilty of serious misrepresentation
o corporation would neither be a de jure or de facto corporation j. Refusal to comply or defiance to a lawful order of the SEC
— transacting business implies a continuity of acts or dealings in the accomplishment k. Failure to file required reports
of the purpose for which the corporation was formed (Mentholatum case infra)
o even a single act would be sufficient if it is intended to be a series of acts in (1) revocation of certificate of registration by SEC
pursuance of the corporate business
o but must take place within the 2-year period — certificate of registration refers to certificate of incorporation
— Art 3 of Code of Commerce: presumption of habituality — other grounds for suspending or revoking certificate are recognized.
o Rebuttable Examples:
— Sec 22: corporate powers will cease, and corporation will be deemed dissolved if o violation by the corporation of any provision in the Corpo Code
not complied with the 2-year requirement o deadlock in a close corporation
— If corporation commenced its business within 2 years but discontinues for at least 5 o grounds for quo warranto
continuous years, certificate of incorporation may be revoked by SEC o Sec 3 Rule 66 of ROC
o No automatic dissolution o Non-compliance with 25% minimum requirement for subscription and/or
o SEC proceeding necessary paid-up capital
o Notice must be given to the corporation and opportunity to be heard o Continuous inoperation for 5 years
— If the corporation fails to commence operation within the 2 year period but does so o Non-adoption or non-filing of by-laws within 1 month
only after the 2-year period lapses: o Failure to submit annual report of financial statements of assets and
o Doctrine of corporation by estoppel may apply liabilities
o Innocent third persons cannot be prejudiced by such dissolution

6. involuntary dissolution (2) quo warranto proceedings

Sec 121 Involuntary dissolution. - A corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified complaint and after proper notice and hearing
on the grounds provided by existing laws, rules and regulations. (n)
— a corporation may be dissolved by the SEC upon a filing of a verified
complaint and after notice and hearing
— Grounds for involuntary dissolution:
— PD 902-A grants exclusive jurisdiction to the SEC over any controversy
between the corporation and the State
Republic v Bisaya Land Trans Co. F: Government files petition for quo warranto against
the Bisaya Land Tranpo Co and its board, and asks for the appointment of a receiver
pendente lite, alleging that the corporation, through the board, violated the provisions of the
Corporation Law as outlined in 9 causes of action. Miguel Cuenco, a member of the Board,
sets up a cross-claim against the other members to recover P4M arising for illegal acts of the

165
corporation of which damage was caused him, and asks for the appointment of a receiver.
The other directors argue that the petition should be dismissed as to Cuenco because his
claims did not arise out of the transactions the subject matter of the quo warranto, which did
not assert any claim against any of the directors. TC denies MTD the quo warranto.
Corporation then filed a motion for judgment on consent, manifesting its consent to the
ordering of the dissolution of the corporation, and ordered the board to proceed with the
liquidation of its assets. It contended that the pendency of the quo warranto petition had
prejudiced the corporation and its business, and that immediate relied be given the
corporation. It also alleged that the majority of the board and 2/3 SHs acceded to the request
to dissolve as the most feasible remedy to its problems. Republic moves that the matter of
implementation of the dissolution be submitted to the TC for judgment. Cuenco concurs but
urges the appointment of a receiver. Directors not Cuenco filed a motion to withdraw its
previous motion for judgment on consent on the ground that the conditions to which motion
was subject had not been accepted. Cuenco opposes withdrawal and pressed for
appointment of receiver. TC denied motion to withdraw. Corporation appeals. SolGen
Barredo moved to dismiss quo warranto proceedings, to which Cuenco opposed. TC grants
Republic’s motion but denies Cuenco’s crossclaim.
I: W/N the TC should have ordered dissolution upon its motion and not the Republic’s, as it
amounted to a confession of judgment.
H; A motion for judgment on consent is not to be equated with judgment by confession.
There must be an unqualified agreement among the parties to the action entered in the
record with leave of court. A judgment by confession is not a plea but an affirmative and
voluntary act of the defendant himself. In this case, there was no meeting of the minds
among the parties with respect to the motion for judgment on consent. Corporation wanted
its liquidation to be effected by its Board. Cuenco wanted the appointment of a receiver in
agreeing to dissolution, and after his cross-claims were considered. Before the parties could
come to an unqualified agreement, the corporation moves to withdraw its motion for
judgment on consent. It is clear that the parties could not agree as to the terms of
dissolution, and the TC correctly rendered judgment dissolving the corporation.
I: W/n TC was wrong in not granting quo warranto because the evidence presented fails to
constitute grounds for quo warranto
H: TC found that the alleged misuse of funds were committed more particularly by Dr Manuel
Cuenco with the cooperation of Velez, for which they are personally liable. The alleged illegal
corporate acts had not resulted in substantial injury to the public, nor were they willful and
clearly obdurate. It found that the controversy between the parties was more personal than
anything else and did not at all affect public interest. Such private controversies can be
ventilated in appropriate SHs suit which do not have to occupy the time and attention of
government officials. The SolGen himself admits that his reason for the MTD is to take the
State out of an unnecessary court litigation. Relief by dissolution would only be awarded
where no adequate relief is available, and is not available where the rights of SHs can be or
are protected in some other way.
I: W/N the SolGen, as the lawyer for the Republic, was vested with full power to manage and
control the State’s litigation.
H: GR: the SolGen may do so with the approval of the court, subject to well-defined
exceptions. If it is discovered that the action commenced was brought for the purpose of
enforcing a right, the advisability or necessity of which he later discovers no longer exists,
then he should be permitted to withdraw his action. Courts should not require parties to
166
litigate whey they no longer desire to do so. Thus the SolGen was within his power to move
to dismiss the petition for quo warranto, and the TC was correct in dismissing Cuenco’s
cross-claim, and receivership is ordered terminated.
— Dissolution is a serious remedy granted to the courts against offending
corporations. Courts, as a general rule, should not resort to dissolution when
the prejudice is not against the public or not an outright abuse or violation of
the corporate charter. Even if the prejudice is public in nature, the remedy is to
enjoin or rectify the mistake. Only when it cannot be remedied anymore then
that dissolution can come in.
Gonzales v Sugar Regulatory Administration. F: Spouses Gonzales obtained a loan from
the RPBank in the amount of P 176,000.00 secured by a real estate mortgage. The
proceeds of the loan were released on a staggered basis and the loan was "payable from
[the] 1980-1981 sugar crop, " the amortization payments to be remitted by the Philsucom to
the RPBank. The RPBank is owned and controlled by the Philsucom. Gonzales received a
statement of account from the RPBank setting forth that they had an outstanding loan
balance due to the bank of P 652,446.38. It appeared that the Gonzaleses had received the
total amount of P l,041,610.55 in loan funds from the RPBank and that they had re-paid
thereon the total amount of P 1,051,296.77; in other words, they had already more than fully
repaid their loan. The Gonzales further averred that Philsucom had deducted from the export
sugar proceeds of petitioners the amount of P 421,517.32 without their authority and consent
with the result that the spouses had overpaid the RPBank by P 289,260.88. the spouses
prayed that the real estate mortgage be cancelled, and that Philsucom and SRA be required
jointly and severally to reimburse the petitioners the amount of P 289,260.88 + damages.
The RPBank, Philsucom and herein respondent SRA moved to dismiss the complaint upon
the ground of lack of cause of action. Philsucom and respondent SRA through the Solicitor
General, denied any obligation on the part of the Philsucom to return any amount to
petitioners on account of allegedly unauthorized deductions from the proceeds of petitioners'
sugar sold by the Philsucom. For its part, the SRA also noted that while the deductions
complained of were made by the Philsucom during the period from 1980 to 1984, the SRA
itself had been created by Executive Order No. 18 only on 18 May 1986 and that it was not a
party to the real estate mortgage between petitioners and the RPBank.
H: Executive Order No. 18, promulgated on 28 May 1986, abolished the Philsucom, created
the SRA and authorized the transfer of assets from Philsucom to SRA. Although the
Philsucom is hereby abolished, it shall nevertheless continue as a juridical entity for three
years after the time when it would have been so abolished, for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets, but not for the purpose of continuing
the functions for which it was established, under the supervision of the Sugar Regulatory
Administration. (Emphasis supplied). We note that Executive Order No. 18 did not provide
for universal succession, as it were, of SRA to Philsucom, or more specifically to the assets
and liabilities of Philsucom. The SRA has been authorized to determine which of the assets
and records of Philsucom are required for the carrying out of the activities which the SRA is
to carry on or undertake. The succession of the SRA to the assets and records of the
Philsucom is thus limited in nature; the extent of such succession is left to the discretionary
determination of the SRA itself. More importantly, Executive Order No. 18 is silent as to the
liabilities of Philsucom; it does not speak of assumption of such liabilities by the SRA.
The Philsucom, it will be seen, succeeded as a matter of course to all the assets, liabilities
and records of the Philippine Sugar Institute and the Sugar Quota Administration. The SRA
did not, quite possibly because the Government wanted the opportunity to examine the
assets, liabilities and records carefully and to determine the compatibility of (asserted)
liabilities of the Philsucom with applicable law and relevant requirements of public policy and
the public interest.
That the assets of the Philsucom must respond for payment of lawful obligations of
Philsucom, does not appear to require demonstration. The assets which, in accordance with
the second paragraph of Section 13 of Executive Order No. 18, may be taken over by the
SRA can thus be only net or residual assets, assets remaining after payment of the valid and
enforceable liabilities of Philsucom has been made or been adequately provided for. We
believe, in other words, that Section 13 of Executive Order No. 18 is not to be interpreted as
authorizing respondent SRA to disable Philsucom from paying Philsucom's demandable
obligations by simply taking over Philsucom's assets and immunizing them from legitimate
claims against Philsucom. The right of those who have previously contracted with, or
otherwise acquired lawful claims against, Philsucom, to have the assets of Philsucom
applied to the satisfaction of those claims, is a substantive right and not merely a procedural
remedy. Section 13 cannot be read as permitting the SRA to destroy that substantive right.
We think that such an interpretation would result in Section 13 of Executive Order No. 18
colliding with the non-impairment of contracts clause of the Constitution insofar as
contractual claims are concerned, and with the due process clause insofar as the non-
contractual claims are concerned. 5 To avoid such a result, we believe and so hold that
should the assets of Philsucom remaining in Philsucom at the time of its abolition not be
adequate to pay for all lawful claims against Philsucom, respondent SRA must be held liable
for such claims against Philsucom to the extent of the fair value of assets actually taken over
by the SRA from Philsucom, if any. To this extent, claimants against Philsucom do have a
right to follow Philsucom's assets in the hands of SRA or any other agency for that matter.
This result appears no more than a dictate of elementary fairness, particularly when one
takes into account that under Section 11 of Executive Order No. 18, the SRA will continue,
"until otherwise provided, as directed and ordered by the President of the Philippines," to
collect and receive the proceeds of "levies, charges and other impositions as [then] granted
by law, decree and/or executive order, to the [Philsucom]." Whether the deductions here
assailed by petitioners are included among the "levies, charges and other impositions" then
made by Philsucom and now continued by SRA must be determined by the trial court.
Petitioners have noted in this connection that the three (3) year period provided for in the
third paragraph of Section 13 of Executive Order No. 18 is about to expire. There is nothing
to prevent Philsucom from appointing a trustee SRA for instance and conveying all its
properties to such trustee, for the benefit of the Government, creditors and other persons in
interest, following at least by analogy the provisions of the second paragraph of Section 122
of the Corporation Code. Should Philsucom decline to so appoint SRA as trustee, the
principles set forth above would of course apply, mutatis mutandis, in respect of whichever
public agency may find itself actually holding the assets and records of Philsucom.
167
We conclude that dismissal of petitioners' complaint against respondent SRA was clearly
premature. Petitioners have a cause of action against SRA to the extent that they are able to
prove lawful claims against Philsucom, which claims Philsucom is or may be unable to
satisfy, and to the extent respondent SRA did, or does, in fact take over all or some of the
assets of Philsucom. At the very least, the motion to dismiss was not shown to rest upon
indubitable grounds and should, therefore, have been denied not only in respect of
Philsucom but also in respect of respondent SRA.
H: The termination of the life of a juridical entity does not by itself imply the diminution of
extinction of rights demandable against such juridical entity among which would be the
priority claims of corporate creditors against corporate assets. Since the assets must
respond for payment of lawful obligations of a dissolved corporation, then it is required that
the succeeding corporation would be liable for all such lawful claims to the extent of the fair
value of assets actually taken over.
No person who assets a claim against a juridical entity can claim any constitutional right to
the perpetual existence of such entity. Juridical persons, whether incorporated or not,
whether owned by the government or the private sector, may come to any end at one time or
another for a variety of reasons, ex the fulfillment or abandonment of the business purposes
for which a corporation was set up. Thus the Code provides for termination of corporate life,
the dissolution of the corporation, the winding up of its operations, the liquidation of its
assets, the payment of its obligations and distribution of any residual assets to its SHs.
Termination of life of a juridical entity does not by itself imply the diminution or extinction of
rights demandable against a juridical entity. Consequently, when the assets of a dissolved
entity are taken over by another entity, the successor entity must be held liable for the
obligations of the dissolved entity pertaining to the assets so assumed, to the extent of the
fair value of assets actually taken over.
Effects of dissolution; winding up and liquidation
— GR: no personality after dissolution
— Exception: liquidation and liquidation only
— Termination itself of personality does not cause extinction or diminution of
rights and liabilities of the dissolved entity nor of its creditors (Gonzales)
— During the 3-year liquidation period, the dissolved corporation is authorized
and empowered to convey all of its property to trustees for the benefit of SHs,
creditors, and other persons in interest
o If expired without a trustee or receiver, board may be permitted to
continue as trustees
o In the absence of the board or trustees, those having pecuniary interest
in the assets may make proper representations with the SEC for working
out a final settlement of corporate concerns
— All interests which the corporation has in the corporate property terminates,
and legal interest vests in the trustees, and beneficial interest in the SHs,
creditors or other persons in interest
 — Any asset undistributable to any creditor or SH shall be escheated to the city
or municipality where such assets are located
— A corporation in process of liquidation has no legal authority to engage in any
new business, even if consistent with its primary purpose
Sec 122 Corporate liquidation. - Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in interest,
all interest which the corporation had in the property terminates, the legal interest vests in
the trustees, and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment
of all its debts and liabilities. (77a, 89a, 16a)
1. loss of juridical personality
— except for the purpose of winding up its affairs
— cannot even be a de facto corporation
— existence cannot be subject to collateral attack
— cannot enter into new contracts
— during 3 year period, corporation must collect all debts owing to it and pay all
its creditors
— it may sue and be sued
— all pending actions by or against the dissolved corporation abate
Pepsi-Cola Products Phils. v CA. F: Pepsi-Cola Products Philippines, Inc. Employees and
Workers Union (PCEWU), a duly- registered labor union of the employees of the Pepsi-Cola
Distributors of the Philippines (PCDP) filed a Complaint against PCDP for payment of
overtime services rendered by fifty-three (53) of its members, for work done during 8 Muslim
Holidays. LA held that workers in Region 12 were entitled, but workers in Region 9 were not.
168
Pepsi Distributors appeals to NLRC, which affirms. Pending resolution of its MR, ownership
of various Pepsi-Cola bottling plants was transferred to petitioner Pepsi-Cola Products
Philippines, Inc. (PCPPI). The PCDP alleged that it had ceased to exist as a corporation on
July 24, 1989 and that it has winded up its corporate affairs in accordance with law. It also
averred that it was now owned by PCPPI. NLRC dismisses complaint, holding that with the
cessation and dissolution of the corporate existence of the PCDP, rendering any judgment
against it is incapable of execution and satisfaction. The CA reverses, and declared that the
PCDP was still in existence when the complaint was filed, and that the supervening
dissolution of the corporation did not warrant the dismissal of the complaint against it. After
all, the appellate court ratiocinated, every corporation is given three (3) years to wind up its
affairs. Hence, in case any litigation is filed by or against the corporation within the three (3)-
year period which could not be terminated within the expiration of the same, such period
must necessarily be prolonged until the final determination of the case.
H: Under Section 122 of the Corporation Code, a corporation whose corporate existence is
terminated in any manner continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it and to enable it
to settle and close its affairs, culminating in the disposition and distribution of its remaining
assets. It may, during the three-year term, appoint a trustee or a receiver who may act
beyond that period.
At any time during the said three (3) years, the corporation is authorized and empowered to
convey all of its properties to trustees for the benefit of stockholders, members, creditors,
and other persons in interest. From and after any such conveyance by the corporation of its
properties in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the properties terminates the legal interest
vests in the trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member, who is unknown or cannot be found, shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment
of all its debts and liabilities.
The termination of the life of a corporate entity does not by itself cause the extinction or
diminution of the rights and liabilities of such entity. If the three-year extended life has
expired without a trustee or receiver having been expressly designated by the corporation,
within that period, the board of directors (or trustees) itself, may be permitted to so continue
as "trustees" by legal implication to complete the corporate liquidation.
National Abaca v Pore. F: National Abaca Corp sued Apolonia Pore to recover money
advanced for the purchase of hemp for the account of the corporation for which she failed to
account therefor. Pore in defense, contends that she made an accounting of the advances
received by her. TC held her accountable and ordered to her to pay the corporation.

Pore moved to dismiss on the ground that the corporation had no legal capacity to sue, it
having been abolished by EO 372. Corporation contends that the EO also stipulates that it
shall continue as a body corporate for 3 years from date of effectivity of the EO, for the
purpose of defending and prosecuting suits and enabling the Board of Liquidators to settle
and close all its affairs.
TC ordered corporation to amend the complaint by including the Board of Liquidators as co-
party plaintiff, otherwise case shall be dismissed. The corporation fails to submit amended
complaint, and the TC dismisses case. Corporation in seeking reconsideration, said that it
was not able to submit the amended complaint on time because of the negligence of the
filing clerk, Ms Ocampo, and that it was lost despite diligent efforts to look for it. TC denies
motion.
I: W/n an action, commenced within 3 years after the abolition of the corporation, may be
continued by the same after expiration of the period. NO
W/m the TC was correct in dismissing motion. NO. should have granted the motion…
H: GR: pending actions by or against a corporation are abated upon the expiration of the
period allowed by law for liquidation. The old corpo law contains no provision authorizing a
corporation after 3 years from expiration of its lifetime, to continue in its corporate name
actions instituted by it within a period of 3 years. It provides that it will continue as a body
corporate for 3 years after the time when it would have been dissolved, for purposes of
prosecuting and defending suit by or against it. During the time which the corporation,
through its officers, may conduct the liquidation of assets and sue and be sued as a
corporation is limited to 3 years from the time period of dissolution commences, but that
there is no time limit within which trustees must complete a liquidation placed in their hands.
The conveyance to the trustees must be made within the 3 year period. It may be found
impossible to complete the work of liquidation within the 3 year period or to reduce dispute
claims to judgment. Suits by or against a corporate abate when it ceased to be an entity
capable of suing or being sued; but trustees to whom the corporate assets have been
conveyed pursuant to the authority of the code may sue and be sued as such in all matters
connected with the liquidation. The effect of conveyance is to make the trustees legal owners
of the property conveyed, subject to the beneficial interest therein of creditors and SHs. The
complete loss of Abaca’s corporate existence after the expiration of 3 year period is what
impelled the creation of the Board of Liquidators, to continue the management of pending
matters.
— GR: in the absence of statutory rules to the contrary, pending actions by or against a
corporation are abated upon the expiration of the 3-year period allowed by law for
liquidation
2. executory contracts
— executory contracts are not extinguished by dissolution
169
— all rights and obligations in an executory contract pass on to a liquidating
trustee or receiver
Sec 145 Amendment or repeal. - No right or remedy in favor of or against any corporation,
its stockholders, members, directors, trustees, or officers, nor any liability incurred by any
such corporation, stockholders, members, directors, trustees, or officers, shall be removed or
impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof. (n)
3. methods of liquidation
Sec. 122 Corporate liquidation. - Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors, and
other persons in interest. From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in interest,
all interest which the corporation had in the property terminates, the legal interest vests in
the trustees, and the beneficial interest in the stockholders, members, creditors or other
persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after payment
of all its debts and liabilities. (77a, 89a, 16a)
— manner of liquidation or winding up may be stipulated in the by-laws
— three methods of liquidation:
a. liquidation by the corporation itself through the Board—the normal
procedure is for directors and officers to have charge of the winding up
operations, though there is the alternative method of assigning the
property to the trustees for the benefit of creditors and SHs. While the
appointment of a receiver rests with the sound discretion of the court,
such discretion must be exercised with caution and governed by legal
and equitable principles (China Bank v Michelin)
 i. authority of the board to manage the corporate affairs includes
the power to undertake the liquidation of corporate affairs
ii. 3-years to liquidate
b. conveying all corporate assets to trustees who will take charge of
liquidation
i. 3-year limitation does not apply
ii. but trusteeship may be limited in duration by the deed of trust
iii. trustee may sue even beyond the 3 year period
c. liquidation conducted by a receiver appointed by the SEC upon
decree of dissolution
i. 3-year limitation does not apply
ii. mere appointment of receiver does not result in dissolution
— receiver in liquidation stands on a different legal basis from a trustee in
liquidation
o trusteeship: basically a contractual relationship, governed by the Law on
Trust, such that the trustee assumes naked title to the property placed in
trust
§ it is a relationship created by a corporation through its board
without need of judicial authorization
§ trustee in liquidation is not appointed by any court, but he is
actually a transferee who holds legal title to the corporate
assets and is accountable under the trust agreement
o receivership: created by means of judicial or quasi-judicial appointment of
a receiver
§ receiver is actually an officer of the court and is accountable to
the court
§ SEC is empowered to create or appoint a management
committee, board or body to undertake the management of a
corporation
— if three year period expires, a creditor may still sue the trustee or follow the
corporate assets in the hands of SHs who may have received the same as
liquidating dividends
4. distribution of assets after payments of debts
— remaining assets, if any, must be distributed to the SHs in proportion to their
interest
— liquidating dividend: share of each SH in the assets upon liquidation
o not a partition of corporate assets among co-owners but a transfer or
conveyance by the corporation to its SHs and therefore exempt from doc
stamps (SHs of Guanzon case)
— director or liquidator may be liable for negligence or fraud to a creditor
prejudiced by distribution of dividends
o may follow the assets in the hands of SHs who received them as
dividends (Tan Tiong Bio case)
— GR: corporation cannot distribute any of its assets or property
170
— Exception: lawful dissolution and after payment of debts and liabilities
o GR: SH cannot get back any part of his invested capital until dissolution
and liquidation
o Exceptions:
§ Decrease of capital stock: results in a surplus which can be
distributed to SHs provided no creditors are prejudiced
§ Otherwise allowed by the Code:
• Appraisal right under 81 and 42
• Deadlock in a close corporation (104)
• SH of close corp can compel the corp to buy his
shares at fair value for any reason (105)
• Corporation repurchases shares of any SH for
legitimate corporate purpose (41)
• Corporation validly distributes dividends (43)
— Directors/trustees/liquidators must still act with due diligence and GF in
settling corporate affairs
— Duty of the liquidator to look for creditors with reasonable diligence
o Notice by publication sufficient
o SEC should not order dissolution without giving creditors opportunity to
be heard
o Creditors prejudiced by distribution of assets can attack its validity for
lack of due process
China Banking Corporation v. Michelin & Co. F: George O’Farrel & Cie Inc is a domestic
corporation acting as agent and representative of the M Michelin & Cie, a foreign corporation
engaged in the sale and distribution of Michelin tires. Michelin decided to discontinue their
business relations, and it was discovered that O Farrel failed to account for an amount
representing the price of tires sold by the latter. Michelin claims the money was disposed by
O Farrel for its own use and benefit and without the authority or consent of Michelin. Gaston
O’Farrel (the person) and Sanchez executed a mortgage on the house of O’Farrel and
shares owned by both to guarantee payment of the amount to the Michelin, but left a balance
which the latter seeks to recover. The board of O’Farrel filed a petition for its dissolution and
sought the appointment of Gaston as receiver and liquidator, which was granted by TC.
Michelin filed its claim against O’Farrel Corp with a prayer that its claim be allowed as a
preferred one against the latter. TC grants motion of Michelin. Nobody except Michelin and
Gaston was notified of the order. China Bank intervened and moved that Michelin’s claim be
allowed as an ordinary one under the Insolvency Law and sought the nullification of the TC
orders.
H: Claims against a corporation in the hands of a receiver should not be approved and paid
without some formal and regular proceeding after a reasonable opportunity is given to all
parties in interest.
The SC held that the provisions of the Insolvency Law should operate. There is no reason for
the corporation to resort to the court for a decree of voluntary dissolution. If the corporation
was under such a financial condition as alleged, and did not desire to continue doing
business, there is no necessity for judicial intervention in the winding up of affairs coupled
with the appointment for a receiver to deal with creditors as though they were creditors of an
insolvent corporation. Under the old corpo law, with respect to decrees of dissolution upon
voluntary application, the court may appoint receivers to collect and take charge of the
assets. It is permissive and not mandatory, because in cases of voluntary dissolution there is
no occasion for the appointment of a receiver except under special circumstances. Such
discretion on the part of the court to appoint must be exercised with caution. IT does not
empower the court to hear and pass upon the claims of creditors of the corporation at first
hand. In such cases, the receiver does not act as a receiver of an insolvent corporation.
Since liquidation consists of collecting all that is due the corporation, all claims must be
presented for allowance to the receiver or trustees during winding up, within 3 years as
provided in Corpo Law. The rulings of the receiver are subject to judicial review by the court
which appointed him.
The normal method is for directors/officers to have charge of the winding up, though there is
the alternative method of assigning property of the corporation to trustees. The law
authorizing voluntary dissolutions are generally held to apply only to dissolutions brought
about by the SHs themselves.
China Bank’s motion was filed 13 months after the decree of dissolution was entered, thus
the motion was flied on time to have its claim reviewed by the court. The appointment of
Gaston as the receiver, who was also the principal promoter of the corporation and at one
time the majority SH, president, and GM, lends itself to serious suspicion. His administration
of the business left much to be desired and that he alone ought to be blamed for the
shortage claimed by Michelin, but to save himself he made the corporation shoulder the
burden of obligations in exchange for a simulated conveyance of his house and shares to the
corporation. Once delinquent, Gaston resorted to a judicial proceeding of voluntary
dissolution in an attempt to settle Michelin’ claim and to free himself from any liability, and
allowed the claim to be a preferred claim without informing or notifying interested parties,
such as China Bank, which also had a claim.
Michelin’s claim cannot be allowed as a preferred claim, because the merchandise was no
longer in the corporation’s possession. The rubber tires consigned were to be sold on order,
and the claim for the advance seems to be in the nature of a current account between the
two companies more than anything else.
Republic v Marsman Devt Co. F: Marsman is a lumber company. An investigation was
conducted and certain taxes due from logs produced from its timber concession granted by
the government. CIR demanded payment representing three assessments made on forest
charges, deficiency sales tax and other surcharges and penalties. Counsel for the
corporation requested for reinvestigation, but was denied unless the legal requirements for
such a request were complied with and payment of ½ of total assessments were made, and
to furnish a bond to guarantee payment of the balance. The corporation repeated failed to
comply with the conditions set by the CIR, which was constrained to make extrajudicial
demand for the tax liabilities. Marsman was then extrajudicially dissolved. BIR files a
complaint for its demands after more than 3 years following the corporation’s dissolution, and
the TC sentenced the corporation to pay the amount demanded by CIR.
H: TC did not err in holding that the period to question the tax assessments had already
expired. By its own omission, the corporation made it possible for the BIR to act on its own
171
MR. Mere filing of a motion does not suspend the running of the period for collection of the
tax, which implies that any assessment made by the BIR is supposed to be final and
executory as to the taxpayer concerned.
I: w/n present action is barred by prescription, in light of the fact that the corporation law
allows corporations to continue only for 3 years after its dissolution, for the purpose of
presenting or defending suits by or against it, and to settle its affairs. no
H: Stress given by Marsman on the extinction of corporate personality by virtue of its
extra0judicial dissolution is misplaced. The assessments against the corporation were made
before its dissolution and not later than 6 months after dissolution. Thus the government
became the creditor of the corporation before the completion of its dissolution. Burgess the
liquidator became in law the trustee of all its assets for the benefit of all person interested,
including the government. It is immaterial that the present action was filed after expiration of
the 3 year period, because the assessment definitely established the government as a
creditor of the corporation for whom the liquidator is supposed to hold corporate assets.
— Code provides for a 3-year period for continuation of the corporate existence for
purposes of liquidation
— But there is nothing in the provision which bars an action for recovery of debts of the
corporation against the liquidator himself, after the lapse of the 3-year period
Tan Tiong Bio v CIR. F: Tan Tiong Bio et al are incorporators and directors (some are
officers—President and treasurer) of the Central Syndicate. The company realized a net
profit of close to P300K, and sale of goods was the only transaction undertaken by it. BIR
sues the Tan Tiong et al for deficiency sales taxes and surcharges on surplus goods
purchased by the corporation from the Foreign Liquidation Commission. Corporation was
dissolved, and Tan Tiong and company substituted themselves as parties, thereby becoming
successors-in-interests in the corporate assets after liquidation. TC rules ifo BIR, and Tan
Tiong et al appeals, claiming that they cannot be held liable for tax liability there being no law
authorizing the government to proceed against SHs of a defunct corporation as transferees
of the corporate assets upon liquidation. If they were liable, it is only to the extent of the
benefits derived by them, and that the action is barred by prescription due to the 3-year limit
in the corpo Law.
I: W/n the sales tax can be enforced against the corporation’s successors-in-interest, even if
corporation has been dissolved by expiration of corporate existence.
--YES
H: Tan Tiong, as substitute parties-in-interest, cannot now be heard to complain that they
were being held liable for the tax due from the corporation whose representation they
assumed and whose assets are distributed to them.
The creditor of a dissolved corporation may follow its assets once they passed into the
hands of a SH. The dissolution of a corporation does not extinguish debts due or owing to it.
A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund,
into the hands of the SHs. The hands of government cannot collect taxes from a defunct
corporation, it loses thereby none of its rights to assess taxes due, and to collect the taxes
due from the corporation from persons who by reason of transactions with the corporation,
hold property against which the tex may be enforced. Court ruled that the net profit remained
intact and was distributed among the SHs immediately after sale of surplus. Tan Tiong et al 5. In any other case, assets may be distributed to such persons,
are thus the beneficiaries of the defunct corporation and should be held liable to pay the societies, organizations or corporations, whether or not organized for
taxes, but only in proportion to their respective shares in the distribution of assets. profit, as may be specified in a plan of distribution adopted pursuant to
this Chapter. (n)
— Even after the 3 year period of liquidation, corporate creditors can still pursue their
claims against corporate assets against the officers or SHs who have taken over the
properties of the corporation
— SC held that the State cannot insist on making tax assessments against a corporation Dissolution
that no longer exists and then turn around and oppose the appeal questioning the
legality of the assessment precisely on the same ground that the corporation is non-
existent Method Initiating party Action to be taken
— The remedy of corporate creditors after the 3-year period is to race where the corporate Voluntary SHs Amendment of AOI
assets have gone, wherever they rested, be he a SH or a non-SH. Cause of action is to (shorten term)
file an action against that person who has control over the corporate assets. Petition for dissolution with
creditors consent
Distribution of assets of non-stock corporations Involuntary Minority/majority SHs Petition for dissolution
State Quo warranto
Creditors Petition for dissolution
Sec 94 Rules of distribution. - In case dissolution of a non-stock corporation in accordance Inaction SEC Revocation of certificate of
with the provisions of this Code, its assets shall be applied and distributed as follows: registration

1. All liabilities and obligations of the corporation shall be paid, satisfied

and discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance with
such requirements;
3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, educational
or similar purposes, but not held upon a condition requiring return,
transfer or conveyance by reason of the dissolution, shall be transferred
or conveyed to one or more corporations, societies or organizations
engaged in activities in the Philippines substantially similar to those of the
dissolving corporation according to a plan of distribution adopted
pursuant to this Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of the articles of
incorporation or the by-laws, to the extent that the articles of incorporation
or the by-laws, determine the distributive rights of members, or any class
or classes of members, or provide for distribution; and
SIR:
— SHs do not have unconditional right to determine whether a dissolution should happen,
neither can they enjoin the State to dissolve
— Is dissolution sought to enforce obligations, or satisfy liabilities?
— Can creditors sue for dissolution to enforce obligations? GR: No!
— Exceptions: insufficiency of assets; inability to pay obligations
— Trust fund doctrine continues until every obligation is satisfied
— Result of dissolution: mandatory institution of actions to enforce obligations
— Is dissolution limited to distressed corporations? Apparently yes.
— Dissolution is a step-by-step process
— Omit one, you don’t proceed!
— Sale of substantially all assets does not mean dissolution
— Liquidating dividends: assumes these are properties remaining for distribution among
SHs as dividends
o May even be the assets themselves! Distribution still based on shares/aliquot
ownership
— In Teodoro: minority wanted out, but did not have representation on the board! Personal
action sought to be enforced. (compare with Republic and Cease)
— Should a derivative suit be filed in Teodoro? No. its purpose is to seek redress for a
wrong done to the corporation, by the SHs in behalf of the corporation; Teodoro was a
personal action
— In Bisaya: dissolution is also a remedy for intra-corporate “squabbles” between SHs
— Pore, Chinabank, Marsman: involve enforcement of obligations by and against the
corporation

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— Tan Tiong was a “short-cut”; involves the BIR going after SHs for unpaid taxes Chapter XVII – Corporate Combinations
Board Purposes of Combinations; Methods

Winding Up 3-yr period Merger and Consolidation

Board of Trustees
— Parties to a merger or consolidation are called constituent corporations
“limited corporate existence” o No liquidation of assets of dissolved corporations
o Surviving or consolidated corporation acquires all their properties, rights, and
1. collation of property/assets franchises
2. enforcement of contractual rights o The SHs of the dissolved corporation become SHs of the consolidated corporation
3. settlement of obligations — Consolidation is the union of two or more existing corporations to form a new
corporation called the consolidated corporation.
o A combination by agreement between two or more corporations by which their
rights, franchises, privileges, and properties are united and become those of a
single new corporation
o All constituents are dissolved and absorbed by the new consolidated enterprise
— Merger is a union whereby one or more existing corporations are absorbed by another
corporation which survives and continues the combined business
o All constituent corporations are dissolved, except the surviving corporation
o May be horizontal (competing firms), vertical (corporation acquired is a user of
products of the absorbing corporation), or conglomerate
— In both cases, there is no liquidation of the assets of the dissolved corporations
— The surviving or consolidated corporation assumes ipso jure the liabilities of dissolved
corporations

1. Nature; distinction

— The power to merge or consolidate is not among the inherent powers of

corporations and must be expressly granted by law

2. Only de facto merger under corporation law

— Old law contained no express provision on merger or consolidation

— Reyes v Blouse paved the way for de facto mergers/consolidations
o Even without express provisions authorizing mergers or consolidations,
the effects of such could be obtained by the ff:
§ Sale of all corporate assets of the absorbed to the absorbing
§ Subsequent dissolution of the selling corporation by shortening
its corporate term
§ Amendment of the AOI of the absorbing
o No automatic assumption by the absorbing corporation of the liabilities of
the absorbed
o Creditor consent is indispensable

3. Express authority to merge granted by Code; requirements

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Secs 76-80
Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge into a
single corporation which shall be one of the constituent corporations or may consolidate into
a new single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate, hereinafter
referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying the same into
effect;
3. A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in
case of consolidation, all the statements required to be set forth in the articles of
incorporation for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable. (n)
Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote of each of
the board of directors or trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the stockholders or members of
each of such corporations at separate corporate meetings duly called for the purpose. Notice
of such meetings shall be given to all stockholders or members of the respective
corporations, at least two (2) weeks prior to the date of the meeting, either personally or by
registered mail. Said notice shall state the purpose of the meeting and shall include a copy
or a summary of the plan of merger or consolidation. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in
the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-
stock corporations shall be necessary for the approval of such plan. Any dissenting
stockholder in stock corporations may exercise his appraisal right in accordance with the
Code: Provided, That if after the approval by the stockholders of such plan, the board of
directors decides to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or trustees of
all the constituent corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of
the members of each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or consolidation. (n)
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Sec. 78. Articles of merger or consolidation. - After the approval by the stockholders or
members as required by the preceding section, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to be signed by the president or
vice-president and certified by the secretary or assistant secretary of each corporation
setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the case of non-
stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and against
such plan, respectively. (n)
Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of
consolidation, signed and certified as herein above required, shall be submitted to the
Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the
case of merger or consolidation of banks or banking institutions, building and loan
associations, trust companies, insurance companies, public utilities, educational institutions
and other special corporations governed by special laws, the favorable recommendation of
the appropriate government agency shall first be obtained. If the Commission is satisfied that
the merger or consolidation of the corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that
the proposed merger or consolidation is contrary to or inconsistent with the provisions of this
Code or existing laws, it shall set a hearing to give the corporations concerned the
opportunity to be heard. Written notice of the date, time and place of hearing shall be given
to each constituent corporation at least two (2) weeks before said hearing. The Commission
shall thereafter proceed as provided in this Code. (n)
Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall have the
following effects:cralaw
1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merger; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of
the surviving or the consolidated corporation;
 3. The surviving or the consolidated corporation shall possess all the rights, o Sets forth:
privileges, immunities and powers and shall be subject to all the duties and liabilities § Merger plan
of a corporation organized under this Code; § Number of shares outstanding or number of members
§ Number of shares or members voting for and against the plan
4. The surviving or the consolidated corporation shall thereupon and thereafter o AOM must be filed not more than 120 days from date of long form audit
possess all the rights, privileges, immunities and franchises of each of the report of each corporation
constituent corporations; and all property, real or personal, and all receivables due — Submission of financial statements
on whatever account, including subscriptions to shares and other choses in action, — Approval by SEC
and all and every other interest of, or belonging to, or due to each constituent o SEC issues a certificate of merger or consolidation
corporation, shall be deemed transferred to and vested in such surviving or o Date of issuance makes merger effective
consolidated corporation without further act or deed; and o Merger does not become effective upon the mere agreement of the
constituent corporations
— Once all requirements in 76-80 are complied with, combination gains legal
5. The surviving or consolidated corporation shall be responsible and liable for all the recognition
liabilities and obligations of each of the constituent corporations in the same manner as if — Apply to stock and non-stock
such surviving or consolidated corporation had itself incurred such liabilities or obligations; — Steps to accomplish a merger/consolidation:
and any pending claim, action or proceeding brought by or against any of such constituent (1) board draws up plan of merger or consolidation
corporations may be prosecuted by or against the surviving or consolidated corporation. The a. includes any amendment to the AOI or statements required therein
rights of creditors or liens upon the property of any of such constituent corporations shall not (2) submission of plan to SHs of each corporation for approval, at a meeting (2 weeks
be impaired by such merger or consolidation. (n) notice)
a. vote of 2/3 representing 2/3 OCS
Procedures in Merger or Consolidation: (3) execution of formal agreement—Articles of Merger or Consolidation
— Plan of Merger or Consolidation (4) submission of AOM to Sec for approval
o Under Sec 76, the board is expressly empowered to approve a plan of (5) SEC sets hearing
merger or consolidation which shall set forth the ff: (6) Issuance of certificate of merger or consolidation
§ Names of constituent corporations a. Only upon issuance of certificate would the merger become effective
§ Terms of the merger and mode of carrying it into effect
§ A statement of changes in the AOI of the surviving corporation — Effects of merger:
in case of merger; all statements required to be set forth in the o All constituent corporations, except the surviving corporation in case of
AOI in the case of consolidation merger, shall be dissolved
§ Such other provisions as are deemed necessary o There is no winding up or liquidation of assets of the absorbed—absorbing
o Approval by majority vote of the board automatically acquires rights, privileges, powers and liabilities
— SHs approval o Creditors rights are not impaired
o at separate corporate meetings of SHs of each corporation
o notice given to all SHs at least 2 weeks prior to the meetings 4. Remedies of creditors and dissenting SHs; appraisal right
o vote of 2/3 of OCS
— Appraisal right — Creditors cannot prevent the merger or consolidation, even if the new entity is
o Available to dissenting SHs (of the absorbing or absorbed corporations or unacceptable a debtor as the old corporation
both?) o Remedy: enforce claims against the surviving or consolidated corporation
o Extinguished when the board decides to abandon its merger plans o Fraudulent conveyance: follow the assets of the dissolved constituents in the
— Amendment of Plan hands of the surviving or consolidated corporation
o Amendment must be approved by majority vote of the board — SHs who dissent cannot prevent the merger or consolidation
o Ratified by at least 2/3 OCS o Remedy: exercise their appraisal right
— Articles of Merger (AOM) o Fraud or gross unfairness: can enjoin the merger
o Executed by each of the constituent corporations § If merger already executed: sue for the value of their interests
o Signed by president or VP § Rescission not granted, generally
o Certified by secretary o Only a derivative suit in behalf of the corporation is proper

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 § Exception: personal action may be allowed disposition of such property and assets be appropriated for the conduct of its remaining
o If new stock as are issued by the absorbing to SHs of the absorbed, SHs of business.
the absorbing cannot exercise preemptive right
§ Why? Consideration is for property. No preemptive right In non-stock corporations where there are no members with voting rights, the vote of at least
a majority of the trustees in office will be sufficient authorization for the corporation to enter
Sale of substantially all corporate assets into any transaction authorized by this section. (28 1/2a)

— Other ways to effect a merger or combination (other than in code)

— Sale of all its assets to the other in exchange for stock 1. legal requirements
o Acquiring corporation assumes selling corporation’s liabilities
o Selling corporation shortens its term, dissolves, and liquidates and distributes stock — sale of all or substantially all assets: one which will render the corporation
received form the acquiring incapable of continuing the business or accomplishing the purpose= SH action
o Consideration must be stocks if the intent is to combine required
— No intent to combine: consideration for the sale would be in cash or other properties — short of “substantially all”= no SH action required
and selling corporation may still continue in existence or remain in suspended animation
2. no assumption of liabilities; exceptions
Sec 40 Sale or other disposition of assets. - Subject to the provisions of existing laws on — GR: purchasing corporation will not be liable for the debts of the selling
illegal combinations and monopolies, a corporation may, by a majority vote of its board of corporation if it acted in GF and paid adequate consideration
directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or — Exceptions:
substantially all of its property and assets, including its goodwill, upon such terms and o Purchasing corp impliedly agreed to assume such debts
conditions and for such consideration, which may be money, stocks, bonds or other o Transaction amounts to a consolidation or merger
instruments for the payment of money or other property or consideration, as its board of o Purchasing corp is merely a continuation of the selling
directors or trustees may deem expedient, when authorized by the vote of the stockholders o Transaction entered into fraudulently
representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members, in a stockholder's or 3. remedies of dissenting SHs: appraisal right
member's meeting duly called for the purpose. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each stockholder or member at his — minority SH cannot prevent sale if approved by the required vote
place of residence as shown on the books of the corporation and deposited to the addressee o remedy: appraisal right
in the post office with postage prepaid, or served personally: Provided, That any dissenting § only if there is unrestricted retained earnings
stockholder may exercise his appraisal right under the conditions provided in this Code. — if sale is fraudulent and entered into to “freeze out” the minority
o remedy: sue in court to enjoin the sale
A sale or other disposition shall be deemed to cover substantially all the corporate property — if sale already executed:
and assets if thereby the corporation would be rendered incapable of continuing the o remedy: sue for value of proportionate interest in the new corporation
business or accomplishing the purpose for which it was incorporated. — majority SHs do not have appraisal right
o GR: corporation can purchase assets of another corporation by mere
After such authorization or approval by the stockholders or members, the board of directors resolution and no need for SH approval
or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, o Exceptions:
mortgage, pledge or other disposition of property and assets, subject to the rights of third § where amendment to AOI would be necessary to effect it or
parties under any contract relating thereto, without further action or approval by the § Where investment in the selling corporation’s business is not
stockholders or members. reasonable necessary for the accomplishment of the purpose

4. compared with merger and consolidation

Nothing in this section is intended to restrict the power of any corporation, without the
authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or — merger v sale of all corporate assets:
otherwise dispose of any of its property and assets if the same is necessary in the usual and o merger:
regular course of business of said corporation or if the proceeds of the sale or other § short cut to the accomplishment of various transactions

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 § avoid difficulty of dissolution
§ constitutes a transfer of property and business of one
corporation to another in exchange for securities issued by the
absorbing corp to the absorbed
§ automatic assumption of liabilities
o sale:
§ there must be sufficient funds reserved by the absorbed to pay
its liabilities
§ chance that sale may be attacked by creditors alleging fraud
§ lesser problems in securing SH approval and recognizing
appraisal rights
Reyes v. Blouse et al. F: Minority SHs of the Laguna Tayabas Bus Co file an action to
enjoin Blouse et al from executing its resolution approved by 99 ½% of SHs to consolidate
the properties and franchises of Laguna Tayabas with Batangas Transport. Blouse believes
it is merely an exchange of properties and not a consolidation.
I: W/n the real purpose of the resolution is merger or consolidation, and if so, whether it can
be carried out under the old Corpo Law.
H: The questioned resolution charges the board of Laguna to consolidate properties and
franchises thereof with that of Batangas Transport. Both corporations have passed similar
resolutions to take steps to effect the consolidation. It is apparent that the purpose of the
resolution is not to dissolve but to merely transfer its assets to a new corporation in
exchange for its shares. This comes within the purview of the old corporation law, which
provides that a corporation may sell, exchange, lease or otherwise dispose of all its property
and assets when authorized by affirmative vote of 2/3 of SHs. The phrase “otherwise
dispose of” covers mergers and consolidations. The transaction in this case cannot be
considered, strictly speaking, as a merger or consolidation because a merger implies the
termination or cessation of the merged corporations and not merely a merger of assets and
properties. The two companies will not lose their corporate existence but will continue to
exist after consolidation. What is intended to be managed and operated by a new
corporation, and not a merger.
The court added that the merger/consolidation (if any) would still be carried out under the
Public Service Law. It does not impose any qualification other that it shall be done with the
approval of the PSC.
Edward Nell Company v Pacific Farms Inc. F: The Edward Nell Co secured a judgment
representing the unpaid balance of the price of a pump sold to Insular Farms. Pacific Farms
then purchased all or substantially all of shares of stock as well as real and personal
property of Insular, selling the shares to certain individuals who reorganized Insular. The
board of the reorganized Insular then sold its assets to be sold to Pacific for P10000. The
writ of execution was returned, stating that Insular had no leviable property. Nell Co sued
Pacific Farms, on the ground as a result of the purchase of all or substantially all assets of
Insular, Pacific became the alter ego of Insular Farms.
H: GR: where the corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the former.
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Exception: (1) purchaser expressly or impliedly assumes such debts; (2) transaction
amounts to a consolidation or merger; (3) purchasing corporation is merely a continuation of
the selling corp; (4) there is fraud to escape liability for the debts
In the present case, no proof was submitted that Pacific expressly agreed to assume the
debts of Insular or that it is a continuation of Insular, or that the transaction was tainted in
fraud of creditors, or that the two parties merged or consolidated. In fact, the sales took
place, not only over 6 months before judgment, but also over a month before the filing of the
case. Pacific also purchased the shares as the highest bidder at an auction sale held at the
instance of a bank to which shares have been pledged as security by Insular. Nell Co’s
theory that Pacific is the alter ego of Insular negates the fact of consolidation/merger,
because a corporation cannot be its own alter ego.
As to the allegation that the selling price of the assets of P10K was grossly inadequate and
thus tainted with fraud, the SC held that the sale was approved by the SEC and that it should
be presumed that the price was fair and reasonable, and should be a matter litigated in
another venue.
SC: since there is neither proof nor allegation that the transferee-corporation expressly or
impliedly agreed to assume the debt of the corporation, or that the sale of either the shares
or the assets to the appellee has been entered into fraudulently, in order to escape liability
for the debt of the subject corporation, there was no basis to hold the transferee liable for the
debts and liabilities of the subject corporation
Rules on enforceability of liabilities of the transferor against the transferee after the transfer
1. pure assets-only transfer: transferee not liable
2. transfer of business enterprise: transferee liable
3. transfer of equity: not liable except where transferee expressly or impliedly agrees
to assume the same
Exchange of stocks
— yet another method of corporate combination
— acquisition of all or substantially all stock of one corporation from SHs in
exchange for stock of another corporation
o SHs of the acquiring become SHs of the acquired
o Once completed, acquired corp becomes a subsidiary of the acquiring
(parent)
— Right of dissenting SHs: depends on whether the mother decides to retain the
acquired corporation as a subsidiary, merges with it, or buys all its assets
o If parent retains as subsidiary:
§ No appraisal right
§ No express provision in the Code, but…
§ … Campos: SH can sell his stocks to another corporation, but
may be liable for damages if in BF or if it damages the
corporation
o If parent merges or purchases: provisions of the Code
 § Same rights as dissenting SHs in a merger or sale—appraisal Chapter XVIII – Foreign Corporations
right
Definition, status
SIR:
— Sec 123: a foreign corporation is one formed, organized, or existing under any laws
— You have to comply with the provisions of the Code to legally effect other than those of the Phils and whose laws allow Filipino citizens and corporations to
mergers/consolidations; short of that, no merger, no consolidation! do business in its own country or state
— Parties to a merger/consolidation are the corporations, not the SHs!
— Merger: marriage of assets and assumption of liabilities Not doing business no need for license
— SHs of absorbing become SHs of the absorbed to sue and be sued
— Isa lang ang patay; or maraming patay pero buhay and kumain! Doing business need license
— Consolidation: lahat ng sumali, patay! Why? Objective is to put up a new one, which
shall own all combined assets and is the successor-in-interest to all obligations Jack: doing business is extending the business of the foreign entity to the RP, on a
— Combinations can happen to distressed corporations continuing and permanent basis, in order to make profits! That’s all it is!
— Blouse was NOT a merger/consolidation!
— Each corporation still had personality Call cases (except Merrill Lynch and TopWeld, are exceptions to doing business! Compare
— They shared assets, business operations; neither absorbed the other with Agilent. Compare Wells and Mentholatum.
— There was no new corporation formed
— All of the elements below must be present! Set aside cases of foreign corporation enforcing IPRs from the other cases (Le Chemise,
Gelhaar, Columbia, Puritan)
Merger/Consolidation
1. dissolution/organization and establishment of new corporation Methods of investment
2. consolidation of equity ownership
3. transfer/conveyance of assets + unconditional assumption of liabilities Permitted areas of investment

1. partially nationalized areas

2. preferred areas; incentives for investment
3. non-preferred areas of investment

Legal Requirements prior to transaction of business

1. BOI Certificate
2. SEC license to do business
3. Certificate from appropriate government agency

Effect of failure to secure SEC license

Marshall Wells v Elser. F: Marshall Wells Co. (foreign) sued Henry Elser Co (local) for the
unpaid balance on the sale of goods. Elser Co files a demurrer, contending that Marshall has
no legal capacity to sue, not having complied with the laws required of foreign corporations
doing business in the RP and not authorized to do business in RP. TC sustains demurrer.
I: W/n the obtaining of the license to do business is a condition precedent to maintaining any
kind of action in RP courts.
H: The object of the statute was to subject the foreign corporation doing businesss in the
Philippines to the jurisdiction of its courts. Its object was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to render it amenable to suit in the

178
local courts. The effect of the statute preventing foreign corporations from doing business
and bringing action in the courts except on compliance with elaborate requirements must not
be unduly extended or improperly applied.
Thus confronted with the option of construing the law to mean that any corporation in the US,
which might ant to sell to a person in the Phils must sent some representative here before
the sale and go through the complicated formulae provided by the corporation law with
regard to obtaining of the license, before the sale was made in order to avoid being swindled
by Filipinos, there can be no other construction. The law simply means that no foreign
corporation shall be permitted to transact business in the Phils unless it shall have the
license required by law, and until it complies with the law, shall not be permitted to maintain
any suit in the local courts.
The non-compliance of a foreign corporation with the requirements of the statute may be
pleaded as an affirmative defense. Thereafter it must appear from the evidence, first—that
the plaintiff is a foreign corporation, and second—that it is doing business in the Phils, and
third—that it has not obtained the proper license.
— To subject foreign corporations doing business in the RP to the jurisdiction of the courts;
and to prevent it from acquiring domicile without taking steps to make it amenable to
suits
— Requirement to obtain license applies only to foreign corporations doing business in RP
Marshall Wells + Metholatum = isolated txns NOT doing business
Columbia Pictures v CA. F: Columbia Pictures et al lodged a formal complaint with the NBI
for violation of PD No. 49, as amended, and sought its assistance in their anti-film piracy
drive. Agents of the NBI and private researchers made discreet surveillance on various
video establishments in Metro Manila including Sunshine Home Video Inc. NBI Senior Agent
Lauro C. Reyes applied for a search warrant with the court a quo against Sunshine seeking
the seizure, among others, of pirated video tapes of copyrighted films all of which were
enumerated in a list attached to the application; and, television sets, video cassettes and/or
laser disc recordings equipment and other machines and paraphernalia used or intended to
be used in the unlawful exhibition, showing, reproduction, sale, lease or disposition of
videograms tapes in the premises above described. TC granted and issued the SW. The
search warrant was served to Sunshine and/or their representatives. In the course of the
search of the premises indicated in the search warrant, the NBI Agents found and seized
various video tapes of duly copyrighted motion pictures/films owned or exclusively distributed
by private complainants, and machines, equipment, television sets, paraphernalia, materials,
accessories all of which were included in the receipt for properties accomplished by the
raiding team. Sunshine filed a motion to lift warrant but was denied by the TC. Sunshine
contended that being foreign corporations, Columbia Pictures et al should have such license
to be able to maintain an action in Philippine courts. In so challenging petitioners’
personality to sue, Sunshine pointed to the fact that petitioners are the copyright owners or
owners of exclusive rights of distribution in the Philippines of copyrighted motion pictures or
films, and also to the appointment of Atty. Rico V. Domingo as their attorney-in-fact, as being
constitutive of “doing business in the Philippines” under BOI Rules. As foreign corporations
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doing business in the Philippines, Section 133 of the Corporation Code denies them the right
to maintain a suit in Philippine courts in the absence of a license to do business, and thus
have no right to ask for the issuance of a search warrant. Upon MR, the TC granted the
same, holding that the master tapes of the copyrighted films from which the pirated films
were allegedly copies, were never presented in the proceedings for the issuance of the
search warrants in question. The orders of the Court granting the search warrants and
denying the urgent motion to lift order of search warrants were, therefore, issued in error and
was set aside. Petitioners appealed.
H: The obtainment of a license prescribed by Section 125 of the Corporation Code is not a
condition precedent to the maintenance of any kind of action in Philippine courts by a foreign
corporation. However, under the aforequoted provision, no foreign corporation shall be
permitted to transact business in the Philippines, as this phrase is understood under the
Corporation Code, unless it shall have the license required by law, and until it complies with
the law in transacting business here, it shall not be permitted to maintain any suit in local
courts. As thus interpreted, any foreign corporation not doing business in the Philippines may
maintain an action in our courts upon any cause of action, provided that the subject matter
and the defendant are within the jurisdiction of the court. It is not the absence of the
prescribed license but “doing business” in the Philippines without such license which debars
the foreign corporation from access to our courts. In other words, although a foreign
corporation is without license to transact business in the Philippines, it does not follow that it
has no capacity to bring an action. Such license is not necessary if it is not engaged in
business in the Philippines. it is recognized that a foreign corporation is “doing,”
“transacting,” “engaging in,” or “carrying on” business in the State when, and ordinarily only
when, it has entered the State by its agents and is there engaged in carrying on and
transacting through them some substantial part of its ordinary or customary business,
usually continuous in the sense that it may be distinguished from merely casual, sporadic, or
occasional transactions and isolated acts. Jurisprudence has, however, held that the term
implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally
incident to or in progressive prosecution of the purpose and subject of its organization.
Based on Article 133 of the Corporation Code and gauged by such statutory standards,
petitioners are not barred from maintaining the present action. There is no showing that,
under our statutory or case law, petitioners are doing, transacting, engaging in or carrying on
business in the Philippines as would require obtention of a license before they can seek
redress from our courts. No evidence has been offered to show that petitioners have
performed any of the enumerated acts or any other specific act indicative of an intention to
conduct or transact business in the Philippines.
Accordingly, the certification issued by the SEC stating that its records do not show the
registration of petitioner film companies either as corporations or partnerships or that they
have been licensed to transact business in the Philippines, while undeniably true, is of no
consequence to petitioners’ right to bring action in the Philippines. Verily, no record of such
registration by petitioners can be expected to be found for, as aforestated, said foreign film
corporations do not transact or do business in the Philippines and, therefore, do not need to
be licensed in order to take recourse to our courts. As a general rule, a foreign corporation
will not be regarded as doing business in the State simply because it enters into contracts
with residents of the State, where such contracts are consummated outside the State. In
fact, a view is taken that a foreign corporation is not doing business in the state merely
because sales of its product are made there or other business furthering its interests is
transacted there by an alleged agent, whether a corporation or a natural person, where such
activities are not under the direction and control of the foreign corporation but are engaged in
by the alleged agent as an independent business.
In accordance with the rule that “doing business” imports only acts in furtherance of the
purposes for which a foreign corporation was organized, it is held that the mere institution
and prosecution or defense of a suit, particularly if the transaction which is the basis of the
suit took place out of the State, do not amount to the doing of business in the State. The
institution of a suit or the removal thereof is neither the making of a contract nor the doing of
business within a constitutional provision placing foreign corporations licensed to do
business in the State under the same regulations, limitations and liabilities with respect to
such acts as domestic corporations. Merely engaging in litigation has been considered as
not a sufficient minimum contact to warrant the exercise of jurisdiction over a foreign
corporation.
As to Sunshine’s contention that petitioners have no legal personality to sue, among the
grounds for a motion to dismiss under the Rules of Court are lack of legal capacity to sue
and that the complaint states no cause of action. Lack of legal capacity to sue means that
the plaintiff is not in the exercise of his civil rights, or does not have the necessary
qualification to appear in the case, or does not have the character or representation he
claims. On the other hand, a case is dismissible for lack of personality to sue upon proof that
the plaintiff is not the real party-in-interest, hence grounded on failure to state a cause of
action. The term “lack of capacity to sue” should not be confused with the term “lack of
personality to sue.” While the former refers to a plaintiff’s general disability to sue, such as
on account of minority, insanity, incompetence, lack of juridical personality or any other
general disqualifications of a party, the latter refers to the fact that the plaintiff is not the real
party- in-interest. Correspondingly, the first can be a ground for a motion to dismiss based
on the ground of lack of legal capacity to sue; whereas the second can be used as a ground
for a motion to dismiss based on the fact that the complaint, on the face thereof, evidently
states no cause of action.
Applying the above discussion to the instant petition, the ground available for barring
recourse to our courts by an unlicensed foreign corporation doing or transacting business in
the Philippines should properly be “lack of capacity to sue,” not “lack of personality to
sue.” Certainly, a corporation whose legal rights have been violated is undeniably such, if
not the only, real party-in-interest to bring suit thereon although, for failure to comply with the
licensing requirement, it is not capacitated to maintain any suit before our courts.
— Columbia: ownership of copyright or distribution rights and enforcement of IPR ≠ doing
business
— Entering into contracts with residents in the RP ≠ doing business
General Garments Corp v Director of Patents. F: General Garments Corp is the owner of
the trademark “Puritan” for assorted men’s wear and underwear. The Puritan Sportswear
Corporation of Pennsylvania, filed a petition for cancellation of the trademark registered in
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the name of General Garments Corporation, alleging ownership and prior use of the name.
General Garments contends that Puritan being a foreign corporation which is not licensed to
do and is not doing business in the RP, is not considered a person under RP laws and
consequently not comprehended within the term “any person” under the Trademark Law
then in force. MTD was denied by the Director of Patents.
I: W/N Puritan Sportswear Corp, not licensed to do business and not doing business in the
RP, has legal capacity to maintain a suit in the Phil. Patent Office.
H: The fact that it may not transact business in the Phils unless it obtains a license or
maintains a suit does not make the respondent any less a juridical person. An exception to
the license requirement is where a foreign corporation sues on an isolated transaction. It
cites the Marshall Wells case (supra)
It should be pointed out that Puritan is not suing in the courts to recover a debt claim or
demand—which would require a license—but filed a petition to cancel the trademark
registered by General Garments. A foreign corporation which has never done business in the
Phils and which is unlicensed and unregistered to do so, but is widely and favorable known
in the Phils through the use therein of its products bearing its corporate name has a legal
right to maintain an action. The purpose of such a suit is to protect its reputation, corporate
name, and goodwill, which has been established through the natural development of its
trade, in the doing of which it does not seek to enforce any legal or contract rights arising
from, or growing out of any business transacted in the Phils.
The lawful entry into the Phils of goods bearing the trademark since 1949 should entitle the
owner to the right to use the same to the exclusion of others. The law is not only for the
protection of the owner of the trademark but also for the protection of purchasers from
confusion or deception.
General Garments invokes the Mentholatum ruling in support of his case, but the SC held
that Congress, in seeking to purposely counteract the effects of the case, enacted RP 638
and inserted Sec 21-A in the Trademark Law, to allow foreign corporations to bring an action
in RP courts for infringement of a mark or trade name, or unfair competition, or false
designation of origin and false description, whether or not it has been licensed to do
business in the RP.
Le Chemise Lacoste v Fernandez. F: La Chemise Lacoste is a French corporation and not
doing business in the RP, and is also the actual owner of the trademarks Lacoste and
Crocodile Device. Hemandas & Co secured a registration of the trademarks in its name from
the Phil Patent Office of the trademarks owned by Le Chemise. Hemandas then assigned all
its rights title and interest in the trademark to Gobindram Hemandas. Le Chemise filed its
own application for registration of the trademarks Crocodile Device and Lacoste, and the
Patent Office approved the former was but rejected the latter. Le Chemise then filed a letter-
complaint with the NBI alleging acts of unfair competition committed by Hemandas and
requesting their apprehension and prosecution. The NBI secured search warrants, but
Hemandas files a MTQ the warrant alleging that his trademarks is different from Le Chemise.
Search warrants were recalled and items seized returned to Hemandas. Le Chemise
questions the quashal.
I: W/n petitioner has no legal capacity to sue because it is not doing business in the
Philippines and is not licensed to do so, and that it failed to allege certain facts in its petition
relative to its capacity to sue.
H: In Leviton case, which is relied on by Hemandas, it was ruled that it is not enough for a
foreign corporation to merely allege that it is a foreign corporation. Compliance with the
requirements under the law or statute from which it seeks relief and upon which the grounds
of the illegal act are alleged, is necessary. It is therefore necessary for the foreign
corporation to comply with these requirements or aver why it should be exempted from them.
The foreign corporation may have the right to sue before RP courts, but our rules on
pleadings require that the qualifying circumstances necessary for the assertion of that right
be affirmatively pleaded. Since the present case involves a criminal offense, the Leviton
case is inapplicable. Le Chemise may still sue even if it failed to allege material facts. A
foreign corporation not doing business needs no license to sue before RP courts for
infringement of trademark and unfair competition. A foreign corporation favorable known in
the Phils through the use of its products bearing its corporate name has a legal right to
maintain action in the Philippines to restrain the formation in BF of a corporation bearing the
same name as the foreign corporation; the sole purpose of its suit is to protect its reputation,
corporate name, goodwill whenever the same has established themselves. A corporate and
trade name are property rights, rights in rem, which the owner may assert and protect
against the whole world, in any courts of the world—even in jurisdictions where it does not
transact business. Since it is the trademark and not the mark that is to be protected, a
trademark acknowledges no territorial boundaries or municipalities or states or nations, but
extends to every market where the trader’s goods have become known and identified.
The letter-complaint that preceded the petition was filed with the NBI. If prosecution would
follow after the PI then the information shall be in the name of the People of the RP and no
longer the petitioner which is only an aggrieved party, since a criminal act is an act against
the State. Le Chemise capacity to sue, would then be of no significance.
The Mentholatum case relied upon by Hemandas is also not on all fours with the present
case. The foreign corporation in Mentholatum is in fact doing business in the RP but without
the requisite license. In the present case, Le Chemise is a foreign corporation not doing
business in the RP. It has an exclusive distributor, Rustans Commercial, which is an
independent entity which buys and sells the products of Le Chemise, and is in other words
not a mere agent or conduit of Le Chemise. BOI rules also support a finding that Le Chemise
is not doing business. Rustans is a middleman acting and transacting business in its own
name and account.
In upholding the rights of Le Chemise, SC held that we are recognizing our duties and rights
of foreign states to which the Philippines and France are parties. We are simply interpreting
and enforcing a solemn international commitment of the Philippines embodied in a
multilateral treaty, the Paris Convention for the Protection of Industrial Property to which we
are a party. The convention has extraterritorial application, and is essentially a compact
between the member countries to accord to member-countries’ citizens the same rights
comparable to those accorded their own citizens by domestic law. The underlying principle is
that foreign nationals should be given the same treatment in each of the member-countries
as that country makes available to its own citizens. It is not premised upon the idea that the
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trademark and related laws shall be given extra-territorial application, but on exactly the
converse that each nation’s law shall have only territorial application. A treaty or convention
is not a mere moral obligation to be enforced but creates a legally binding obligation on the
parties founded on the generally accepted principles of international law of pacta sunt
servanda, which has been adopted as the law of the law.
— Foreign corporation not doing business has personality to commence criminal
proceedings for violation of RPC
— Mentholatum does not apply! Le Chemise’s exclusive distributor buys and then sells it
shirts for its own account and for its own profit and is not an agent or conduit of Le
Chemise
— Not every sale to an exclusive agent in RP constitutes doing business! The agent must
sell or transact in the foreign corporation’s name and for the foreign entity’s own
account to constitute doing business
— Villanueva: but buying the products to be resold in the RP from foreign entities involve
the foreign entity as direct parties!
What constitutes doing business
— Isolated transaction: set apart from common business; no intention to engage in a
progressive pursuit of the business or corporate purpose
Litton Mills v CA. F: Petitioner Litton Mills, Inc. (Litton) entered into an agreement with
Empire Sales Philippines Corporation (Empire), as local agent of Gelhaar Uniform Company
(Gelhaar), an American corporation, whereby Litton agreed to supply Gelhaar 7,770 dozens
of soccer jerseys. The agreement stipulated that before it could collect from the bank on the
letter of credit, Litton must present an inspection certificate issued by Gelhaar’s agent in the
Philippines, Empire Sales, that the goods were in satisfactory condition. Litton then sent four
shipments totaling 4,770 dozens of the soccer jerseys. A fifth shipment of 2,110 dozens of
the jerseys, was inspected by Empire, but Empire refused to issue the required certificate of
inspection. Alleging that Empire’s refusal to issue a certificate was without valid reason,
Litton filed a complaint for specific performance to compel Empire to issue the inspection
certificate covering the 2,110 dozen jerseys plus damages. The trial court issued the writ and
the next day, Empire issued the inspection certificate, so that the cargo was shipped on time.
The law firm of Sycip, Salazar, Feliciano and Hernandez entered a special appearance for
the purpose of objecting to the jurisdiction of the court over Gelhaar, and moved to dismiss
the case and to quash the summons on the ground that Gelhaar was a foreign corporation
not doing business in the Philippines, and as such, was beyond the reach of the local courts.
It contended that Litton failed to allege and prove that Gelhaar was doing business in the
Philippines.
H: We sustain petitioner’s contention based on the first ground, namely, that the trial court
acquired jurisdiction over Gelhaar by service of summons upon its agent as required by of
Rule 14, § 14. But, it should be noted, in order that service may be effected in the manner
above stated, said section also requires that the foreign corporation be one which is doing
business in the Philippines. This is a sine qua non requirement. This fact must first be
established in order that summons can be made and jurisdiction acquired. The fact of doing
business must then, in the first place, be established by appropriate allegations in the
complaint. Hence, a court need not go beyond the allegations in the complaint to determine
whether or not a defendant foreign corporation is doing business for the purpose of Rule 14,
§ 14. In the case at bar, the allegation that Empire, for and in behalf of Gelhaar, ordered
7,770 dozens of soccer jerseys from Litton and for this purpose Gelhaar caused the opening
of an irrevocable letter of credit in favor of Litton is a sufficient allegation that Gelhaar was
doing business in the Philippines.
Gelhaar contends that the contract with Litton was a single, isolated transaction and that it
did not constitute “doing business.” where a single act or transaction of a foreign corporation
is not merely incidental or casual but is of such character as distinctly to indicate a purpose
on the part of the foreign corporation to do other business in the state, such act will be
considered as constituting doing business. This Court referred to acts which were in the
ordinary course of business of the foreign corporation.
In the case at bar, the trial court was certainly correct in holding that Gelhaar’s act in
purchasing soccer jerseys to be within the ordinary course of business of the company
considering that it was engaged in the manufacture of uniforms. The acts noted above are of
such a character as to indicate a purpose to do business.
In accordance with Rule 14, § 14, service upon Gelhaar could be made in three ways: (1) by
serving upon the agent designated in accordance with law to accept service of summons; (2)
if there is no resident agent, by service on the government official designated by law to that
effect; and (3) by serving on any officer or agent of said corporation within the Philippines.6
Here, service was made through Gelhaar’s agent, the Empire Sales Philippines Corp. There
was, therefore, a valid service of summons on Gelhaar, sufficient to confer on the trial court
jurisdiction over the person of Gelhaar.
— Single transaction most not simply be casual or incidental to constitute doing
business… it must be in the ordinary course of the business of the foreign corporation
Mentholatum v Mangaliman. F: MEntholatum Co Inc, a Kansas corporation which
manfactures “Mentholatum” (a medicament and salve adapted for the treatment of colds,
nasal irritations etc) and its distributing agent Philam Drug Co filed an action against
Mangaliman et al for infringement of trademark and unfair competition. They allege that the
Mangaliman et al prepared a medicament and salve named “Mentoliman” which they sold in
a container of the same size, color, shape as “Mentholatum,” and allege damages and
diminutions of sales and loss of goodwill and reputation. TC ruled ifo Mentholatum Co. CA
reverses, holding that the activities of Mentholatum were business transactions in the
Philippines through its agent PhilAm Drug, and that under the Corpo Law they cannot
maintain their suit. Mentholatum claims that they have not personally sold any of their
products in the RP and that the Philam Drug Co was merely an importer of the products,
their sales not being for the account of Mentholatum but for their own. Mangaliman
countered that PhilAm Drug is the exclusive distributor of Mentholatum and that because of
this arrangement, the acts of the former became acts of the latter, and thus Mentholatum is
engaged in doing business in the RP and would require a license before it can sue.
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I: W/N Mentholatum is doing business in the RP; W/N Mentholatum Inc could prosecute their
action without having secured the license; W/N the PhilAm Drug co could by itself maintain
the suit.
H: There is no general rule regarding what constitutes doing business in the Phils. The true
test is whether the foreign corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substantially retired from it and turned
it over to another, thus implying a continuity of dealings and arrangements, and
contemplates the performance of acts and exercise of functions normally incident to the
purpose and object of its organization. In this case, as stipulated in their respective
pleadings, whatever transactions of PhilAm Drug had executed in view of the law, the
Mentholatum Co. being a foreign corporation doing business without the license, may not
prosecute the action. Neither may the PhilAm Drug maintain the action for the reason that
the distinguishing features of the agent being his representative character and derivative
authority, it cannot, to the advantage of its principal, claim an independent standing in court.
— Sale of products of a foreign entity through a local distributor is equivalent to doing
business; isolated transaction is not doing business
— Mentholatum tests:
(1) substance test: continuing the substance of the business and purpose for which it
was organized
(2) continuity test: continuity of dealings and arrangements, or acts normally incidental
to the purpose and object
Agilent Technologies Singapore v. Integrated Silicon Technology Phils. F: Petitioner
Agilent Technologies Singapore (Pte.), Ltd. (“Agilent”) is a foreign corporation, which, by its
own admission, is not licensed to do business in the Philippines. Respondent Integrated
Silicon Technology Philippines Corporation (“Integrated Silicon”) is a private domestic
corporation, 100% foreign owned, which is engaged in the business of manufacturing and
assembling electronics components. A 5-year Value Added Assembly Services Agreement
(“VAASA”), was entered into on April 2, 1996 between Integrated Silicon and the Hewlett-
Packard Singapore (Pte.) Ltd., Singapore Components Operation (“HP-Singapore”). Under
the terms of the VAASA, Integrated Silicon was to locally manufacture and assemble fiber
optics for export to HP-Singapore. HP-Singapore, for its part, was to consign raw materials
to Integrated Silicon; transport machinery to the plant of Integrated Silicon; and pay
Integrated Silicon the purchase price of the finished products. HP-Singapore assigned all its
rights and obligations in the VAASA to Agilent. Integrated Silicon sues Agilent and its officers
for specific performance, alleging that Agilent breached the parties’ oral agreement to extend
the VAASA. Integrated Silicon thus prayed that defendant be ordered to execute a written
extension of the VAASA for a period of five years as earlier assured and promised. Agilent
then filed a separate complaint for specific performance against Integrated Silicon, Teoh
Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M. dela
Cruz and Rolando T. Nacilla, and prayed for the immediate return and delivery to plaintiff its
equipment, machineries and the materials to be used for fiber-optic components which were
left in the plant of Integrated Silicon. TC denied MTD of Silicon. CA reverses. Integrated
Silicon et al argue that since Agilent is an unlicensed foreign corporation doing business in
the Philippines, it lacks the legal capacity to file suit, assailing various acts of Agilent,
purportedly in the nature of “doing business” in the Philippines.

H: A foreign corporation without a license is not ipso facto incapacitated from bringing an
action in Philippine courts. A license is necessary only if a foreign corporation is
“transacting” or “doing business” in the country. The Corporation Code provides:
Sec. 133. Doing business without a license. — No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.
The aforementioned provision prevents an unlicensed foreign corporation “doing business” in
the Philippines from accessing our courts. In a number of cases, however, we have held that
an unlicensed foreign corporation doing business in the Philippines may bring suit in
Philippine courts against a Philippine citizen or entity who had contracted with and benefited
from said corporation. Such a suit is premised on the doctrine of estoppel. A party is
estopped from challenging the personality of a corporation after having acknowledged the
same by entering into a contract with it. This doctrine of estoppel to deny corporate
existence and capacity applies to foreign as well as domestic corporations. The application
of this principle prevents a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes chiefly in cases where such person has
received the benefits of the contract.
The principles regarding the right of a foreign corporation to bring suit in Philippine courts
may thus be condensed in four statements:
(1) if a foreign corporation does business in the Philippines without a license, it cannot sue
before the Philippine courts;
(2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue
before Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction;
(3) if a foreign corporation does business in the Philippines without a license, a Philippine
citizen or entity which has contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate personality in a suit brought before Philippine
courts; and
(4) if a foreign corporation does business in the Philippines with the required license, it can
sue before Philippine courts on any transaction.
In Mentholatum, the Court discoursed on the two general tests to determine whether or not a
foreign corporation can be considered as “doing business” in the Philippines. The first of
these is the substance test, thus: The true test [for doing business], however, seems to be
whether the foreign corporation is continuing the body of the business or enterprise for which
it was organized or whether it has substantially retired from it and turned it over to another.
The second test is the continuity test, expressed thus: The term [doing business] implies a
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continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to,
and in the progressive prosecution of, the purpose and object of its organization.
Although each case must be judged in light of its attendant circumstances, jurisprudence has
evolved several guiding principles for the application of these tests. For instance,
considering that it transacted with its Philippine counterpart for seven years, engaging in
futures contracts, this Court concluded that the foreign corporation in Merrill Lynch Futures,
Inc. v. Court of Appeals and Spouses Lara, was doing business in the Philippines. In Top-
Weld Manufacturing v. ECED, IRTI, et al. both involved the License and Technical
Agreement and Distributor Agreement of foreign corporations with their respective local
counterparts that were the primary bases for the Court’s ruling that the foreign corporations
were doing business in the Philippines. In particular, the Court cited the highly restrictive
nature of certain provisions in the agreements involved, such that… the Philippine entity is
reduced to a mere extension or instrument of the foreign corporation.
The case law definition has evolved into a statutory definition, having been adopted with
some qualifications in various pieces of legislation. The Foreign Investments Act of 1991
(the “FIA”; Republic Act No. 7042, as amended), Sec 3 (d) defines “doing business” as those
which “include soliciting orders, service contracts, opening offices, whether called “liaison”
offices or branches; appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods totaling one hundred
eighty (180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity, or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the functions normally
incident to, and in the progressive prosecution of, commercial gain or of the purpose and
object of the business organization.” An analysis of the relevant case law, in conjunction with
Section 1 of the Implementing Rules and Regulations of the FIA (as amended by Republic
Act No. 8179), would demonstrate that the acts enumerated in the VAASA do not constitute
“doing business” in the Philippines.
The IRR of the FIA (as amended by Republic Act No. 8179) provides that the following shall
not be deemed “doing business”:
a. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as
such investor;
b. Having a nominee director or officer to represent its interest in such
corporation;
c. Appointing a representative or distributor domiciled in the Philippines which
transacts business in the representative’s or distributor’s own name and
account;
d. The publication of a general advertisement through any print or broadcast
media;
e. Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;
 f. Consignment by a foreign entity of equipment with a local company to be
used in the processing of products for export;
g. Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated contract of sale which
are not on a continuing basis, such as installing in the Philippines
machinery it has manufactured or exported to the Philippines, servicing the
same, training domestic workers to operate it, and similar incidental
services.
By and large, to constitute “doing business”, the activity to be undertaken in the Philippines
is one that is for profit-making. By the clear terms of the VAASA, Agilent’s activities in the
Philippines were confined to (1) maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by Integrated Silicon; and (2) consignment of
equipment with Integrated Silicon to be used in the processing of products for export. As
such, we hold that, based on the evidence presented thus far, Agilent cannot be deemed to
be “doing business” in the Philippines. Respondents’ contention that Agilent lacks the legal
capacity to file suit is therefore devoid of merit. As a foreign corporation not doing business
in the Philippines, it needed no license before it can sue before our courts.
— Jqck: Agilent sums up everything; it’s the controlling doctrine now
Merrill Lynch Futures v CA. F: Merrill Lynch Futures, Inc. a non-resident foreign
corporation not doing business in the Philippines, sued the Spouses Pedro M. Lara and Elisa
G. Lara for the recovery of a debt and interest thereon. Merrill Lynch is a "futures
commission merchant" duly licensed to act as such in the futures markets and exchanges in
the United States, and essentially functioning as a broker… (executing) orders to buy and
sell futures contracts received from its customers on U.S. futures exchanges.
It also defined a "futures contract" as a "contractual commitment to buy and sell a
standardized quantity of a particular item at a specified future settlement date and at a price
agreed upon, with the purchase or sale being executed on a regulated futures exchange." It
entered into a Futures Customer Agreement with the defendant spouses, in virtue of which it
agreed to act as the latter's broker for the purchase and sale of futures contracts in the U.S.
and that pursuant to the contract, orders to buy and sell futures contracts were transmitted to
ML FUTURES by the Lara Spouses "through the facilities of Merrill Lynch Philippines, Inc., a
Philippine corporation and a company servicing plaintiffs customers. Later, the Laras would
reaffirm their lack of awareness that Merrill Lynch Philippines, Inc. (formerly registered as
Merrill Lynch, Pierce, Fenner & Smith Philippines, Inc.) did not have a license, claiming that
they learned of this only from inquiries with the Securities and Exchange Commission which
elicited the information that it had denied said corporation's application to operate as a
commodity futures trading advisor. Lara Spouses actively traded in futures contracts,
including "stock index futures" for four years or so, i.e., from 1983 to October, 1987. A loss
amounting to US$160,749.69 was incurred in respect of three (3) transactions involving
"index futures," and after setting this off against an amount of US$75,913.42 then owing by
ML FUTURES to the Lara Spouses, said spouses became indebted to ML FUTURES for the
ensuing balance of US$84,836.27. Lara Spouses however refused to pay this balance,
"alleging that the transactions were null and void because Merrill Lynch Philippines, Inc., the
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Philippine company servicing accounts of plaintiff… had no license to operate as a
'commodity and/or financial futures broker. Lara files a MTD, and TC sustains the motion. CA
affirms, holding that the Trial Court had seen "through the charade in the representation of
MLPI and the plaintiff that MLPI is only a trading advisor and in fact it is a conduit in the
plaintiff's business transactions in the Philippines,” citing the ruling in Mentholatum v
Mangaliman.
I: W/n (a) ML FUTURES is prohibited from suing in Philippine Courts because doing
business in the country without a license, and that (b) it is not a real party in interest since
the Lara Spouses had not been doing business with it, but with another corporation, Merrill
Lynch, Pierce, Fenner & Smith, Inc.
H: The ground that the plaintiff has no legal capacity to sue — may be understood in two
senses: one, that the plaintiff is prohibited or otherwise incapacitated by law to institute suit
in Philippine Courts; or two, although not otherwise incapacitated in the sense just stated,
that it is not a real party in interest. Now, the Lara Spouses contend that ML Futures has no
capacity to sue them because the transactions subject of the complaint were had by them,
not with the plaintiff ML FUTURES, but with Merrill Lynch Pierce Fenner & Smith, Inc.
The facts on record adequately establish that ML FUTURES, operating in the United States,
had indeed done business with the Lara Spouses in the Philippines over several years, had
done so at all times through Merrill Lynch Philippines, Inc. (MLPI), a corporation organized in
this country, and had executed all these transactions without ML FUTURES being licensed
to so transact business here, and without MLPI being authorized to operate as a commodity
futures trading advisor. The Laras did transact business with ML FUTURES through its agent
corporation organized in the Philippines, it being unnecessary to determine whether this
domestic firm was MLPI (Merrill Lynch Philippines, Inc.) or Merrill Lynch Pierce Fenner &
Smith (MLPI's alleged predecessor). The fact is that ML FUTURES did deal with futures
contracts in exchanges in the United States in behalf and for the account of the Lara
Spouses, and that on several occasions the latter received account documents and money
in connection with those transactions.
I: W/N ML FUTURES may sue in Philippine Courts to establish and enforce its rights against
said spouses, in light of the undeniable fact that it had transacted business in this country
without being licensed to do so. W/N the Lara Spouses are now estopped to impugn ML
FUTURES' capacity to sue them in the courts of the forum.
H: The rule is that a party is estopped to challenge the personality of a corporation after
having acknowledged the same by entering into a contract with it. And the "doctrine of
estoppel” to deny corporate existence applies to foreign as well as to domestic corporations;
"one who has dealt with a corporation of foreign origin as a corporate entity is estopped to
deny its corporate existence and capacity." The principle "will be applied to prevent a person
contracting with a foreign corporation from later taking advantage of its noncompliance with
the statutes, chiefly in cases where such person has received the benefits of the contract
where such person has acted as agent for the corporation and has violated his fiduciary
obligations as such, and where the statute does not provide that the contract shall be void,
but merely fixes a special penalty for violation of the statute… "
There would seem to be no question that the Laras received benefits generated by their
business relations with ML FUTURES. Those business relations, according to the Laras
themselves, spanned a period of seven (7) years; and they evidently found those relations to
be of such profitability as warranted their maintaining them for that not insignificant period of
time; otherwise, it is reasonably certain that they would have terminated their dealings with
ML FUTURES much, much earlier. In fact, even as regards their last transaction, in which
the Laras allegedly suffered a loss in the sum of US$160,749.69, the Laras nonetheless still
received some monetary advantage, for ML FUTURES credited them with the amount of
US$75,913.42 then due to them, thus reducing their debt to US$84,836.27. Given these
facts, and assuming that the Lara Spouses were aware from the outset that ML FUTURES
had no license to do business in this country and MLPI, no authority to act as broker for it, it
would appear quite inequitable for the Laras to evade payment of an otherwise legitimate
indebtedness due and owing to ML FUTURES upon the plea that it should not have done
business in this country in the first place, or that its agent in this country, MLPI, had no
license either to operate as a "commodity and/or financial futures broker."
— Estoppel doctrine: if local parties knew that the foreign entity does not have a license,
yet it is doing business, and they still transacted with them—estopped from invoking
lack of license!
— Villanueva: Merrill Lynch lacks an element of estoppel—action/representation by the
local which induces the foreign to believe that he would be entitled to relief… the simple
act of entering into a contract with a foreign entity does not of itself give rise to estoppel.
Topweld Manufacturing v ECED. F: TopWeld, a domestic corporation engaged in
manufacturing and selling welding supplies and equipment, entered into separate contracts
with 2 different foreign entities. The first contract is a License and Technical Assistance
Agreement with the IRTI, a Swiss corporation, which constituted TopWeld a licensee of IRTI
to manufacture welding products under certain specifications with raw materials to be
purchased by TopWeld from suppliers designated by IRTI. The second contract is a
Distributor Agreement with the ECED SA, a Panamanian corporation, which designated
TopWeld as ECED’s distributor in the RP of its welding products and equipment. Upon
learning that the two foreign corporations were negotiating with another group to replace
TopWeld, the latter sued IRTI, ECED and an American corporation, EUTECTIC, and also
Victor Gaerlan, the alleged representative of the three corporations. TopWeld sought to
restrain the corporations from negotiating with third parties and from terminating its contract.
TC grants petition and issues TRO. IRTI and ECED writes TopWeld to inform it of their intent
to sever their agreement. TopWeld amended its complaint to ask the court to compel the
ECED to deliver items covered by the agreement and to prohibit them from importing into the
RP any EUTECTIC products. TC granted the amended prayer. CA reverses, holding that
IRTI and ECED, by entering into licensing and distributing agreements with TopWeld, were
doing business in the RP and thus should have required a certificate from the BOI. It held
that having not obtained the requisite certificate, the provisions of RA 5455 prohibiting alien
firms from terminating their franchise or licensing agreements with domestic firms without
payment of compensation and reimbursement of expenses cannot be applied to them. They
are not bound by the requirement on termination and thus TopWeld cannot invoke the same.
To impose a requirement would perpetuate or condone an unlawful business operation. The
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CA finally held that TopWeld ought to know whether or not IRTI and ECED were properly
authorized to engage in business in the RP. TopWeld appeals to SC.
I: W/n IRTI and ECED can be considered as doing business and thus subject to the
requirements of RA 5455.
H: IRTI and ECED are foreign corporations not licensed to do business in the Phils. SC
reverted to the lack of a general rule as to what exactly constitutes doing or engaging in
business in the RP, and acknowledged that each case must be judged in light of its peculiar
circumstances. Acts of corporations should be distinguished from single or isolate business
transactions or occasional, incidental, or casual transactions. Where a single act or
transaction is not merely incidental or casual but indicates the foreign corporation’s intention
to do other business in the Phils, said single act constitutes doing or engaging in business in
the RP.
The SC concurs with the CA that the IRTI and ECED were doing business in the RP. When
they entered into the dispute contracts with TopWeld, they were carrying out the purposes
for which they were created—to manufacture and market welding products and equipment.
The terms and conditions of the contracts indicate that they established within the RP, a
continuous business, and not merely one of a temporary character. This is buttressed by the
admission that they were negotiating with another domestic company. Their acts enable
them to enter into the mainstream of our economic life in competition with local business
interests, bringing them under the provisions of RA 5455. IRTI and ECED contends
exemption from RA 5455 because TopWeld maintained an independent status during the
existence of the contracts. But a perusal of the agreements shows that they are highly
restrictive, and in assuming TopWeld to have an independent status, in essence it merely
extends to the Islands the business of IRTI and ECED.
As between the parties, RA 5455 does not declare void or invalid the contracts entered
without the license being secured. What is created is an illegal situation between the parties
having entered into agreements without the license or certificate. In this case, TopWeld had
actual knowledge of the applicability of RA 5455 at the time of execution of the contract. It
was incumbent upon TopWeld to know whether or not IRTI and ECED were properly
authorized to engage in the RP. The very purpose of the law was circumvented when they
etered into the licensing and distributorship agreements, and the parties being equally guilty
and are in pari delicto, it follows that TopWeld is not entitled to the relief prayed for.
— TopWeld: “pari delicto rule”—local company knew that the law it alleges to have been
violated by the foreign corporation is in force at the time of the questioned contracts
were consummated; while foreign corporation is doing business without a license!
— The contracts cannot be voided!
— Highly restrictive agreements which has the effect of reducing the local corporation to
mere conduits or extensions of the foreign corporation
Antam Consolidated v CA. F: Stokely (parent) and Capital City (subsidiary) companies are
foreign corporations not engaged and not licensed to do business in the RP. Capital City and
Comphil acting through broker Rothschild entered into a contract wherein Comphil undertook
to sell and deliver and Capital City agreed to buy 500 long tons of crude coconut oil. Comphil
failed to deliver the coconut oil so that Capital decided to cover its oil needs in the open How courts acquire jurisdiction over foreign corporations
market, resulting in a loss of $103,600. The parties entered into a second contract—
designated as a “wash out” of the first contract—wherein Comphil undertook to buy back the Laws governing licensed foreign corporations
500 long tons of coconut oil at a higher price, the difference in price offsetting the loss
sustained in the first contract. Comphil failed to pay. A third contract was entered into, Merger of licensed foreign corporation
wherein Comphil was to sell the same quantity of coconut oil at a discounted price from the
market value thereof, again offsetting the loss of $103,600 sustained by Capital City. Again Withdrawal of foreign corporation
Comphil failed to deliver, and despite repeated demands Comphil refused to settle its
obligations to Capital City under the agreements. The Tambuntings, former directors of Revocation and suspension of license
Comphil, left the company and were replaced by 5 employees of their pawnshop business,
and caused the name of Comphil to be changed to Banahaw Milling. The new directors also Existing Licensed Foreign Corporations
authorized Tambunting to sell the oil mill of Comphil/Banahaw, which is the only substantial
asset of Banahaw and would thus leave it with no assets to satisfy claims of creditors.
Unicom also took over the assets and capital stock of Banahaw. Capital City alleged that all
petitioners evaded their obligation thereto through the devious scheme of using Tambunting
employees to replace the Tambuntings in the management of Banahaw and disposing part
of the assets and entire interests in Comphil/Banahaw to Unicom. TC ordered the writ of
attachment. Petitioners Antam et al file MTD on the ground that petitioners are foreign
corporations no licensed to do business in the RP and has no personality to maintain the
instant suit. TC denies MTD, and Antam et al appeals. Antam claims Stokely and Capital city
are doing business in the RP, because it entered into three transactions/contracts with them
either as seller or buyer, and which are in the pursuit of the purpose and object for which
they are organized. They are thus required to obtain a license first before maintaining any
legal action against them.

H: the transactions are not a series of commercial dealings which signify an intent on the
part of Stokely and Capital City to do business in the RP, but constitute an isolated one
which does not fall under the category of “doing business.” The records show that the only
reason why the second and third contracts were entered into was to recover the loss
sustained from the failure of Antam et al to deliver the crude coconut oil under the first
contract. Instead of outright demand, the foreign company even tried to push through with
the transaction to recover the amount lost. And again petitioners failed to make good. It can
be deduced therefore, that in reality there was only one agreement—to deliver 500 long tons
of coconut oil—and the 3 different transactions were entered into in an effort to fulfill the
basic agreement and in no way indicate an intent to engage in a continuity of transactions
with the petitioners which would categorize it as a foreign corporation doing business in the
RP.

It is a common ploy of defaulting companies sued by unlicensed foreign companies not

engaged in business in the RP to invoke lack of capacity to sue. The doctrine of lack of
capacity to sue based on failure to acquire a local license is based on considerations of
sound public policy. It was never intended to favor domestic corporations who enter into
solitary obligations simply because the latter are not licensed to do business in the country.

— Antam: “auxiliary rule”—performance of services auxiliary to an existing contract is not

doing business!

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