THE CORPORATION CODE OF THE PHILIPPINES

CHAPTER 1: INTRODUCTION law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the
KINDS OF BUSINESS ORGANIZATION grant of its independent existence as a juridical entity;

1. SOLE PROPRIETORSHIP – one conducted for profit by a lone or 2. ARTIFICIAL BEING – it has a juridical personality, separate and
single individual who owns all assets, personally owes and answers all distinct from the persons composing it.
the liabilities or suffers all the losses and enjoys all the profits to the
exclusion of others. 3. RIGHT OF SUCCESSION – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its stockholder does not
ADVANTAGES DISADVANTAGES result in its dissolution;
Eliminates the bureaucratic process Unlimited personal liability of the
common in corporations where the proprietor 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
board of directors must sit as a AUTDHORIZED BY LAW – it can exercise only such powers and can
body to have a valid transaction. hold only such properties as are granted to it by the enabling statutes
The proprietor makes his own unlike natural persons who can do anything as they please.
decisions and can act without delay.
Proprietor owns all the profits Capital is limited by the proprietor’s LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept.
without having to share the same personal resources 21, 1994]) – Private respondent Carloto, incumbent President-Manager of
private respondent Rural Bank of Labason, alleged that he was instructerd
2. PARTNERSHIP – a contract where two or more persons bind to go to Manila to follow up on the Bank’s plan of payment of
themselves to contribute money, property or industry to a common fund rediscounting obligations with Central Bank’s main office, where he
with the intention of dividing the profits among themselves (Art. 1767, purchased a round trip ticket and phone his sister to send him P1,000 for
Civil Code) his pocket money which LBC failed to deliver and eventually Carloto was
not able to submit the rediscounting documents and the Bank was made
3. JOINT VENTURE – a one-time grouping of two or more persons, to pay the Central Bank P32,000 s penalty interest and alleged that he
natural or juridical, in a specified undertaking. suffered embarrassment and humiliation. Respondent Rural Bank was later
on joined as one of the plaintiff and prayed for the reimbursement of
PARTNERSHIP JOINT VENTURE P32,000. Carloto and the Bank was awarded moral and exemplary
Has a personality separate and Does not acquire a separate and damages of P10,000 and P5,000, respectively.
distinct from the partners distinct personality from the
venturers ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
Object is an undertaking of a awarded moral damages?
Has for its object a general business
of particular kind, although there particular or single transaction
HELD: No. Moral damages are granted in recompense for physical suffering,
may be partnership for a single
mental anguish, fright, serious anxiety, besmirched reputation, wounded
transaction
feelings, oral shock, social humiliation and social injury. A corporation, being
Corporations, generally are not Corporations may enter joint
an artificial person and having existence only in legal contemplation, has no
allowed to enter into partnerships* ventures
feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
*A corporation is generally not allowed to enter into partnerships because (1)
one having a nervous system and it flows from real ills, sorrows and grieves
the identity of the corporation is lost or merged with that of another; and (2)
of life – all of which cannot be suffered by respondent bank as an artificial
the discretion of the officials is placed in other hands other than those
person.
permitted by the law in its creation.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
EXCEPTION to the rule is when the following conditions are met:
slander and other forms of defamation, a corporation is entitled to
a. The articles of incorporation expressly authorized the corporation to enter
moral damages.
into contracts of partnership;
b. The agreement or articles of partnership must provide that all the partners
C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
will manage the partnership; and
c. The articles of partnership must stipulate that all the partners are and shall
1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons
be jointly and severally liable for all obligations of the partnership
may unite in a single enterprise without using their names, without
difficulty or inconvenience, and with the valuable right to contract, to
4. CORPORATION – an artificial being created by operation of law,
sue and be sued, and to hold or convey property, in the corporate
having the right of succession and the powers, attributes and properties
name;
expressly authorized by law or incident to its existence (Sec. 1,
2. LIMITED SHAREHOLDER‘S LIABILITY – the limit of his liability since
Corporation Code [CC])
stockholders are not personally liable for the debts of the corporation;
3. CONTINUITY OF EXISTENCE – rights and obligations of a
corporation are not affected by the death, incapacity or replacement of
CHAPTER 2: DEFINITION AND ATTRIBUTES
the individual members;
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the
A. DEFINITION
individuals to cooperate in order to furnish the large amounts of
capital necessary to finance large scale enterprises;
Sec. 2. Corporation Defined – A corporation is an artificial being
5. TRANSFERABILITY OF SHARES – unless reasonably restricted,
created by operation of law, having the right of succession and the powers,
shares of stocks, being personal properties, can be transferred by the
attributes and properties expressly authorized by law or incident to its
owner without the consent of the other stockholders;
existence.
6. CENTRALIZED MANAGEMENT – the vesting of powers of
management and appointing officers and agents in board of directors
B. ATTRIBUTES (CARP)
gives to a corporation the benefit of a centralized administration which
is a practical business necessity in any large organization; and
1. CREATED BY OPERATION OF LAW – the formal requirement of 7. STANDARDIZED METHOD OF ORGANIZATION,
the State’s consent through compliance with the requirements imposed by MANAGEMENT AND FINANCE – which are provided under a well-
drawn general
 corporation law. The corporation statutes enter into the charter F. GOVERNMENT POWERS IN RELATION TO CORPORATIONS
contract and these are constantly being interpreted by courts. An
established system of management and protection of shareholders The Corporation Code places all corporations registered under its provision
and creditors’ rights has thus been and are being evolved. to be under the control and supervision of the Securities and
Exchange Commission (Sec. 19 and 144). Its powers and functions are
D. DISADVANTAGES clearly spelled out in PD 902-A, as amended by RA No. 8799, otherwise
1. To have a valid and binding corporate act, formal proceedings, such known as the Securities Regulation Code.
as board meetings are required;
2. The business transactions of a corporation is limited to the State of
its incorporation and may not act as such corporation in other CHAPTER 3: CLASSIFICATION OF CORPORATION
jurisdiction unless it has obtained a license or authority from the
foreign state; A. CLASSES OF CORPORATIONS UNDER THE CORPORATION
3. The shareholders’ limited liability tends to limit the credit available to CODE
the corporation as a separate legal entity;
4. Transferability of shares may result to uniting incompatible Sec. 3. Classes of corporations. - Corporations formed or organized
and conflicting interests; under this Code may be stock or non-stock corporations. Corporations
5. The minority shareholders have practically no say in the conduct which have capital stock divided into shares and are authorized to
of corporate affairs; distribute to the holders of such shares dividends or allotments of the
6. In large scale enterprises, stockholders’ voting rights may surplus profits on the basis of the shares held are stock corporations. All
become merely fictitious and theoretical because of disinterest in other corporations are non-stock corporations.
management, wide-scale ownership and inaccessible place of meeting;
7. ―Doubt taxation‖ may be imposed on corporate income; and REQUISITES TO BE CLASSIFIED STOCK
8. Corporations are subject to governmental regulations, supervision CORPORATIONS: 1. They have a capital stock
and control including submission of reportorial requirements not dividend into shares; and
otherwise imposed in other business form. 2. That they are authorized to distribute dividends or allotments as
surplus profits to its stockholders on the basis of the shares held by
E. CORPORATION VS. PARTNERSHIP each of them.
SIGNIFICANT DISTINCTION: Although a non-stock corporation exists
CORPORATION PARTNERSHIP for purposes other than for profit, it does not follow that they cannot make
Created by operation of law (Sec. Created by mere agreement of the profits as an incident to their operations. But a significant distinction is that
2&4, Corp Code) parties (Art. 1767, Civil Code) profits obtained by a non-stock corporation cannot be distributed as
There must be at least Maybe formed by two or more dividends but are used merely for the furtherance of their purpose or
5 incorporations (Sec. natural persons (Art. 1767) purposes.
10), except corporation sole
which is incorporated by one COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO, INC.
single individual (Sec. 110) DE CEBU (5 SCRA 312; May 31, 1968) – Herein respondent Club
Can exercise only such powers Can do anything by agreement operates a clubhouse, a bowling alley, a golf course and a bar restaurant
and functions expressly granted to of the parties provided only that it where it sells wines, liquors, soft-drinks, meals and short orders to its
it by law and those that are is not contrary to law, morals, members and their guests. The bar and restaurant was a necessary
necessary or incidental to its good customs or public order. (Art. incident to the operation of the Club and its golf course is operated
existence (Sec. 2, 45) 1306) mainly with funds derived from membership fees and dues. Whatever
Unless validly delegated expressly In the absence of an agreement profits it had were used to defray its overhead expenses and to improve
or impliedly, a corporation to the contrary, any one of the its golf course. In 1951, as a result of capital surplus arising from the
must transact its parties in the partnership form of revaluation of its real properties, the Club declared stock dividends. In
business through the board of business may validly bind the 1952, the BIR assessed percentage taxes on the gross receipt of the Club’s
directors (Sec. 23) partnership (Art. 1308, par. 1) bar and restaurant pursuant to Sec. 182 of the Tax Code: ―unless
Right of succession, it continues Based on mutual rust and the otherwise provided, every person engaging in a business on which the
to exist despite the death, death, incapacity, percentage tax is imposed shall pay in full a fixed annual tax of P10 for
withdrawal, incapacity or civil insolvency, each calendar year or a fraction thereof‖ and under Sec. 191:
interdiction of the stockholders or civil interdiction or ―keepers of restaurant, refreshment parlors and other eating places shall
members. (Sec. 3) mere withdrawal of one of the pay a tax of 3% of their gross receipts‖
Transferability of shares – A partner cannot transfer his
ISSUE: WON the Club is liable for the assessment?
without the consent of rights or interests in the
the other partnership so as to make the
HELD: No. It has been held that the liability for fixed and percentage
stockholders. (Sec. 63) transferee a partner without the
taxes does not ipso facto attach by mere reason of the operation of a
consent of the other partners
bar and restaurant. For the liability to attach, the operator thereof must
Limited liability – only to the All partners, including industrial
be engaged in the business as a bar keeper and restauranteur. Business,
extent of their ones (except a limited partner) are
in the ordinary sense, is restricted to activities or affairs where profit is
subscription or liable pro rata with all their
the purpose or livelihood is the motive, and the term business
their promised contribution. property and after all the
when used without qualification, should be construed in its plain
partnership property has been and ordinary meaning; restricted to activities for profit or livelihood.
exhausted, for all partnership
The term of corporate existence May exist for an indefinite
The fact that the Club derived profits from the operation of its bar
is limited only to fifty years and period subject only to the and restaurant does not necessarily convert it into a profit making
unless extended by amendment, it causes of dissolution provided for enterprise. The bar and restaurant are necessary adjunct of the Club to
shall be considered non-existent by the law of its creation (Art. 1824) foster its purpose and the profits derived therefrom are necessarily
except for the purpose of incidental to the primary object of developing and cultivating sports for
Cannot be dissolved by Partners may dissolve the healthful recreation and entertainment of the stockholders and
mere agreement of the their partnership at will members. That a club makes profit does not make it a profit-making club.
stockholders. The consent of the or at any time they deem it fit
State is necessary for it to cease as (Art. 1830, par. 1(b) and par. 2) ISSUE2: Is the Club a stock corporation?

HELD: No. The fact that the capital of the 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.
Moreover, for a stock corporation to exists, two requisites must
be complied with: (1) a capital stock divided into shares; and (2)
an authority to distribute to the holders of such shares, dividends
or allotments of surplus profits on the basis of the shares held. In
the case at bar, nowhere it its AOI or by-laws could be found an authority for
the distribution of its dividends or surplus profits. Strictly speaking, it
cannot therefore, be considered as stock corporation, within the
contemplation of the Corporation Code.
B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER
Sec. 4. Corporations created by special laws or charters.
-Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar
as they are applicable.
Among these corporations created by special law are the Philippine National
Oil Company, the National Development Company, the Philippine Export and
Foreign Loan Guarantee Corporation and the GSIS. All these are government
owned or controlled, operating under a special law or charter such that
registration with the SEC is not required for them to acquire legal and
juridical personality. They owe their own existence as such not by virtue of
their compliance with the requirements of registration under the Corporation
Code but by virtue of the law specially creating them.
They are primarily governed by the special creating them. But unless
otherwise provided by such law, they are not immune from suits, it is thus
settled that when the government engages in a particular business through
the instrumentality of a corporation, it divests itself pro hoc vice of its
sovereign character so as to subject itself to the rules government private
corporations (PNB vs. Pabolar 82 SCRA 595)
Officers and employees of GOCCs created by special laws are governed by
the law of their creation, usually the Civil Service Law. Their
subsidiaries, organized under the provisions of the Corporation Code are
governed by the LAbor Code. The test in determining whether they are
governed by the Civil Service Law is the manner of their creation.
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) – Danilo
Mercado, an employee of herein petitioner was dismissed on the ground of
dishonesty and violation of company rules and regulations. He filed an
illegal dismissal complaint before herein respondent NLRC who ruled on his
favour, despite the motion to dismiss of petitioner that the Civil Service
Commission has jurisdiction over the case.
ISSUE: WON NLRC has jurisdiction over the case?
HELD: Yes. Employees of GOCCs, whether created by special law or formed
as subsidiaries under the Corporation Law are governed by the Civil Service
Law and not the Labor Code, under the 1973 Constitution has been
supplanted by the present Constitution.
Thus, under the present state of the law, the test in
determining whether a GOCC is subject to the Civil Service Law is
the manner of its creation, such that government corporations
created by special charter are subject to its provisions while those
incorporated under the General Corporaiton Law are not within its
coverage.
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been
incorporated under the General Corporation Law was held to be a
GOCC whose employees are subject to the provisions of the Labor Code.
C. OTHER CLASSES OF CORPORATIONS
1. PUBLIC AND PRIVATE CORPORATIONS
PUBLIC CORPORATION: those formed or organized for the government of
a portion of the State or any of its political subdivisions and which have for
their purpose the general good and welfare.
It is to be observed, however, that the mere fact that the undertaking in
which a corporation is engaged in is one which the State itself might enter
into as part of its public work does not make it a public one. Nor is the fact
that the State has granted property or special privileges to a
corporation render it public. Likewise, the fact that some or all of the
stocks in the corporation are held by the government does not
make it a public corporation.
The TRUE TEST to determine the nature of a corporation is found in the
relation of the body to the State. Strictly speaking, a public corporation
is one that is created, formed or organized for political or
governmental purposes with political powers to be exercised for purposes
connected with the public good in the administration of the civil government.
The GOCCs are regarded as private corporations despite common
misconceptions.
NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL
REVENUE (146 Phil. 583) – Herein plaintiff brought an action for the
purpose of recovering a sum of money allegedly paid by it under protest
to the herein defendant, a specific tax on some tons of coal. It claimed
exemption from taxes under Sec. 1469 of the Administrative Code which
provides that ―on all coal and coke shall be collected per metric ton, fifty
centavos‖. Of the 30,000 shares issued by the corporation, the Philippine
government is the owner of 29,809 or substantially all of the shares of the
company.
ISSUE: WON the plaintiff corporation is a public corporation?
HELD: No. The plaintiff is a private corporation. The mere fact that
the government happens to be a majority stockholder does not
make it a public corporation. As a private corporation, it has no
greater rights, powers and privileges than any other corporation which
might be organized for the same purpose under the Corporation Law, and
certainly, it was not the intention of the Legislature to give it a preference
or right or privilege over other legitimate private corporation in the mining of
coal.
PRIVATE CORPORATIONS: those formed for some private purpose,
benefit, aim or end. They are created for the immediate benefit and
advantage of the individuals or members composing it and their
franchise may be considered as privileges conferred by the State to be
exercised and enjoyed by them in the form of the corporation.
2. ECCLESIASTICAL AND LAY CORPORATIONS
ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are composed
exclusively of ecclesiastics organized for spiritual purposes or for
administering properties held for religious ones. They are organized to secure
public worship or perpetuating the right of a particular religion.
LAY CORPORATIONS: are those organized for purposes other than
religion. They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent purposes such
as those organized for the purpose of maintaining hospitals and houses for
the sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for the benefit,
pecuniary or otherwise, of its members.
3. AGGREGATE AND SOLE CORPORATIONS
AGGREGATE CORPORATIONS: are those composed of a number of
individuals vested with corporate powers.
CORPORATION SOLE: those consist of one person or individual only and
who are made as bodies corporate and politic in order to give them some
legal capacity and advantage which, as natural persons, they cannot have.
Under the Code, a corporation sole may be formed by the chief archbishop,
bishop, priest, minister, rabbi, or other presiding elder or religious
denominations, sects or churches. attacked even by

4. CLOSE AND OPEN CORPORATION

CLOSE CORPORATIONS: are those whose shares of stock are held by a

limited number of persons like the family or other closely-knit group. There
are no public investors and the shareholders are active in the conduct of the
corporate affairs. Recognized under Sec. 96 of the Corporation Code.

OPEN CORPORATIONS: are those formed to openly accept outsiders as

stockholders or investors. They are authorized and empowered to list in the
stock exchange and to offer their shares to the public such that stock
ownership can widely be dispersed.

5. DOMESTIC AND FOREIGN CORPORATIONS

DOMESTIC CORPORATIONS: are those organized or created under or by

virtue of the Philippine laws, either by legislative act or under the provisions
of the General Corporation Law.

FOREIGN CORPORATIONS: are those formed, organized or existing under

any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state (Sec. 123,
Corporation Code).

The second part of the definition is, however, somehow misplaced since any
corporation for that matter, which is not registered under Philippine laws is a
foreign corporation. Such second part was inserted only for the purpose of
qualifying a foreign corporation to secure a license and to do business in the
Philippines.

6. PARENT OR HOLDING COMPANIES AND SUBSIDIARIES AND

AFFILIATES

PARENT OR HOLDING COMPANY: a corporation who controls another

corporation, or several other corporations known as its subsidiaries. Holding
companies have been defined as corporations that confine their activities to
owning stock in, and supervising management of other companies. A holding
company usually owns a controlling interest (more than 50% of the voting
stock) in the companies whose stocks it holds. As may be differentiated from
investment companies which are active in the sale or purchase of shares of
stock or securities, parent or holding companies have a passive portfolio and
hold the securities merely for purposes of control and management.

SUBSIDIARY CORPORATIONS: those which another corporation owns at

least a majority of the shares, and thus have control.

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 or vice versa.

AFFILIATES: are those corporations which are subject to common control

and operated as part of a system. They are sometimes called
―sister companies‖ since the stockholdings of a corporation is not substantial
enough to control the former. Example: 15% of ABCD Company is held by
A Corp, 18% by B Corp, and another 15% by C Corp. – A, B and C are
affiliates.

7. QUASI-PUBLIC CORPORATIONS

These are private corporations which have accepted from the state the grant
of a franchise or contract involving the performance of public duties. The
term is sometimes applied to corporations which are not strictly public in the
sense of being organized for governmental purposes, but whose operations
contribute to the convenience or welfare of the general public, such as
telegraph and telephone companies, water and electric companies. More
appropriately, they are known as public service corporations.

8. DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL

DE JURE CORPORATIONS: are juridical entities created or organized in

strict or substantial compliance with statutory requirements of
incorporation and whose rights to exist as such cannot be successfully
the State in a quo warranto proceeding. They are, in effect, incorporated by
strict adherence to the provisions of the law of their creation.
DE FACTO CORPORATIONS: are those which exist by the virtue of an
irregularity or defect in the organization or constitution or from some
omission to comply with the conditions precedent by which corporations de
jure are created, but there was colorabe compliance with the requirements of
the law under which they might be lawfully incorporated for the purpoes and
powers assumed, and user of the rights claimed to be conferred by law. Its
existence can only be attacked by a direct action of quo warranto
proceedings.
Sec. 20. De facto corporations. - The due incorporation of
any corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto
proceeding.
CORPORATION BY ESTOPPEL: those which are so defectively formed as
not to be either de jure or de facto corporations but which are considered as
corporations in relation only to those who cannot deny their corporate
existence due to their agreement, admission or conduct.
Sec. 21. Corporation by estoppel. - All persons who assume to act as
a corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no
corporation.
under this code shall file with the Securities and Exchange Commission
articles of incorporation in any of the official languages duly signed and
acknowledged by all of the incorporators, containing substantially
the following matters, except as otherwise prescribed by this Code or by
special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which
is/are he secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its
nature as such;
3. The place where the principal office of the corporation is to be located,
which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5)
nor more than fifteen (15);
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;
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
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and
convenient.
The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a
sworn statement of the Treasurer elected by the subscribers showing that
CHAPTER 4: FORMATION AND ORGANIZATIONS OF CORPORATIONS
1. PROMOTIONAL STAGE
This is undertaken by the organizers or promoters who bring together
persons interested in the business venture. They enter into contract either in
their own names or in the name of the proposed corporation.
LIABILITY OF PROMOTERS:
GENERAL RULE: a promoter, although he may assume to act for and on
behalf of a projected corporation and not for himself, will be held personally
liable on contracts made by him for the benefit of a corporation he intends to
organize. The personal liability continues even after the formation of the
corporation unless there is novation or other agreement to release him
from liability. As such, the promoter may do either of the following options:
a. He may make a continuing offer on behalf of the corporation, which, if
accepted after incorporation, will become a contract. In this case, the
promoter does not assume any personal liability, whether or not the
corporation will accept the offer;
b. He may make a contract at the time binding himself, with the
understanding that if the corporation, once formed, accepts or adopts the
contract, he will be relieved of responsibility; or
c. He may bind himself personally and assume responsibility of looking to the
proposed corporation, when formed, for reimbursement.
2. PROCESS OF INCORPORATION
Includes the drafting of the Articles of Incorporation, preparation
and submission of additional and supporting documents, filing with the SEC,
and the subsequent issuance of the Certificate of Incorporation.
CONTENTS OF THE ARTICLES OF INCORPORATION
Contents of the articles of incorporation. - All corporations
organized
that it can act and perform all legal acts. Each corporation should therefore,
have a name by which it is to sue and be sued and do all legal acts.
A corporation, once formed, cannot use any other name, unless it has been
amended in accordance with law as this would result in confusion and may
open the door to fraud and evasion as well as difficulties of administration
and supervision.
Thus, the organizers must make sure that the name they intend to use as a
corporate name is not similar or confusingly similar to any other
name already registered and protected by law since the SEC would
refuse registration if such be the case.
Sec. 18. Corporate name. - No corporate name may be allowed by
the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
The SEC, in implementing the above provision on corporate name, thus
requires that a ―Verification Slip‖ from the Records Division of
the Commission be submitted showing that the proposed name is
legally permissible. If the corporate name is available for use, the SEC will
allow the incorporators to ―reserve‖ it for a nominal fee for a specific
period until the AOI is filed with the SEC.
SEC Memorandum Circular No. 14-2000 dated October 24, 2000, provides:
In implementing Section 18 of the Corporation Code of the Philippines (BP
68), the following revised guidelines in the approval of corporate and
partnership names are hereby adopted for the information and guidelines of
all concerned:
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.
FORMS OF ARTICLES OF INCORPORATION (Sec. 15)
a. PREFATORY PARAGRAPH
xxx
―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
the laws of the Republic of the Philippines‖
xxx
It must specify the nature of the corporation being organized in order to
prevent difficulties of administration and supervision. Thus, the corporation
should indicate whether it is a stock or a non-stock corporation, a close
corporation, corporation sole or a religious corporation.
b. CORPORATE NAME
xxx
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";
xxx
The name of the corporation is essential to its existence since it is through it
8. Name containing a term descriptive of a business different from the
business of a registered company whose name also bears similar
term(s) used by the former may be allowed.
9. The name should not be patently deceptive, confusing
or contrary to existing laws.
10. The name which contains a word identical to a word in
a registered name shall not be allowed if such word is coined
or already appropriated by a registered firm, regardless of
the number of the different words in the proposed name,
unless there is consent from the registered firm of this firm
is one of the stockholders of partners of the entity to be
registered.
11. The name of an internationally known foreign corporation
or one similar to it may not be used by a domestic
corporation without the consent of the former.
12. The term "Philippines" when used as part of the name of
a subsidiary corporation of a foreign corporation shall be
in parenthesis: i.e. "(Philippines)" or "(Phil.)".
13. The following words shall not be used as part of a corporate
or partnership names:
a. As provided by special laws:
1. "Finance", "Financing" or "Finance and Investment" by
corporations or partnerships not engaged in the financing
business (R.A. 5980, as amended)
2. "Engineer", "Engineering" or "Architects" as part of the
corporate name (R. A. 546 and R.A. 1582)
3. "Bank", "Banking", "Banker", Building and Loan Association",
Trust Corporation", "Trust Company" or words of similar
import by corporations or associations not engaged in banking
business. (R.A. 337, as amended)
4. "United Nations" in full or abbreviated form can not be part of
a corporate or partnership name (R.A. 226)
5. "Bonded" for corporations or partnerships with unlicensed
warehouse (R.A. 245)
b. As a matter of policy:
1. "Investment(s)" by corporations or partnership not organized
as investment house company or holding company.
1. The corporation name shall contain the word "Corporation" or
its abbreviation "Corp." or "Incorporated", or "Inc.".
The partnership name shall contain the word "Company" or "Co.". For
limited partnership, the word "Limited" or "Ltd." shall be included. In
case of professional partnership, the word "Company" need not be used.
2. Terms descriptive of a business in the name shall be indicative of the
primary purpose. If there are two (2) descriptive terms, the first shall
refer to the primary purpose and the second shall refer to one of the
secondary purposes.
3. The name shall not be identical, misleading or
confusingly similar to one already registered by another
corporation or partnership with the Commission or a sole
proprietorship registered with the Department of Trade and Industry.
If the proposed name is similar to the name of a
registered firm, the proposed name must contain at least one
distinctive word different from the name of the
company already registered. (The Book of Sir Ladia, 2007
Edition, provides that there must be two other words different and
distinct from the name of the company already registered or protected
by law).
4. Business or tradename of any firm which is different from its corporate
or partnership name shall be indicated in the articles of incorporation or
partnership of said firm.
5. Tradename or trademark duly registered with the Intellectual Property
Office cannot be used as part of a corporate or partnership name
without the consent of the owner of such tradename of trademark.
6. If the name or surname of a person is used as part of
a corporate or partnership name, the consent of said person
or his heirs must be submitted except of that person
is a stockholder, member, partner of a declared national
hero. If such person cannot be identified or non-
existent, an explanation for the use of such name shall be
required.
7. The meaning of initials in the name shall be disclosed in
writing by the registrant.
2. "National" by all stock corporations and partnership.
3. "Asean", "Calabarzon" and "Philippines 2000".
14. The name of a dissolved firm shall not be allowed to be used by other
firms within three (3) years after the approval of the dissolution of the
corporation by the Commission, unless allowed by the last stockholders
representing at least majority of the outstanding capital stock of the
dissolved firm.
15. Registrant corporations or partnership shall submit a letter undertaking
to change their corporate or partnership name in case another person or
firm has acquired a prior right to the use of the said firm name or the
same is deceptively or confusingly similar to one already registered
unless this undertaking is already included as one of the provisions of
the articles of incorporation or partnership of the registrant.
(http://www.disini.ph/res_sec__mc142000.html)
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60
Phil. 549; Sept. 6, 1934) – A certificate of public convenience was issued
in the name of Rural Transit Co. by the Public Service Commission
despite opposition of herein petitioner-appellant Red Line Transportation
Co.. It appears that ―Red Line Transit Co.‖ is being used as a trade name of
Bahrach Motors Co.
ISSUE: Who is the real party in interest, Rural Transit Co. which appears in
the face of the application? Or Bahrach Motors, Inc. using the name of the
former as a trade name?
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any
court in this jurisdiction to authorize one corporation to assume the name of
another corporation as a trade name. Both Rural Transit and Bahrach are
Philippine corporations and the very law of their creation and continued
existence requires each to adopt and certify a distinctive name.
The incorporators constitute a body politic and corporate under the
name state in the certificate (Sec. 11, Act. No. 1459). A corporation has the
power of succession in its corporate name (Sec. 13). The name of a
corporation is
therefore essential to its existence. It cannot change its name except in the
manner provided by law. By that name alone it is authorized to transact
business.
The law gives a corporation on express or implied authority to assume
another name that is unappropriated; still less that of another corporation,
which is expressly set apart from it and protected by law. If any corporation
should assume at pleasure as a unregistered trade name, the name of
another corporation, this practice would result in confusion of administration
and supervision. The policy of the law as expressed in our corporation statute
and the Code of Commerce is clearly against such a practice.
UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS INC.
(78 SCRA 62; July 28, 1977) – In 1953, Universal Textile Mills, Inc. (UTMI)
was organized. In 1954, Universal Hosiery Mills Corporation (UHMC) was
also organized. Both are actually distinct corporations but they engage
in the same business (fabrics). In 1963, UHMC petitioned to change its
name to Universal Mills Corporation (UMC). The Securities and Exchange
Commission (SEC) granted the petition.
Subsequently, a warehouse owned by UMC was gutted by fire. News about
the fire spread and investors of UTMI thought that it was UTMI’s warehouse
that was destroyed. UTMI had to make clarifications that it was UMC’s
warehouse that got burned. Eventually, UTMI petitioned that UMC should be
enjoined from using its name because of the confusion it brought. The SEC
granted UTMI’s petition. UMC however assailed the order of the SEC as it
averred that their tradename is not deceptive; that UTMI’s tradename is
qualified by the word ―Textile‖, hence, there can be no confusion,
ISSUE: WON the SEC is correct?
HELD: Yes. There is definitely confusion as it was evident from the facts
where the investors of UTMI mistakenly believed that it was UTMI’s
warehouse that was destroyed. Although the corporate names are not really
identical, they are indisputably so similar that it can cause, as it already
did, confusion. The SEC did not act in abuse of its discretion when it order
the campuses of Lyceum of the Philippines and those of the other Lyceums
were physically quite remote from each other.
On appeal, the CA affirmed the deicison of the CA en banc, and denied
reconsideration.
ISSUE: WON private respondents can be directed to delete the word
―lyceum‖ from their corporate names?
HELD: No. The policy underlying the prohibition in Section 18
against the registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the public which
would have occasion to deal with the entity concerned, the
evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations.
Herein, the Court does not consider that the corporate names of the
academic institutions are "identical with, or deceptively or confusingly similar"
to that of Lyceum of the Philippines Inc.. True enough, the corporate names
of the other schools (defendant institutions) entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, the "Lyceum of
Aparri" cannot be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be confused with
the Lyceum of the Philippines. Further, etymologically, the word "Lyceum" is
the Latin word for the Greek lykeion which in turn referred to a locality on
the river Ilissius in ancient Athens "comprising an enclosure dedicated to
Apollo and adorned with fountains and buildings erected by Pisistratus,
Pericles and Lycurgus frequented by the youth for exercise and by the
philosopher Aristotle and his followers for teaching."
In time, the word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public discussions.
Thus today, the word "Lyceum" generally refers to a school or an institution
of learning. Since "Lyceum" or "Liceo" denotes a school or institution of
learning, it is not unnatural to use this word to designate an entity which
UMC to drop its name because there was a factual evidence presented
as to the confusion. Further, when UMC filed its petition for change of
corporate name, it made an undertaking that it shall change its name in the
event that there is another person, firm or entity who has obtained a prior
right to the use of such name or one similar to it. That promise is still
binding upon the corporation and its responsible officers
LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219 SCRA
610; March 5, 1993) - Lyceum of the Philippines Inc. previously obtained
from the SEC a favourable decision on the exclusive use of ―Lyceum‖
against Lyceum of Baguio, Inc.. such decision assailed by the latter before
the SC which was denied for lack of merit.
Armed with the Resolution of the Supreme Court, the Lyceum of the
Philippines then wrote all the educational institutions it could find using the
word "Lyceum" as part of their corporate name, and advised them to
discontinue such use of "Lyceum." Unheaded, Lyceum of the Philippines
instituted before the SEC an action to enforce what Lyceum of the Philippines
claims as its proprietary right to the word "Lyceum." The SEC rendered a
decision sustaining petitioner's claim to an exclusive right to use the word
"Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of
Baguio, Inc. case.
On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of
Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi
Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern Philippines,
Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Inc.,,
which are also educational institutions, to the SEC En Banc, the decision of
the hearing officer was reversed and set aside. The SEC En Banc did not
consider the word "Lyceum" to have become so identified with Lyceum of the
Philippines as to render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in the mind of the
general public. Unlike its hearing officer, the SEC En Banc held that the
attaching of geographical names to the word "Lyceum" served sufficiently to
distinguish the schools from one another, especially in view of the fact that
is organized and operating as an educational institution. To determine
whether a given corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate name, it is not
enough to ascertain the presence of "Lyceum" or "Liceo" in both names.
One must evaluate corporate names in their entirety and when the name of
Lyceum of the Philippines is juxtaposed with the names of private
respondents, they are not reasonably regarded as "identical" or "confusingly
or deceptively similar" with each other.
ISSUE2: WON the word ―Lyceum‖ has acquired a secondary
meaning although originally generic?
HELD: No. The Court of Appeals recognized this issue and answered it in the
negative: "Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to an article in
the market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the
purchasing public, the word or phrase has come to mean that the article was
his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into
which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. . . .
No evidence was ever presented in the hearing before the Commission
which sufficiently proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there was any of this kind,
the same tend to prove only that the appellant had been using the disputed
word for a long period of time.
The number alone of the private respondents in the present case suggests
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has
not been attended with the exclusivity essential for applicability of the
doctrine of secondary meaning. It may be noted also that at least one of the
private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" 17 years before Lyceum of the Philippines registered its own
corporate name with the SEC and began using the word "Lyceum." It follows
that if any institution had acquired an exclusive right to the word "Lyceum,"
that institution would have been the Western Pangasinan Lyceum, Inc. rather
than Lyceum of the Philippines. Hence, Lyceum of the Philippines is not
entitled to a legally enforceable exclusive right to use the word "Lyceum" in
its corporate name and that other institutions may use "Lyceum" as part of
their corporate names.
PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206 SCRA
457; Feb. 21, 1992) – Petitioner is the registered owner of the trademark
PHILIPS and PHILIPS SHIELD EMBLEM issued by the Philippine Patent
Office. Philips Electric Lamp Inc. and Philips Industrial Development Inc.,
also petitioners, are the authorized users of such trademark.
Petitioner filed a case with SEC praying for a writ of injunction to prohibit
herein respondent Standard Philips Corporation from using the
word ―PHILIPS‖ in its corporate name, which was denied. On appeal,
the CA affirmed the SEC.
ISSUE: WON Standard Philips should be directed to delete the word PHILIPS
from its corporate name?
HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes , 51
Phil. 115 (1927), the Court declared that a corporation's right to
use its corporate and trade name is a property right, a right in
rem, which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or personal,
against trespass or conversion. It is regarded, to a certain extent,
as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another corporation in
the same field (Red Line Transportation Co. vs. Rural Transit Co.,
September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence
of a corporation (American Steel Foundries vs. Robertson, 269 US 372,
70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42;
First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE
792). Its name is one of its attributes, an element of its existence, and
essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as
921). In this regard, there is no doubt with respect to Petitioners' prior
adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners
Philips Electrical and Philips Industrial were incorporated on 29 August 1956
and 25 May 1956, respectively, while Respondent Standard Philips was issued
a Certificate of Registration on 12 April 1982, twenty-six (26) years
later. Petitioner PEBV has also used the trademark "PHILIPS" on electrical
lamps of all types and their accessories since 30 September 1922.
The second requisite no less exists in this case. In determining the
existence of confusing similarity in corporate names, the test
is whether the similarity is such as to mislead a person, using
ordinary care and discrimination. In so doing, the Court must look to
the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio
Life Ins. Co., 210 NE 2d 298). While the corporate names of
Petitioners and Private Respondent are not identical, a reading of
Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS
ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC.,
inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant
word in that all the companies affiliated or associated with the principal
corporation, PEBV, are known in the Philippines and abroad as the PHILIPS
Group of Companies.
Respondent’s argue that there were no evidence presented that there was
actual confusion. It is settled, however, that proof of actual
confusion need not be shown. It suffices that confusion is probably
or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long
line of cases).
Moreover, Given Private Respondent's underlined primary purpose in its AOI,
nothing could prevent it from dealing in the same line of business of electrical
devices, products or supplies which fall under its primary purposes. Besides,
there is showing that Private Respondent not only manufactured and sold
ballasts for fluorescent lamps with their corporate name printed thereon but
also advertised the same as, among others, Standard Philips (TSN, before the
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As
aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as
part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to
to corporations is that each corporation must have a name by which
it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same
manner as the name of an individual designates the person
(Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport
Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its
corporate name is as much a part of the corporate franchise as any
other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129
Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name
identical with or similar to one already appropriated by a senior
corporation while an individual's name is thrust upon him (See Standard Oil
Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d
973, 977). A corporation can no more use a corporate name in
violation of the rights of others than an individual can use his
name legally acquired so as to mislead the public and injure
another (Armington vs. Palmer, 21 RI 109. 42 A 308).
The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be
any clearer. To come within its scope, two requisites must be proven,
namely:
(1) that the complainant corporation acquired a prior right over the use of
such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with
freedom from infringement by similarity is determined by
priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co.,
82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash.
274, 134 Pac.
show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" ( Rollo, p. 137).
The subsequent appropriator of the name or one confusingly similar thereto
usually seeks an unfair advantage, a free ride of another's goodwill
(American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al,
89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the
SEC maintains that the corporate names of Petitioners PHILIPS
ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC.
contain at least two words different from that of the corporate name
of respondent STANDARD PHILIPS CORPORATION, which words will readily
identify Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar to
one already used by another corporation or partnership. If the
proposed name contains a word already used as part of the firm name or
style of a registered company; the proposed name must contain
two other words different from the company already
registered" (Emphasis ours). It is then pointed out that Petitioners
Philips Electrical and Philips Industrial have two words different from that of
Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name
which was registered as far back as 1922. Petitioners, therefore, have the
exclusive right to its use which must be free from any infringement by
similarity. A corporation has an exclusive right to the use of its
name, which may be protected by injunction upon a principle
similar to that upon which persons are protected in the use of
trademarks and tradenames (18 C.J.S. 574). Such principle proceeds
upon the theory that it is a fraud on the corporation which has acquired a
right to that name and perhaps carried on its business thereunder, that
another should attempt to use the same name, or the same name with a
slight variation in such a way as to induce persons to deal with it in the
belief that they are dealing with the corporation which has given a reputation
to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co.
v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private
Respondent's name actually contains only a
General Bonded Warehousing Act must be submitted along with the AOI.
single word, that is, "STANDARD", different from that of Petitioners inasmuch
as the inclusion of the term "Corporation" or "Corp." merely serves the
Purpose of distinguishing the corporation from partnerships and other
business organizations.
The fact that there are other companies engaged in other lines of business
using the word "PHILIPS" as part of their corporate names is no defense and
does not warrant the use by Private Respondent of such word which
constitutes an essential feature of Petitioners' corporate name previously
adopted and registered and-having acquired the status of a well-known mark
in the Philippines and internationally as well (Bureau of Patents Decision No.
88-35 [TM], June 17, 1988, SEC Records).
c. PURPOSE CLAUSE
xxx
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);
xxx
The statement of the objects or purpose or powers in the charter results
practically in defining the scope of authority of the corporate enterprise or
undertaking. This statement both congers and also limits the actual authority
of the corporate representatives.
The reasons for requiring a statement of the purposes or objects:
1. In order that the stockholder who contemplates on an investment in a
business enterprise shall know within what lines of business his money is to
be put at risks;
2. So that the board of directors and management my now within what
lines of business they are authorized to act; and
3. So that anyone who deals with the company may ascertain whether a
contract or transaction into which he contemplates entering is one within the
general authority of the management.
SECONDARY PURPOSE: Although the Corporation Code does not
restrict nor limit the number of purpose or purposes which a corporation
may have, Sec. 14 thereof, requires that if it has more than one purpose,
the primary purpose as well as the secondary ones must be indicated
therein.
PROHIBITION: The following are prohibited by special laws for having any
other purpose not peculiar to them:
1. Educational, religious, and other non-stock corporations cannot include
any other purpose which would change or contradict its nature or to
engage in any enterprise to make profits for is members;
2. Insurance companies cannot engage in commercial banking at the same
time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.
RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC
is duty bound to determine the legality of the corporate purpose/s before it
issues the certificate of registration;
2. A corporation may not be formed for the purpose of practicing a
profession like law, medicine or accountancy, either directly or indirectly.
These are reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso
equivalent are reserved exclusively for Filipinos, or for corporations or
partnerships wholly owned by such citizen.
4. As a general rule, corporations with foreign equity are not allowed to
engage in restaurant business but corporations with such foreign equity can
purse such undertaking if it is incidental or in connection with hotel or inn-
keeping business.
5. Management consultants, advisers and/or specialists, must submit the
personal information sheet of the incorporators and directors in order
that the SEC may be able to find out or determine whether or not the
applicant corporation is qualified to act as such.
6. As a matter of policy, financing companies are required by the SEC to
submit certain additional documents together with their applications for
registration to verify compliance with RA 8556.
7. For bonded warehousing companies, an undertaking to comply with the
8. In case the applicant proposes to engage in the business of hospital
and/or clinic, the purpose clause must contain the following proviso:
―Provided that purely medical or surgical services in connection
therewith shall be performed by duly qualified physician and surgeon who
may or may not be freely and individually contracted by the parties.‖
9. In the case of Customs Brokerage business, the applicant must submit the
license of at least two customs broker connected with the applicant
corporation;
10. Transfer Agents, Broker and Clearing Houses must submit the certificate
of admission to the profession of the CPA of any officer of the corporation;
11. Carriage of mails cannot be a purpose of a corporation unless a special
franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose under
the supervision of another government agency, prior clearance
and/or approval of the concerned government agencies or
instrumentalities will be required pursuant to the last paragraph of Sec.
17 of the Code.
GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in broad or
general terms;
3. If there is more than one purpose, the primary as well as the secondary
ones must be specified; and
4. The purposes must be capable of being lawfully combined.
d. PRINCIPAL OFFICE
xxx
THIRD: That the principal office of the corporation is located in
the City/Municipality of............................................, Province
of................................................., Philippines
xxx
It must be located within the Philippines. The AOI must not only specify the
province, but also the City or Municipality where it is located. In this regard,
it is to be observed that the principal office may be in one place but
the business operations are actually conducted in other areas. The law does
not, of course, require a statement of the place of corporate operations
and, therefore, may be dispensed with.
The principal office serves as the residence of the corporation, and is thus
important in: (1) venue of actions; (2) registration of chattel mortgage of
shares; (3) validity of meetings of stockholders or members in so far as
venue thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb.
18, 1967) – The New Cagayan Grocery filed a complaint against CRS for
some irregularities in the transmission of a message which changed the
context and purport causing damages. The complaint was filed in the City
Court of Cagayan de Oro.
ISSUE: WON the action will prosper?
HELD: No. The action was based on tort and not upon a written contract
and as such, under the Rules of Court, it should be filed in the municipality
where the defendant or any of the defendants resides or may be
served with summons.
Settled is the principle in corporation law that the residence of
a corporation is the place where the principal office is
established. Since it is not disputed that CRS has its principal office in
Manila, it follows that the suit against it may properly be filed in the City of
Manila.
The fact that CRS maintains branch office in some parts of the country does
not mean that it can be sued in any of these places. To allow such would
create confusion and work untold inconveniences to the corporation.
e. TERM OF EXISTENCE
xxx
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;
become stockholders provided they are legally represented by parents,
xxx
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
The corporate term is necessary in determining at what point in time the
corporation will cease to exist or have lost its juridical personality. Once it
ceases to exist, its legal personality also expires and could not thereafter, act
in its own name for the purpose of prosecuting it business.
EXTENSION: can be made not earlier than 5 years prior to the expiry date
unless there are justifiable reasons.
f. INCORPORATORS
xxx
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
NAME .......... NATIONALITY RESIDENCE
........... ......... ............................. ............................
............ ........ ............................. ............................
............. ....... ............................. ............................
.............. ...... ............................. ............................
............... ............................. ............................
xxx
Sec. 5. Corporators and incorporators, stockholders and members.
-Corporators are those who compose a corporation, whether as
stockholders or as members. Incorporators are those stockholders or
members mentioned in the articles of incorporation 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.
CORPORATORS apply to all who compose the corporation at any given
time and need not be among those who executed the AOI at the start
of its formation or organization.
INCORPORATORS are those mentioned in the AOI as originally
forming the corporation and who are signatories in the AOI.
An incorporator may be considered as a corporator as long as he continues to
be a stockholder or a member, but not all corporators are incorporators.
Sec. 10. Number and qualifications of incorporators. - Any number
of natural persons not less than five (5) but not more than fifteen (15), all
of legal age and a majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or purposes. Each
of the incorporators of a stock corporation must own or be a subscriber to
at least one (1) share of the capital stock of the corporation.
QUALIFICATIONS OF INCORPORATORS:
1. Must be natural persons. It implies that a corporation or a partnership
cannot become incorporators. EXCEPTION: (1) cooperatives;
(2) corporations primarily organized to hold equities in rural banks and
may rightfully become incorporators thereof. It must be noted likewise
that the law does not preclude firms and other entities from becoming
stockholders or subscribers to the shares of a stock corporation. Thus,
while they cannot qualify as incorporators, they can become corporators or
stockholders.
2. Of Legal Age. Minors cannot be incorporators. They may, however,
guardians or administrators.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines. The law does not provide for
citizenship requirements. EXCEPT: in certain areas of activity or
industry wherein ownership of shares of stock are reserved wholly or
partially to Filipino citizens. Hence, all incorporators may be foreigners
provided majority of them are residents. Note that the requirement is
residence and not citizenship.
g. DIRECTORS/TRUSTEES
xxx
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 NATIONALITY RESIDENCE
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
..................... ............................. ............................
xxx
DIRECTORS is the governing board in stock corporations. TRUSTEES
refer to non-stock corporations.
There must be at least 5 but not more than 15 directors in a private
corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations whose
number of trustees, though not less than 5 and not more than 15 should be
divisible by 5.
2. In close corporations where all stockholders are considered as members of
the board of directors (Sec. 97) thereby effectively allowing 20 members in
the board.
The by-laws of a corporation may provide for additional qualifications
and disqualifications of its members of the board of directors or
trustees. However, it may not do away with the minimum disqualifications
laid down by the Code. The minimum qualifications of directors and
trustees in a domestic corporation are provided under the 2nd par. Of Sec.
23:
Sec. 23. The board of directors or trustees
xxx
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.
QUALIFICATIONS OF DIRECTORS/TRUSTEES:
1. Must own at least 1 share in their own names or a member (in the case of
trustees);
2. Majority must be resident of the Philippines. Even aliens may be elected as
directors, provided that the majority of such directors are residents of the
Philippines. EXCEPT: in activities exclusively reserved to Filipino citizens like
the management of educational institutions and those governed by the
Retail Trade Law.
Sec. 27. Disqualification of directors, trustees or officers. - No
person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the date of his election or
appointment, shall qualify as a director, trustee or officer of any corporation.
DISQUALIFICATIONS:
1. Imprisonment for a period exceeding 6 years;
2. Violation of the Corporation Code within 5 years prior to the date of
election or appointment;
3. Such other disqualifications that may be provided in the by-laws.
JOHN GOKONGWEI, JR., Petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL
CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL,
ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, EMIGDIO TANJUATCO and EDUARDO VISAYA, Respondents
(GR No. L-52129; April 21, 1980)
FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition with the
SEC for the declaration of nullity of the by-laws etc. against the majority
members of the BOD and San Miguel. The amended by-laws provided for the
disqualification of competitors from nomination and election in the Board
of irectors of SMC. This was denied by the SEC.
ISSUE: Is the disqualification valid?
HELD: Yes. The Court held that a corporation has authority prescribed, by
law, the qualifications of directors. It has the inherent power to adopt by-
laws for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. A corporation, under
the Corporation law, may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers, and
employees. 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 he impliedly contracts that the will of the majority shall
govern in all matters within the limits of the acts of incorporation and
lawfully enacted by-laws and not forbidden by law. Any corporation may
amend its by-laws by the owners of the majority of the subscribed stock. It
cannot thus be said that petitioners has the vested right, as a stock holder,
to be elected director, in the face of the fact that the law at the time
such stockholder's right was acquired contained the prescription that the
corporate charter and the by-laws shall be subject to amendment, alteration
and modification. A Director stands in a fiduciary relation to the
corporation and its shareholders, which is characterized as a
trust relationship. An amendment to the corporate by-laws
which renders a stockholder ineligible to be director, if he be
also director in a corporation whose business is in competition
with that of the other corporation, has been sustained as valid.
This is based upon the principle that where the director is employed
in the service of a rival company, he cannot serve both, but must betray
one or the other. The amendment in this case serves to advance the
benefit of the corporation and is good. Corporate officers are also not
permitted to use their position of trust and confidence to further their private
needs, and the act done in furtherance of private needs is deemed to be for
the benefit of the corporation. This is called the doctrine of corporate
opportunity.
h. CAPITALIZATION
xxx
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
........................ .............. ................ ..........................
. ........................ .............. ................ ........................
 ...
........................ .............. ................ ...........................
........................ .............. ................ ........................... 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
NINTH: That the above-named subscribers have paid at least thereof, by the stockholders representing at least a majority of the
twenty-five (25%) percent of the total subscription as outstanding capital stock at a meeting duly called for the purpose.
follows:
SHARES OF STOCKS AND THEIR CLASSIFICATIONS
Name of Subscriber Amount Subscribed Total Paid-Up
.............................. .............................. .................... .. SHARES OF STOCK designate the units into which the proprietary
............................ .............................. .................... .... interest in a corporation is divided. They represent the proportionate
.......................... .............................. .................... ...... integers or units, the sum of which constitutes the capital stock of the
........................ .............................. .................... ........ corporation. It is likewise the interest or right which the owner, called
...................... .............................. .................... the stockholders or shareholder, has in the management of the
corporation, and in the surplus profits and in case of distribution, in all
(Modify Nos. 8 and 9 if shares are with no par value. In case the of its assets remaining after the payment of its debts.
corporation is non-stock, Nos. 7, 8 and 9 of the above articles
may be modified accordingly, and it is sufficient if the articles CERTIFICATE OF STOCK is a document or instrument evidencing
state the amount of capital or money contributed or donated by the interest of a stockholder in the corporation.
specified persons, stating the names, nationalities and residences
of the contributors or donors and the respective amount given by
each.)
accordance with this Code; and priority or preference only.
8. Dissolution of the corporation.
Cumulative and Non-cumulative Preference Shares
Except as provided in the immediately preceding paragraph, the vote Cumulative preferred shares are those that entitle the owner thereof to
necessary to approve a particular corporate act as provided in this Code shall payment not only of current dividends but also back dividends not previously
be deemed to refer only to stocks with voting rights. paid whether or not, during the pas years, dividends were declared or paid.
In light of the provision of the Code stating that all shares are equal in all
PURPOSE OF CLASSIFICATION: respects unless otherwise stated in the AOI, a preferred share to be
1. To specify and define the rights and privileges of the stockholders; considered cumulative, the same must be provided for and specified in the
2. For regulation and control of the issuance of sale of corporate securities certificate.
for the protection of purchasers and stockholders.
3. As a management control device. Non-cumulative preferred shares are those which grant the holders of such
4. To comply with statutory requirements particularly those which provide for shares only to the payment of current dividends but not back dividends,
certain limitations on foreign ownership. when and if dividends are paid, to the extent agreed upon before any other
5. To better insure return on investment which can be affected through the stockholders are paid the same. This type may be divided into three groups:
issuance of redeemable shares or preferred shares, i.e., granting the holders 1. Discretionary dividend type – depends on the judgment or discretion of
thereof, preference as to dividends and/or distribution of assets in case of the board of directors. Unless there is grave abuse of discretion as to
liquidation; and result in oppression, fraud or unfair discrimination, the dividend right of
6. For flexibility in price, particularly, no par shares may be issued or sold stockholders of a particular year cannot be made up in subsequent years;
from time to time at different prices depending on the net worth of the 2. Mandatory if earned – impose a positive duty on directors to declare
company since they do not purport to represent an actual or fixed value.

COMMON STOCKS are the most commonly issued shares of stock of a

corporation. Although no clear cut definition can be found, it has been
described as one which entitles it owner to an equal or pro-rata division of
profits, if there are any, but without any preference or advantage in that
respect over any other stockholder or class of stockholders.

A common share usually carries with it the right to vote, and frequently, the
exclusively right to do so. However, where the AOI is silent, all issued and
outstanding shares shall be considered to have the right to vote and be
voted for.

PREFERRED STOCKS is a stock that gives the holder preference over

the holder of common stocks with respect to the payment of dividends
and/or with respect to distribution of capital upon liquidation. LIMITATIONS
imposed by the Code in the issuance of preferred stocks: (1) They can be
issued only with a stated par value; and (2) The preference must be
stated in the AOI and in the certificate of stock otherwise each share shall
be, in all respect, equal to every other share.

a. PREFERENCE AS TO DIVIDENDS
They have the privilege of being paid dividends first before any other
stockholders are paid theirs. The guaranty is not absolute so as to create a
relation of debtor and creditor between the corporation and the holders of
such stock. The amount of preference is stated in the contract of subscription
and is usually a fixed percentage or by specified amount indicated therein.

Participating and Non-Participating Preferred Shares

If the preferred shares is participating, they are entitled to participate in
dividends with the common shareholders beyond their stated preference.
Non-participating preferred shares on the other hand are entitled to its fixed
dividends every year when profits are earned. In effect, directors cannot
withhold dividends if there are profits.
3. Earned cumulative or dividend credit type – gives the holder the right to
arrears in dividends if there were profits earned during the previous years. In
effect, their right to receive dividends is merely postponed on a later date.
The moment dividends are declared, back dividends earned in previous years
but not declared as such must first be paid to this type of preferred
shareholders before the common shareholders receive theirs.
DIFFERENCE WITH CUMULATIVE PREFERRED: Cumulative preferred are
entitled to dividends whether or not there are profits. Earned cumulative or
dividend credit type is entitled only to arrears if there are profits in those
years.
b. Voting Right of Preferred Shares
Preferred shares, along with redeemable shares, are usually denied voting
rights as they are allowed to be denied of such as provided in Sec. 6, but this
right must clearly be withheld. However, even if deprived, preferred
shareholders have the right to vote in matters enumerated in the penultimate
paragraph of Sec. 6.
c. Preference Upon Liquidation
Such preference must also be stated in the contract, accordingly giving tem
the preference to the distribution of corporate assets upon liquidation
or termination of corporate existence. If the preferred shares are
cumulative, they have the right to any arrears in arrears in priority to any
distribution of assets to the common stockholders.
PAR AND NON-PAR VALUE SHARES
Par Value Shares are those whose values are fixed in the AOI. Its par value
is the minimum subscription or original issue price of the shares and
indicates the amount which the original subscribers are supposed to
contribute to the capital, which, however, may not reflect the true value of
the shares because the same may fluctuate depending on the liability
vote and participate in the management of the corporation, through
the election of the BOD, or in any matter requiring stockholders’ approval.
However, voting shares may practically be denied the right to vote where
there exist founders’ shares.
Non-voting shares do not grant the holder thereof, a voice in the election of
directors and some other matter requiring stockholders’ vote.
Only preferred and redeemable shares may be denied the right to vote. But,
even if denied such right, they may still vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation
FOUNDERS‘ SHARES are shares issued to the founders of the
corporation which are granted certain right and privileges such as the
exclusive right to vote and be voted for in the election of directors.
Sec. 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.
The period of 5 years is non-extendable because it may result in the almost
and networth of the enterprise.
Watered Stocks are those issued at less than par value where the
stockholders will remain liable for the difference between what he paid and
the actual par value thereof (Sec. 65).
No Par Value Shares are those whose issued price are not stated in the
certificate of stock but may be fixed in the AOI, or by the BOD when so
authorized the articles or the by-laws, or in the absence thereof, the
stockholders themselves. They do not purport to represent ay stated
proportionate interest in the capital measured by value, but only an aliquot
part of the whole number of shares of the corporation issuing it.
The Code allows the issuance of no par value shares, subject to the following
limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, non-assessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for
dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance companies,
public utilities and building and loans associations.
Advantages of no-par value shares:
1. Flexibility in price – no par shares may be issued from time to time at
different prices with the exception only that it shall not be issued at less than
P5;
2. The issuance thereof practically results to the evasion of the danger of
liability upon watered stock in case of overvaluation of the consideration paid
for it;
3. There is a disappearance of personal liability on the part of the holder for
unpaid subscription since they are already deemed fully paid and non-
assessable.
VOTING AND NON-VOTING SHARES
Voting shares as the name suggests, gives the holder thereof the right to
perpetual disqualification of other stockholders to elect or be elected as
members of the BOD resulting to the lack of proper representation thereat.
REDEEMABLE SHARES are those subject to redemption as may be
provided in the subscription contract, which are usually attached to preferred
shares and other debt securities like bonds.
Sec. 8. Redeemable shares. - Redeemable shares may be issued by
the corporation when expressly so provided in the articles of incorporation.
They may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other
terms and conditions as may be stated in the articles of incorporation,
which terms and conditions must also be stated in the certificate of stock
representing said shares
These types of shares grants the corporation the right to repurchase the
shares at its option or at the option of the holder based on the face or issued
value plus specified premium, such redemption may be optional or
mandatory at a fixed or future date.
Such repurchase may also be made regardless if there are unrestricted
retained earnings. (see Power to Acquire Own Shares)
TREASURY SHARES
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have
been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors.
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They
may be issued for a price, even less than par, and the purchaser will not be
liable to the creditors of the corporation for the difference of the
purchase price and its par value. They may also be declared as dividends
since they are properties of the corporation.
Such shares do not have the right to share in dividends nor the right to vote.
COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA
14; Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized
capital stock of Manta Trading and Supply Co., the rest are owned by
herein respondents. Upon Reese’ death, his shares was held in trust by the
law firm Ross, Carrascoso and Janda for the private respondent, who were to
continue management of the corporation. These shares considered by the
respondents as treasury shares, prior to full payment, were declared as
stock dividends. Such declaration was assessed by the BIR as distribution of
assets subject to income tax.
ISSUE: WON the subject shares are treasury shares?
HELD: No. Treasury shares are stocks issued and fully paid for and
reacquired by the corporation either by purchase, donation, forfeiture or
other means and do not have the status of outstanding shares. They may be
re-issued or sold again and while held by the company participates neither in
dividends, because dividends cannot be declared by the corporation to itself,
nor in meeting of the corporation as voting stock for otherwise
equal distribution of voting powers among stockholders will be effectively
lost and the directors wil be able to perpetuate their control of the
corporation, though it still represent a paid for interest in the property of the
corporation. These features of a treasury stock are lacking in the questioned
shares.
In this case, and under the terms of the trust agreement, the shares of stock
of Reese participated in dividends which the trustee received and the said
shares were voted upon by the trustee in all corporate meetings. They were
not, therefore, treasury shares. The 24,700 shares were outstanding shares
of Reese’s estate until they were fully paid. Such being the case, their
declaration as treasury stock dividend was a complete nullity.
preferences regarding the transfer, sale or assignment of shares in the AOI
except in close corporations which would subject their shares to specific
restrictions as required in Sec. 96 of the Code. They are not, however,
restrained or prohibited from doing so
If the corporation desires to grant such options, restrictions and/or
preferences, the same must be indicated in the AOI AND in all of the stock
certificates. Failure to provide the same in the AOI would not bind the
purchasers in good faith despite the fact that the said restriction and/or
preference is indicated in the by-laws of the corporation.
In a close corporation, however, such restrictions and preferences must not
only appear in the articles of incorporation and in the stock certificates BUT
ALSO be embodied in the by-laws of that close corporation otherwise it may
not bind purchasers in good faith.
j. THE TREASURER
xxx
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.
xxx
k. NO TRANSFER CLAUSE
xxx
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 recorded in the proper books
CAPITAL REQUIREMENTS
Sec. 12. Minimum capital stock required of stock corporations.
-Stock corporations incorporated under this Code shall not be required to
have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of
the following section
Sec. 13. Amount of capital stock to be subscribed and paid for
the purposes of incorporation. - At least twenty-five percent (25%)
of the authorized capital stock as stated in the articles of incorporation
must be subscribed at the time of incorporation, and at least twenty-five
(25%) per cent of the total subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates,
upon call for payment by the board of directors: Provided, however, That in
no case shall the paid-up capital be less than five Thousand (P5,000.00)
pesos
From the above provisions, it can be said that there is no minimum capital
requirement in order that a corporation may be duly incorporated except in
special cases and provided that at least P5,000 should be paid-in, which
effectively would make the P5,000 the minimum capital requirement.
The 25% minimum paid-in capital can be paid by any shareholder, meaning
that it is not particularly required that each subscriber pay 25% of their
subscription.
There are instances were the SEC, by virtue of an existing law, rules and
regulations or policies, requires the payment of more than the amount
provided in the Code, such as Financing Companies where he required
minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000
(other cities), and P2,000,000 (municipalities).
i. RESTRICTIONS AND PREFERENCES
Corporations are not required to provide for certain restrictions and
of the corporation and this restriction shall be indicated in all
stock certificates issued by the corporation."
xxx
This indicates the treasurer who has been elected as such until his successor
has been elected and qualified and who is authorized to receive for and in
the name of the corporation all subscriptions, contributions or donations paid
or given by the subscribers or members.
l. THE EXECUTION CLAUSE
xxx
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.
(Names and signatures of the incorporators)
xxx
The signatures are important as the AOI serves as a contract between the
signatories thereof, by and among themselves, with the corporation, and
the latter with the State.
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)
xxx
n. NOTARIAL
ACKNOWLEDGMENT xxx
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.........................., 19.......
Doc. No...............;
Page No...............;
Book No..............;
Series of 19.....
xxx
GROUNDS FOR DISAPPROVAL
m. TREASURER‘S AFFIDAVIT
xxx
TREASURER'S AFFIDAVIT
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
time that it acquires juridical personality and legal existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Those organized as Cooperatives covered by Bureau of Cooperatives and
Home Owners’ Associations covered by Home Insurance Guaranty
Corporation.
d. Corporation Sole – which is reckoned from the filing of verified articles.
(Sec. 112)
Sec. 19. Commencement of corporate existence. - A
private corporation formed or organized under this Code commences
to have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission
issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors
shall constitute a body politic and corporate under the name stated in the
articles of incorporation for the period of time mentioned therein, unless
said period is extended or the corporation is sooner dissolved in
accordance with law.
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil.
233; Dec. 23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed
of Sale where he sold four parcels of land in favor of herein petitioner
Cagayan Fishing Development Co., said to be under the process of
incorporation. Plaintiff company filed its AOI with the Bureau of Commerce
and Industry on Oct. 22, 1930. A year later, before the issuance of
the certificate of incorporation, the BD of the company adopted a
resolution to sell the four parcels of land to Teodoro Sandiko for P42,000.
ISSUE: WON the subsequent sale to Sandiko is valid?
Sec. 17. Grounds when articles of incorporation or amendment
may be rejected or disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation or disapprove any
amendment thereto if the same is not in compliance with the requirements of
this Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable
portions of the articles or amendment. The following are grounds for such
rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules
and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by existing
laws or the Constitution.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan
associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved
by the Commission unless accompanied by a favorable recommendation
of the appropriate government agency to the effect that such articles or
amendment is in accordance with law.
After filing of the AOI, the SEC will examine and process them to determine
compliance with the requirements enumerated in Sec. 14 and if the form
prescribed under Sec. 15 is complied with. Only substantial and not
strict compliance is required.
The above grounds are not exclusive. There may be other reasons for
rejection or disapproval such as the corporate name is not legally permissible
or that the minimum capital requirement is not sufficient.
3. COMMENCEMENT OF CORPORATE EXISTENCE
Corporate existence is reckoned from the time of the issuance of
its CERTIFICATE OF INCORPORATION or registration. It is only from
this
created as a de jure corporation (or according to some, an apparently
valid statute);
b. An attempt, in good faith, to form a corporation according to
the requirements of law which goes far enough to amount to a
―colourable compliance‖ with the law;
c. A user of corporate powers, the transaction of business in some way as
if it were a corporation;
d. Good faith in claiming to be and doing business as a corporation.
HELD: No. A duly organized corporation has the power to purchase and hold
real property as the purpose for which such corporation was formed may
permit and for this purpose may enter into such contract as may be
necessary. But before a corporation may be said to be lawfully organized
many thing have to be done. Among which, the law requires the filing of the
AOI.
It cannot be denied that the plaintiff was not incorporated when it entered
into the contract of sale. It was not even a de facto corporation at that time.
Not being in legal existence then, it did not possess juridical personality to
enter into the contract.
Corporations are creatures of the law, and can only come into existence in
the manner prescribed by the law. That a corporation should have a full and
complete organization and existence as an entity before it can enter into a
contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do
those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter, there is no corporation, nr does it
possess franchise or faculties for it to exercise, until it acquires complete
existence.
If the company could not and did not acquire the four parcels of and here
involved, it follows that it did not have the resultant right to dispose the
same to the defendant.
D. DEFECTIVELY FORMED CORPORATIONS
A corporation de jure is one created in strict or substantial compliance to the
governing corporation statutes and whose right to exist and act as such could
not be attacked in a either collaterally or through a direct proceeding for
that purpose even by the State.
1. DE FACTO CORPORATIONS
A de facto corporation is one that is so defectively created as not to be a
de jure corporation but nevertheless exists, for all practical purposes,
as a corporate body, by virtue of its bona fide attempt to incorporate
under existing statutory authority, coupled with the exercise of corporate
powers.
REQUISITES:
a. There is a valid statute under which the corporation could have been
the State.
ISSUE: WON it is a de facto corporation?
HELD: No. First, not having obtained a certificate of incorporation,
the company, even its stockholders, may not probably claim ―in good faith‖
to be a corporation.
Such claim is compatible with the existence of errors and irregularities, but
Sec. 20. De facto corporations. - The due incorporation of
any corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto
proceeding
ATTACK: From the above provision, the only purpose of determining
whether it is a de facto or de jure corporation is the applicability of the rules
on collateral and direct attack. Such that a de jure is impregnable to either,
while a de facto corporation’s existence can only be questioned in a direct
proceeding by the State through a quo warranto. A de facto corporation’s
corporate existence however cannot be attacked collaterally.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER
MACAORAO BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI
HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL,
MARONSONG ANDOY, MACALABA INDAR LAO. Respondents
GR No. L-28113; March 28, 1969)
FACTS: The Municipality of Balabagan was created from the barrios and
sitios of the Municipality of Malabang by virtue of EO No 386 issued by
President Garcia by virtue of Sec. 68 of the Revised Administrative Code.
Following the decision of the Court in Pelaez vs. Auditor General, which
declared Sec. 68 unconstitutional and that the President had no power to
create a municipality, herein petitioners sought to nullify EO 386 and to
restrain the respondents, who are officers of Balabagan, to vacate said their
office and desist from performing their functions.
Respondents argue that it is at least a de facto corporation and the ruling in
Pelaez is not applicable to it, having been organized under color of a statute
before it was declared unconstitutional, its officers having been either elected
or appointed, and the municipality itself having discharged
corporate functions for the past five years. That as a de facto corporation,
its existence cannot be collaterally attacked.
ISSUE: WON the Municipality of Balabagan is a de facto corporation?
HELD: No. In cases where a de facto municipal corporation was recognized
as such despite the fact that the statute creating it was later invalidated, the
decision could be fairly made to rest on the consideration that there
was some other valid law giving validity to the organization. Hence,
in the case at bar, the mere fact that Balabagan was organized at the time
when the statute had not been invalidated cannot conceivably make it a
de facto corporation, as independently of the Administrative Code
provision in question, there is no other valid statute to give color of
authority for 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; it is, in legal contemplation, as
inoperative as though it had never been passed.
HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together
with private respondents signed and acknowledged the AOI of Far East
Lumber and Commercial Co., Inc., after the execution of which the
corporation proceeded to do business by adopting its by-laws and election
of its officers. Subsequently, pending action on the AOI, the respondents
filed with the CFI alleging the corporation to be an unregistered partnership
and praying for its dissolution, which was granted.
Herein petitioner claims that the corporation is a de facto corporation, that
its dissolution may be ordered only in a quo warranto proceedings instituted
by
not with a total or substantial disregard of the law. UNnless there has been
an evident attempt to comply with the law the claim to be a corporation
―under this Act‖ (Sec. 19) could not be made in good faith.
Second, this is not a suit where the corporation is a party. This is a litigation
between a stockholder of the alleged corporation, for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders, without
the intervention of the State.
2. CORPORATION BY ESTOPPEL
A corporation may exist on the ground of estoppel by virtue of the
agreement, admission or conduct of the parties such that they will not be
permitted to deny the fact of the existence of the corporation. It is neither a
de jure nor de facto because of serious defects in its incorporation or
organization, unlike the de facto doctrine, it does not involve a theory
that the irregular corporation has acquired a corporate status generally. It
applies to the consequences of some particular transactions or acts
done in the corporate name by associates assuming to be a corporation.
Sec. 21. Corporation by estoppel. - All persons who assume to act as
a corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no
corporation.
From the above provision, it is clear that the doctrine of estoppel may apply
to the alleged corporation or to a third party transacting with the former.
As to the Corporation – the members who purported to be a corporate body
cannot deny their purported existence as a corporation in an action against
them on the contract, where the third persons were induced to deal with the
supposed corporation. They cannot avoid liability on the ground of lack of
personality to be sued.
As to third persons – they are estopped from denying the existence of the
alleged corporation in a suit to enforce a contract. However, the
association of persons must have purported or acted, and were treated
by the third persons, as corporations. The doctrine also applies when the
third person tries to escape liability on a contract from which he has
benefited on the irrelevant ground of defective incorporation.
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) –
Petitioner Reynaldo Lozano and respondent Antontio Anda agreed to
consolidate their respective Jeepney Associations, to which they are
presidents. They conducted an election for one set of officers of the
consolidated association, where petitioner was the winner. Respondent,
however, refused to abide by the agreement which prompted petitioner to
institute an action for damages in the trial court which was denied for being
intra-corporate, and was held to be within the jurisdiction of the SEC.
ISSUE: WON there is corporation by estoppel placing the case within SEC
jurisdiction?
HELD: None. The unified association was still a proposal and had not
been approved by the SEC, neither had its officers and members submitted
their
AOI. Their respective associations are distinct and separate entities,
petitioner and private respondent does not have an intra-corporate relation
much less do they have an intra-corporate dispute. The SEC has no
jurisdiction over the complaint.
The doctrine of corporation by estoppel advance by privte respondent cannot
override jurisdictional requirements. Jurisdiction is fixed by law and is not
subject to the agreement of the parties.
Corporation by estoppel is founded on principle of equity and is designated
to prevent injustice and unfairness. It applies when persons assume to
form a corporation 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 to form a
corporation, who therefore know that it has not been
registered, there is no corporation by estoppel.
ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84; Jan.
30, 1965) – Jose Aruego, president of defendant University Publishing Co,
Inc. entered into a contract with plaintiff for the publishing of the latter’s
revised commentaries on the Revised Penal Code, which the defendant
failed to pay the second instalment due. The CFI of Manila rendered
judgment in favor of plaintiff, such judgment reduced by the Supreme Court
to P15,000.
The CFI issued a writ of execution against Aruego, as the real defendant,
stating the discovery that there is no such entity as University Publishing Co.,
Inc.
ISSUE: WON the writ of execution may be effected upon Aruego?
HELD: Yes. On account of non-registration, University cannot be considered
a corporation, not even a corporation de facto. It has therefore, no
personality separate from Aruego it cannot be sued independently.
The doctrine of corporation by estoppel is inapplicable. Aruego represented a
non-existent entity and induced not only the plaintiff but even the court of
belief of such representation. He signed the contract as ―President‖
of University and obviously misled plaintiff in to believing that University
is a ―corporation duly organized and existing under the laws of the
Philippines‖. One who has induced another to act
upon his wilful misrepresentation that a corporation was
duly organized and existing under the law, cannot, thereafter, set
up against his victim the principle of corporation by estoppel.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) –
Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered
into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
corporation. For failure to comply with the obligations under the lease,
petitioner filed a complaint in the CFI where the company was declared in
default and decision was rendered in favor of petitioner. Defendant Refuerzo
filed a motion claiming that he should not be made personally liable in the
decision which was granted by the Court. Hence, this petition.
ISSUE: WON Refuerzon can be made personally liable?
HELD: Yes. While as a general rule, a person who has 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
transaction or dealing, yet this doctrine may not be held
applicable where fraud takes part in the said transaction. In the
instant case, on plaintiff’s charge that she was unaware of the fact that the
company had no juridical personality, defendant Refuerzo gave no
confirmation or denial and the circumstances surrounding the execution
of the contract led to the inescapable conclusion that plaintiff Salvatierra
was really made to believe that such corporation was duly organized in
accordance with law.
The rule on the separate personality of a corporation is understood to
refer merely to registered corporations and cannot be made applicable
to the liability of members of an unincorporated association. The reason
behind this doctrine is obvious – since an organization which before
the law is non-existent has no personality and would be
incompetent to act on its behalf; thus, those who act or
purport to act as its
representatives or agent do so without authority and at their
own risk. And, as is it elementary principle of law that a person who acts
as an agent without authority or without principal is himself
regarded as the principal, a person acting or purporting to act
on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agents.
In acting on behalf of a corporation which he knew to be unregistered, the
president of the unregistered corporation Refuerzo, assumed the risk
of reaping the con the consequential damages of resultant right, if any,
arising out of such transaction.
CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18, 1989)
– Private respondent Faustina Oh has been teaching in the herein
petitioner School since 1932 for a continuous period of 33 years until that
day that she was told that she had no assignment for the next semester.
She filed a suit before the CFI against the school and later on amended
her complaint to include certain officials. The CFI of Sorsogon dismissed
the complaint. On appeal, the CA reversed the decision and held herein
petitioner school liable but absolved the other defendants.
ISSUE: WON the School can be held liable?
HELD: Yes. Even though the school failed to incorporate as mandated
by law, it cannot now invoke such non-compliance with the law to
immunize it from the private respondent’s complaint. There should also be
no question that having contracted with the private respondent every year
for 32 years and thus represented itself possessed of juridical personality
to defeat her claim against it. According to Art. 1431 of the Civil Code:
―through estoppel an admission or representation is rendered
conclusive upon the person making it and it cannot be denied as against
the person relying on it‖.
As the school itself may be sued in its own name, there is no need to apply
Rule 3, Sec. 15 ,under which the persons joined in an association without any
juridical personality may be sued with such an association. Besides, it has
been shown that the individual members of the board of trustees are not
liable, having been appointed only after the private respondent’s dismissal.
ASIA BANKING CORP., plaintiff-appelle VS. STANDARD PRODUCTS
CO., INC., defendant-appellant (46 Phil. 144; Sept. 11, 1924) – This
action was brought to recover the balance due of a promissory note
executed by herein appellant. The court rendered judgment in favor of the
plaintiff.
At the trial of the case the plaintiff failed to prove affirmatively the
corporate existence of the parties and the appellant insists that
under these circumstances the court erred in finding that the parties
were corporations with juridical personality and assigns same as reversible
error.
ISSUE: WON parties herein are corporations with juridical personality?
HELD: Yes. There is no merit whatever in the appellant's contention. The
general rule is that in the absence of fraud a person who
has contracted or otherwise dealt with an association in such a
way as to recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate
existence in any action leading out of or involving such contract or
dealing, unless its existence is attacked for cause which have
arisen since making the contract or other dealing relied on as an
estoppel and this applies to foreign as well as to domestic
corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te
Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by
making a promissory note in its favor and making partial payments on the
same is therefore estopped to deny said plaintiff's corporate existence. It is,
of course, also estopped from denying its own corporate existence. Under
these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted
that there is no evidence showing circumstances taking the case out of the
rules stated.
In the case of Merill Lynch Futures, the SC held that a foreign corporation
INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC. VS.
CA (343 SCRA 674; Oct. 19, 2000) – Petitioner International Express
Travel & Tours Services, Inc. entered into an agreement with the
Philippine Football Federation through its president Henry Kahn, herein
private respondent, where the former supplied tickets for the trips of
the athletes to the Southeast Asian Games and other various trips. The
Federation failed to pay a balance of P265,894.33 which led petitioner to file
a civil case in the RTC of Manila which decided in its favor and holding
Henry Kahn personally liable. On appeal, the CA reversed the decision of
the RTC absolving Kahn from personal liability holding that the
Federation had a separate and distinct personality.
ISSUE: WON Henry Kahn can be made personally liable?
HELD: Yes. While we agree with the appellate court that associations may be
accorded corporate status, such does not automatically take place by the
mere passage of RA 3135 otherwise known as the Revised Charter of the
Philippine Amateur Athletic Federation and PD 604. It is a basic postulate
that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general
enabling act. Nowhere can it be found in RA 3135 and PD 604 any
provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided for
the manner by which these entities may acquire juridical personality.
The recognition of Philippine Amateur Athletic Federation required under RA
3135 and the Department of Youth and Sports Development under
604, extended to the PFF was not substantiated by Kahn. Accordingly, the
PFF is not a national sports association within the purview of the
aforementioned laws and does not have corporate existence of its own.
This being said, it follows that private respondent Kahn should be held liable
for the unpaid obligations of the unincorporated PFF. It is a settled principle
in corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for
other acts performed as such agents.
We cannot subscribe to the position taken by the appellate court that even
assuming that the PFF was defectively incorporated, the petitioner cannot
deny the corporate existence of the PFF because it had contracted and dealt
with the PFF in such a manner as to recognize and in effect admits its
existence. The doctrine of corporation by estoppel is mistakenly applied by
the respondent court to the petitioner. The application of the doctrine
applies to a third party only when he tries to escape liability on
a contract from which he has benefited on the irrelevant ground
of defective incorporation. In the case at bar, the petitioner is not trying
to escape liability from the contract but rather is the one claiming from
the contract.
GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216; Aug.
10, 1994) – Petitioner is a German company who was granted a
license to establish a regional or area headquarters in the
Philippines. Private respondent Romana Lanchinebre was a sales
representative of petitioner who made advances totalling P35,000 which
were left unpaid. Petitioner filed a complaint for the collection of a sum of
money which was dismissed by the judge holding, among others, that the
license of petitioner does not include the license to do business in the
Philippines.
ISSUE: WON petitioner has capacity to sue?
HELD: Yes. Private respondent is estopped from assailing the personality of
petitioner. ―The rule is that the 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 domestic corporation; 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 f its non-compliance with the statutes chiefly in
case where such person has received the benefits of the contract‖ (Merill
Lynch Futures, Inc. vs. CA).
doing business in the Philippines may sue in Philippine courts although not
authorized to do business here against the Philippine citizen who had
contracted with and been benefited by said corporation. Citing and applying
the doctrine laid down in Asia Banking Corp. vs. Standard Prodcuts Co., Inc.
IN SUMMARY: it appears that if a corporation by estoppel exist and
enters into a contract and transact business with a third party, tha latter
has three possible remedies:
1. He may file a suit against the ostensible corporation to recover from the
corporate properties;
2. He may file the case directly against the associates personally liable who
held out the association as a corporation; and
3. Against both the ostensible corporation and persons forming it, jointly
and severally. The last two remedies may not, however, be availed of if
the third party by his conduct is estopped from denying the existence of
the association as a corporation and as such, recovery should be limited
only against the corporate assets.
INDIVIDUAL LIABILITY of associates should not be overlooked. If
the doctrine of corporation by estoppel cannot be applied in their favor
because the third party dealing with it has not, in any manner, deemed
to have chosen to deal with it as a corporation or in short not, estopped
to deny corporate existence, the associates can be held liable either as
partners or principals.
WHO SHOULD BEAR THE LOSS: The better view is that those who
actively participated in holding out the association as a corporation should
be held personally liable by virtue of the express provision of Sec. 21 which
provides that ―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‖ therefrom.
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS
a. CORPORATE ORGANIZATION
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
incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the corporation
as may be determined by the Securities and Exchange Commission.
Once the certificate of incorporation has been issued, the corporation MUST
formally organize and commence its business.
NON-USE OF CORPORATE CHARTER: Apparent from the above
provision is that the failure of the corporation to organize within 2
years would result in it automatic dissolution, unless, of course, its
failure to do so is due to causes beyond its control.
FORMAL ORGANIZATION: refers to the process of structuring the
corporation to enable it to effectively pursue the purpose for which it was
organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD;
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its
subsequent filing with the SEC which must be within 1 month from the
issuance of the certificate of incorporation;
c. Organizational meeting of the BOD to elect the corporate officers,
adoption of corporate seal, accepting pre-incorporation subscriptions,
establishing the principal office and such other steps necessary to
transact the legitimate business for which the corporation was formed.
Strict compliance is not required. Substantial compliance therewith is
sufficient. Thus, it has been held in the case of Perez vs. Balmaceda that a
corporation is deemed to have formally organized if it had a governing board
which direct its affairs, as well as a treasurer and a clerk, and that through
these instrumentalities, it actually functioned and engaged in the business
for which it was organized. It cannot be held to have forfeited its charter
simply because it has not been shown that is also had a president and a
secretary.
b. COMMENCEMENT OF BUSINESS/TRANSACTION
This means that the corporation has actually functioned and engaged in
business for which it was organized which must be done within two years
from the issuance of the certificate of incorporation lest it
is deemed dissolved. This may take the form of entering into contracts
which tend to pursue its business undertaking or other acts related thereto.
If a corporation has commenced its business but subsequently becomes
inoperative continuously for a period of at least 5 years, the
same shall be merely a ground for suspension or revocation
of its corporate franchise or certificate of registration.
CHAPTER 5: THE CORPORATE CHARTER AND ITS AMENDMENTS
A. CORPORATE CHARTER
CORPORATE CHARTER signifies an instrument or authority from the
sovereign power, bestowing rights or power, and is often used convertibly
with the term ―act of incorporation‖, where the corporation was formed
under a special act of the legislature, and with the ―articles of
incorporation‖, when the corporation was formed under a general law.
THREE-FOLD CONTRACT:
1. Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation’
2. Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
3. Between and among the stockholders or members themselves as far as
their relationship with one another is concerned.
FRANCHISE: appropriately applies to the right or privilege itself to be and
act as a corporation or to do a certain act while charter applies to the
instrument by which the state vests such right or privilege. Franchise may
either be: (1) Primary – nothing more than the right or privilege of being a
corporation; or (2) Secondary – the powers and privileges vested in, and to
be exercised by the corporate body as such. Example: Employment Agencies,
primary franchise is the certificate of incorporation from the SEC, the
secondary franchise is the license issued by the POEA.
B. CORPORATE ENTITY THEORY
As a legal entity, the corporation is possessed with a juridical personality
separate and distinct from the individual stockholders or members and is not
affected by the personal rights, obligations or transactions of the latter. The
properties it possesses belongs to it exclusively as a separate juridical entity
such that the personal creditors of its stockholders or members cannot attach
corporate properties to satisfy their claims.
On the other hand, the corporation is not likewise liable for the debts,
obligations or liabilities of its stockholders. Neither may it properties be
made answerable to satisfy the claim of creditors against its
stockholders or member even if the stockholder concerned is its president.
SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO
ARANETA, INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17,
1976) – Plaintiff-appellant Sulo ng Bayan, Inc. instituted a
reinvindicatory action for the recovery of 28,000 square meters of land
for and in behalf of it members, who were themselves and their
predecessors-in-interest pioneered in the clearing of the land and
cultivated the same since the Spanish Regime and have been in continuous
possession of the same. The action was dismissed on the ground that
there is no cause of action. On appeal, the CA certified the case to the SC
for the legal issues involved.

ISSUED: WON Sulo ng Bayan, Inc. may institute the action for recovery of
property of it individual members?
HELD: No. It is a doctrine well-established and obtains both at law and in
equity that a corporation is a distinct legal entity to be considered as
separate and apart from the individual stockholders or members who
compose it, and is not affected by the personal rights, obligations and
transactions of its stockholders or members. The property of a corporation
is its property and not that of the stockholders, as owners, although they
have equities in it. Properties registered in the name of the corporation
are owned by it as an entity separate and distinct from its members.
Conversely, a corporation ordinarily has no interest in the individual
property of it stockholders unless transferred to the corporation, ―even in
the case of a one-man corporation‖.
Absent any showing of interest, therefore, a corporation, like
plaintiff-appellant herein, has no personality to bring an action for and in
behalf of its stockholders or members for the purpose of recovering
property which belongs to said stockholders or members in their personal
capacities.
It is fundamental that there cannot be a cause of action without an
antecedent primary legal right conferred by law upon a person. Evidently,
there can be no wrong without a corresponding right, and no breach of duty
by one person without a corresponding right belonging to some other person.
FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND ALBERTO
V. ARELLANO (151 SCRA 372; June 30, 1987) – Herein petitioners
were ordered jointly and severally to pay the plaintiff P50,000 for the
preparation of the project study and his technical services that led to the
organization of the defendant corporation. The petitioners questioned the
order stating that they are mere subsequent investors in the corporation that
was later created, that they should not be held solidarily liable with the
Filipinas Orient Airways, a separate juridical entity, and with co-defendants
who were the ones who requested the said services from the private
respondent.
ISSUE: WON petitioners can be held personally liable for such expenses?
HELD: No. Petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by Baretto, respondent,
as the main promoter. It was he who was putting all the pieces together, so
to speak. The petitioners were merely among the financiers whose interest
was to be invited and who were in fact persuaded, on the strength of the
project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality,
to justify making the petitioner, as principal stockholder thereof, responsible
for its obligations. As a bona fide corporation, the Filipinas Orient Airways
should alone be liable for its corporate acts as duly authorized by its
directors and officers.
The most that can be said is that they benefited from the services, but that
surely is no justification t hold them personally liable therefor. Otherwise,
all other stockholders of the corporation, including those who came in later,
and regardless of the amount of their stockholdings would be equally
and personally liable also with the petitioners for the claims of the
private respondents.
Petitioners are not liable under the challenged decision.
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665;
Oct. 19, 1992) – Petitioner Rustan entered into a conract of sale with
respondent Lluch which was later on stopped by Rustan through a letter.
Lluch sent a letter to clarify whether the letter sent by Rustan was for
the stoppage of delivery or termination of the contract of sale. Unanswered,
respondent Lluch resumed devliveries and later on filed a complaint for
contractual breach which was dimissed. On appeal, the CA modified the
decision of the trial court directing petitioner including Tantoco, president
and general manager, and Vergara, resident manager, to pay private
respondents.
ISSUE: WON individual petitioners may be held liable?
HELD: No. The president and manager of a corporation, who
entered into and signed a contract in his official capacity, cannot
be made liable thereunder in his individual capacity in the
absence of stipulation to that effect due to the personality of a
corporation being separate and distinct from the person
composing it. And because of this precept, Vergara’s supposed non-
participation in the contract of sale although he signed the letter terminating
it is completely immaterial.
CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) – Adelio Cruz charged
Quiterio Dalisay, Senior Deputy Sheriff of Manila, with malfeasance in office,
corrupt practices and serious irregularities when the respondent sheriff
attached and/or levied the money belonging to complainant Cruz when he
was not himself the judgment debtor in the final judgment of NLRC sought to
be enforced but rather the company known as Qualitrans Limousine Service,
Inc., a duly registered corporation.
ISSUE: WON the charge against the respondent should be upheld for
attaching personal property of the corporate president?
HELD: Yes. The respondent’s action in enforcing judgment against complaint
who is not the judgment debtor in the case calls for disciplinary action.
Considering the ministerial duty in enforcing writs of execution, what is
incumbent upon him is to ensure that only that portion of a decision ordered
or decreed in the dispositive part should be the subject of execution. No
more, no less. That the title of the case specifically names complaint as one
of the respondent is of no moment as execution must conform to that
directed in the dispositive portion and not in the title of the case. The tenor
of the NLRC judgment and the implementing writ are clear enough. It
directed Qualitrans to reinstate the discharged employee and pay the full
backwages. Respondent, however, chose to ―pierce the veil of
corporate entity‖ usurping a power belonging to the court and assumed
improvidently that since the complainant is the owner/president, they are
one and the same. It is well-settled doctrine, both in law and in equity
that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members. The mere
fact that one is president of a corporation does not render the
property he owns or possesses the property of the corporation,
since the president, as individual, and the corporation are separate
entities.
PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983) – Petitioner
Palay, Inc. through its president Albert Onstott, executed in favor of
respondent Naario Dumpit a Contract to Sell a parcel of land which
provided for automatic rescission upon default in payment of any
monthly amortization without need of notice and forfeiture of all
instalments paid. Respondent failed to pay some instalments and later
offered to update all his overdue account but was informed that the
contract has already been rescinded.
Respondent filed with the NHA a complaint questioning the validity of the
rescission which decided in its favor holding Palay, Inc. and Alberto Onstott,
in his capacity as president, jointly and severally liable.
ISSUE: WON the corporate president is liable to refund the amount state in
the NHA ruling?
HELD: No. As a general rule, a corporation may not be made to answer for
acts or liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate fiction may
be pierced when it is used as a shield to further an end subversive of justice;
or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend
crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent
the law or perpetuate deception; or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders.
We find no badges of fraud on petitioners’ part. They had literally relied,
albeit mistakenly, on its contract with private respondent when it
rescinded the contract to sell extrajudicially and had sold it to another
person.
No sufficient proof exists on record that said petitioner used the corporation
to defraud private respondent. He cannot, therefore, be made personally
liable just because he ―appears to be the controlling stockholder‖.
Mere ownership by a single stockholder or by another corporation
or nearly all of the capital stock of a corporation is not, of
itself, sufficient ground for disregarding the separate
corporate personality.
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO
G. MACADANGDANG, petitioners,
vs.
HON. COURT OF APPEALS (Former Sixth Division) and GERVACIO
CU, respondents
(GR No. L-49834; June 22, 1989)
FACTS: Petitioners were held solidarily liable by the appellate court in their
personally capacity to the private respondent for non-payment of tobacco
under an agreement between them embodied in a receipt which states as
follows:
GREETINGS:
WE, the President, Manager, Treasurer and Director Representative of
Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
That we received from Mr. Gervacio Cu, a truck load of Virginia tobacco
consisting of ONE HUNDRED SIXTY (160) bales of fifty (50) kilos each bale
(sic) the said Virginia tobacco consists of different grades or class from E
to A (sic) the said tobaccos are to be shipped to the redrying plants
through the Bacarra Facoma under Guia number 236.
Conditions of the deal between Mr. Cu and the Association. Upon payment
of the said tobacco by the Philippine Virginia Tobacco Administration then
Mr. Cu, will collect the corresponding payments as graded by the redrying
plant as further stipulated that the check representing the payment shall
only be cashed in the presence of Mr. Cu, or his authorized representative.
(Sic)
This instrument is executed for the protection, guidance and information of
the parties concerned.
Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
(Sgd.) Paulino Soriano
PAULINO SORIANO
President
(Sgd.) Nenita C. Esperanza
NENITA C. ESPERANZA
Sec. Treasurer
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO
E. ACOSTA Director, Official
Representative
(Sgd.) A. Macadangdang
A.G. MACADANGDANG
Manager
ISSUE: WON petitioners are liable?
HELD: No. We cannot accept the conclusion that the official designations of
petitioners were written on the document merely as meaningless and hollow
decorations or as mere descripto personae without any relevance to the
liability of the corporation these officers obviously represented. Indeed,
taking in conjunction with the other obtaining circumstances, the
receipt discloses the capacity by which the petitioners entered into the
―deal‖ with private respondent.
The subject receipt itself states tht the conditions contained therein were
between the private respondent and the ―Association‖. The lower court
held that the ―Association‖ referred only to the signatories. We disagree. It
is quite plain and we are convinced that the ―Association is none other
than the Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative
marketing association. Not only that , we cannot find any cogent
reason why the petitioners used the word ―Association‖ when they could
have more easily and conveniently placed ―the undersigned‖ or words to
the same effect in its
of all
stead.
In light of the foregoing, it is clear that the liability of the petitioners under
the document subject of the instant case is not personal but corporate, and
therefore attached to the Bacarra (I.N.) Facoma, Inc. which being a
corporation, has a personality distinct and separate from that of the
petitioners who are only its officers. It is the general rule that
the protective mantle of a corporation‘s separate and
distinct personality could only be pierced and liability attached
directly to its officers and/or member-stockholders, when the
same is used for fraudulent, unfair or illegal purpose.
C. PIERCING THE VEIL OF CORPORATE FICTION
The notion of corporate legal entity is not, at all ties respected. This is
because the applicability of the corporate entity theory is confined to
legitimate transactions and is subject to equitable limitations to prevent its
being used as a cloak or cover for fraud or illegality, or to work injustice.
While no hard and fast rule exists as to when the corporate fiction may
pierced or disregarded, it is a fundamental principle in Corporation law that a
corporation is an entity separate and distinct from its stockholders or member
and from other corporations to which it may be connected. But when the
notion of legal entity is used to defeat public convenience, Justify wrong,
Protect fraud, Defend crime, the law will regard the corporation as a mere
association of persons, or in the case of two corporations, merge them into
one, the one being merely regarded as part or instrumentality of the other.
The same is true where a corporation is a mere dummy and serves no
business purpose and is intended only as a blind, or an alter-ego or business
conduit for the sole benefit of the stockholders.
In cases where the doctrine of piercing the veil of corporate fiction, liability
will attach directly to the officers and stockholders, at least, in so far as that
particular act is concerned.
PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; Aug.
31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, ran
over the child of herein petitioner Mario Palacio, and was found guilty of the
criminal case filed against him. Isabelo Calingasan, the employer, was held
subsidiarily liable and not the defendant corporation. Plaintiffs now
contend that the defendant corporation should be made subsidiarily
liable for damages in the criminal case because the sale to it of the jeep
in question, after the conviction of Carillo was merely an attempt on
the part of Calingasan, its president and general manager, to evade his
subsidiary civil liability.
ISSUE: WON the corporation can be held liable for the subsidiary civil
liability of Isabelo Calingasan?
HELD: Yes. It is evident that Calingasan’s main purpose in forming the
corporation was to evade his subsidiary civil liability resulting from the
conviction of his driver. This conclusion is borned out by the fact that the
incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. We believe that this one case
where the defendant corporation should not be heard to say that
it has a personality separate and distinct from its members when
to allow it to do so would be to sanction the use of the fiction
of corporate entity as a shield to further an end of subversive
of justice. Furthermore, the failure of the defendant corporation to prove
that it has other property other than the jeep strengthens the conviction
that its formation was for the purpose above indicated.
MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil.
376; Feb. 24, 1954) – Plaintiffs, as stockholders of Marvel Building
Corporation sought to enjoin the defendant Collector of Internal Revenue
from selling at a public auction properties which were said to be registered in
the name of said corporation. Said properties were seized and distrained
by defendant to collect war profits taxes against Maria Castro who the
former claims to be the sole owner of the said corporation. Maria Castro
owns P250,000 of the P1,025,000 capital of the corporation, of the rest
of the incorporators were her half-brothers, half-sister and a brother-in-law.
ISSUE: WON Maria Castro is the sole owner of the Corporation?
HELD: Yes. Circumstantial pieces of evidence presented were: (1)
Endorsement in blank of the certificates of stock issued in the name of the
incorporators and the possession thereof by Maria Castro; (2) The
other incorporators did not have incomes in such amount, during the time
of the organization of the corporation or immediately thereto, as to enable
them to pay in full their supposed subscriptions; and (3) It should have
been the supposed subscribers who should have come to court to assert
that they actually paid for their subscriptions and are not mere dummies.
The circumstantial evidence is not only convincing, it is conclusive. In
addition to the above, the fact that the stockholders or directors never
appeared to hae ever met to discuss the business of the corporation and the
fact that Maria Castro advanced big sums of money to the corporation
without any previous arrangements or account, and the fact that the books
of accounts were kept as if they belonged to Maria Castro alone – these
facts are of patent and potent significance.
In our opinion, the facts and circumstances duly set forth, all of which have
been proved to our satisfaction, prove conclusively and beyond reasonable
doubt that Maria Castro is the sole and exclusive owner of all the shares of
stock of the corporation and that the other partners are her dummies.
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) –
Herein petitioner Yutivo purchased its cars and trucks from General Motors
Overseas Corporation (GM), the latter paying the sales tax once on
original sales, Yutivo no longer paid sales tax on its sales to the public.
Later no, GM withdrew from the Philippines and appointed Yutivo as
importer. Yutivo in turn exclusively sold to Southern Motors, Inc. (SM), a
corporation where the incorporators are sons fo the founders of Yutivo.
Under this arrangement, Yutivo paid the sales tax on original sale, while
SM did not subject to sales tax its sales to the public.
The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
which the CTA affirmed.
ISSUE: WON Yutivo is liable for the deficiency taxes?
HELD: No. It is elementary rule and fundamental principle of corporation law
that a corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, 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 case of two corporations merge them into one.
Another rule is that, when the corporation is a mere alter-ego or business
conduit of a person, it may disregarded.
The sales tax liability of Yutivo did not arise until it became the importer and
simply continued its practice of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as a tax evasion device runs
counter to the fact that there was no tax to evade.
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch
of the latter created for the purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as service repair shops. It is not
disputed that the petitioner, which is engaged principally in hardware
supplies and equipment, is completely controlled by the Yutivo, Young and Yu
family. The founders of the corporation are closely related to each other
either by blood or affinity and most of its stockholders are members of the Yu
(Yutivo or Young) family.
According to the AOI, the amount of P62,500 was actually advanced by
Yutivo. The additional subscriptions to SM were paid by Yutivo. The
shareholders in SM are mere nominal stockholders holding the share for and
in behalf of Yutivo, so even conceding that the original subscribers were bona
fide stockholders, Yutivo was at all tie in control of the stock of SM and that
the latter was a mere subsidiary of the former.
SM is under the management control of Yutivo by virtue of the
management contract entered into between the two parties. In fact,
the controlling
to dismiss which was denied. Hence, this present petition for certiorari.
majority of the BOD of Yutivo is also the controlling majority of the Board
of SM. At the same time, the principal officers of both corporations are
identical. In addition, both corporations have a common comptroller. There is
therefore no doubt that by virtue of such control, the business,
financial and management policies of both corporations would be
directed towards common ends. Likewise, cash or funds of SM, including
those of its branches which are directly remitted to Yutivo, and subject
to withdrawal only by Yutivo, SM’s being under Yutivo’s control, the
former’s operations and existence became dependent upon the latter.
SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly
disregarded the technical defense of separate corporate entity to arrive at
the true tax liability of Yutivo.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
(GR No. L-17618; 11 SCRA 714; Aug 31, 1964)
FACTS: Herein respondent entered into an agreement with Jackbilt where
the former was made the sole and exclusive distributor of concrete blocks
manufactured by Jackbilt and accordingly every order of a customer of
Norton was transmitted to Jackbilt which delivered the merchandise directly
to the customer. Payment of the goods, however, is made to Norton, which
in turn pays Jackbilt the amount charged the customer less a certain amount,
as its compensation or profit.
During the existence of the agreement, Norton acquired by purchase all the
outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
Revenue, assess respondent Norton for deficiency taxes making the basis of
sales tax the sales of Norton to the public, which is the higher price compare
to the sale of Jackbilt to Norton. The CTA decided in favor of Norton.
ISSE: WON the two corporations may be merged into a single corporation?
HELD: Yes. It has been settled that the ownership of all the stocks of
a corporation by another corporation does not necessarily breed
an identity of corporate interest between the two companies and
be considered as a sufficient ground for disregarding
distinct personalities. However, in the case at bar, we find sufficient
grounds to support the theory that the separate identities of the two
companies should be disregarded.
(a) Norton owned all the outstanding stocks of Jackbilt;
(b) Norton constituted Jackbilt’s directors;
(c) Norton financed the operations of Jackbilt;
(d) Norton treats Jackbilt’s employees as its own;
(e) Compensation given to board members of Jackbilt indicate that Jackbilt is
merely a department of Norton;
(f) The offices of Norton and Jackbilt are located in the same compound;
(g) Payments were effected by Norton of accounts for Jackbilt and vice versa;
(h) Payments were also made to Norton of accounts due or payable to
Jackbilt and vice versa.
The circumstances presented by the facts of the case, yields to the
conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego of
Norton and that the fiction of corporate entities, separate and distinct
from each other should be disregarded.
LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953)
– Tan Tong, one of herein petitioners, is engaged in the buying and selling
of guagua under the trade name La Campana Guagua Packing. Later on,
Tong and his family organized a family corporation known as La Campana
Coffee Factory Co, Inc. with its principal office located at the same place as
that of La Campana Guagua Packing.
Tan Tong’s employees later on formed a union (herein respondent) through
which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement
through mediation had given no result, the Department of Labor certified
the dispute to the Court of Industrial Relations (CIR). Petitioners filled a
motion
ISSUE: WON the corporate entity of La Campana Coffee Factory, Inc. may
be disregarded?
HELD: Yes. La Campana Guagua Packing and La Campana Coffee Factory,
Inc. are operating under on single management, that is, as one business
though with two trade names. True, the coffee factory is a corporation and,
by legal fiction, an entity existing separate and apart from the person
composing it, that Tan Tong and his family. But it is settled that this fiction
of law, which has been introduced as a matter of convenience
and to subserve the ends of justice cannot be invoked as to
further and end subversive of that purpose.
In the present case, Tan Tong appears to be the owner of the guagua
factory. And the factory, though an incorporated business, is in reality
owned exclusively by Tan Tong and his family. As found by the CIR, one
payroll, except after July 17, the day the case was certified to the CIR,
when the person who was discharging the office of cashier for both
branches of the business began preparing separate payrolls for the two.
And above all, it should not be overlooked that, as also found by the
industrial court, the laborers of the guagua factory and the coffee factory
were interchangeable. In view of all these, the attempt to make the two
factories appear as two separate businesses, when in reality they are but
one, is but a device to defeat the ends of the law and should not be
permitted to prevail.
EMILIO CANO ENTERPRISES, INC. VS. COURT OF
INDUSTRIAL RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965) – In
a complaint for unfair labor practice, the Court of Industrial Relations
rendered a decision in favor of Honorata Cruz, ordering Emilio and Rodolfo
Cano, officials of herein petitioner corporation, to reinstate Cruz. An order
of execution was issued directed against the properties of herein petitioner.
Hence, this petition.
ISSUE: WON execution may be had on the properties of the corporation?
HELD: Yes. We should not lose sight of the fact that Emilio Cano Enterprises,
Inc. is a closed family corporation where the incorporators and directors
belong to one single family. Here is an instance where the corporation and its
members are considered as one. And to hold such entity liable for
the acts of its members is not to ignore the legal fiction but
merely to give meaning to the principle that such fiction cannot be
invoked if its purpose is to use it as a shield to further an end
subversive of justice. And so it has been held that while a
corporation is a legal entity existing separate and apart from
the person composing it, that concept cannot be extended to a
point beyond it reason and policy, and when invoked in support
of an end subversive of this policy it should be disregarded by the
courts.
Emilio and Rodlfo Cano were indicted in the case, not in their personal
capacity, but as president and manager of the corporation. Having been sued
officialy, their connection with the case must be deemed to be impressed
with the representation of the corporation. In fact, the court’s order is for
them to reinstate Honorata Cruz to her former position in the corporation
and incidentally pay her the wages she had been deprived of during
her separation. Verily, the order against them is in effect against the
corporation. No benefit can be attained if this case were to be remanded
to the court a quo merely in response to a technical substitution of parties.
TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA 354;
May 13, 1981) – The late Pacifico Gatus was an employee of Utilities
Management Corporation (UMACOR), a sister company of herein Petitioner
TESCO. He was later on detailed with Petitioner Company and returned back
to UMACOR. But he contracted illness and later on died of ―liver
cirrhosis with malignant degeneration‖.
His wife, respondent Leonila Gatus filed a Notice and Claim for Compensation
with the Workmen’s Compensation Commission (WCC) alleging Pacifico to
be an employee of TESCO. An employer’s report was submitted to WCC
where UMACOR was indicated as the employer of the deceased and stated
that it would not contravert the claim and admitted that Pacifico contracted
illness ―in regular occupation‖.
operations to Libra Garments, which later changed to Dolphin Garments, the
public respondent cannot deny reinstatement to the petitioners simply
The sheriff levied on and attached the property of TESCO and scheduled the
sale of the same at public auction. Thus, the present petition for
certiorari with preliminary injunction.
ISSUE: WON the award may be rendered against TESCO?
HELD: Yes. We note that it is only in this Petition that petitioner denied, for
the first time, the employer-employee relationship. In fact, in the letters it
submitted to the Acting Referee and to the Commission, petitioner
represented and defended itself as the employer of the deceased. Petitioner
even admitted that TESCO and UMACOR are sister companies operating
under one single management and housed in the same building. Although
respect for the corporate personality as such, is the general
rule, there are exceptions. In appropriate cases, the veil of
corporate fiction may be pierced as when the same is made as
a shield to confuse the legitimate issues.
While indeed, jurisdiction cannot be conferred by acts or omission of the
parties. TESCO’s denial at this stage that it is the employer of the deceased is
obviously an afterthought, a devise to defeat the law and evade its
obligations. This denial also constitutes a change of theory on appeal which is
not allowed in this jurisdiction.
CLARAPOLS VS. COMMISSIONER OF INTERNAL REVENUE (July 31,
1975; 65 SCRA 613) – A decision rendered against herein petitioner was
rendered on a complaint filed by herein private respondents Allied Workers’
Association, Demetrio Garlitos and 10 respondent workers who petitioner
dismissed from Clarapols Steel and Nail Plant.
ISSUE: WON the veil of corporate fiction should be pierced?
HELD: Yes. It very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skilfully timed to avoid
financial liability that already attached to its predecessor, Clarapols Steel and
Nail Plant. (1) Both predecessor and successor were owned and controlled by
the petitioner Eduardo Clarapols; and (2) there was no break in the
succession and continuity in the same business. This avoiding-the-
liability scheme is very patent, considering that (3) 90% of the subscribed
shares of stock of the second corporation was owned by Clarapols himself,
and (4) all assets of the dissolved Clarapols Steel and Nail Plant were turned
over to the emerging Clarapols Steel Corporation.
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 its financial
obligations to its employees.
NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS. OPLE
(143 SCRA 124; July 22, 1986) – NAFLU requested for conciliation
before the Bureau of Labor Relations for certain money claims and
refusal of the company to conclude collective agreement and run-away
shop undertaken by management. In the course of the negotiation,
management unilaterally declared a temporary shutdown. But it was
discovered that the actual partial shutdown begun a month before and
that the machines of Lawman were transferred to a different location and
the name of the company was changed to Libra Garments, upon discovery of
this, the name was further changed to DOLPHIN garments. For failure of
the company to resume operations in January 1983 (as promised) a
complaint for unfair labor practice was filed.
ISSUE: WON the corporate fiction of LIBRA (now DOLPHIN) garments
should be pierced?
HELD: Yes. It is very obvious from the above findings that the second
corporation seeks the protective shield of a corporate fiction to achieve illegal
purpose. As enunciated in Clarapols vs. CIR, its view in the present case
should, therefore be pierced as it was deliberately and maliciously designed
to evade its financial obligations to it employees. It is an established principle
that when the veil of corporate fictions is made as a shield to perpetrate a
fraud or to confuse legitimate issues (here, the relation of employer-
employee), the same should be pierced.
After finding that Lawman Industrial Corporation had transferred business
because Lawman has ceased its operation.
As Libra Garments is but an alter-ego of the old employer, Lawman
Industrial, the former must bear the consequences of the latter’s unfair act
by reinstating petitioners to their former positions without loss of seniority
rights.
AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498 May
29, 1987) – A decision was rendered by the CIR and affirmed by this
Court against AC Ransom for unfair labor practice. Writ of execution were
issued successively against Ransom to no avail. The Union filed an ex-parte
motion for a Writ of Execution and Garnishment against the
officers/agents of AC Ransom personally and on their estates, as the case
may be, which the Labor Arbiter granted. On appeal, the NLRC reversed the
Labor Arbiter relieving the officers of personal liability.
ISSUE: WON the officers may be liable?
HELD: Yes. The NLRC, on appeal, could not have modified the CIR
decision as affirmed by this Court, by relieving AC Ransom’s officers and
agent of liability which were held to be jointly and severally liable to the 22
employees for unfair labor practice.
This finding does not ignore the legal fiction that a corporation has a
personality separate and distinct from its stockholders and members for, as
this Court had held ―where the incorporators belong to a single family,
the corporation and its members can be considered as one in order to
avoid it being used as an instrument to commit injustice,‖ or to further
an end subversive of justice. In the case of Clarapols vs. CIR involving
almost similar facts as in this case, it was also held that the shield of
corporate fiction should be pierced when it is deliberately and maliciously
designed to evade financial obligations to employees.
Aggravating AC Ransom’s clear evasion of pyment of it financial obligations is
the organization of a ―run-away‖ corporation, ROSARIO
Industrial Corpoartion, in 1969 at the time the unfair labor practice
case was proceeding before the CIR by the same person who were the
officers and stockholders of AC Ransom, engaged in the same line of
business, producing the same line of product, occupying the same
compound, using the same machineries, buildings, factories, bodega
and sales and accounts departments used by AC Ransom, and
which is still in existence. Both corporations were closed corporations
owned and managed by members of the same family. Its organization
proved to be a convenient instrument to avoid payment of backwages
and the reinstatement of 22 workers. This is another instance where the
fiction of separate and distinct corporate entities should be disregarded.
CONCEPT BUILDERS, INC. VS. NLRC (257 SCRA 149; May 29, 1996)
– Private respondents were employees of petitioner Concept Builders, Inc,
who were served termination letters stating that the project for which they
were hired was already completed and that their contracts have already
expired. Finding that the project was not actually completed yet, and that
petitioner employed a subcontractor whose employees performed the duties
of private respondents, the latter filed a complaint for illegal dismissal with
the Labor Arbiter who held that the dismissal was illegal.
A writ of execution was issued but was partially satisfied only. The sheriff
sought levy upon the properties in the head office of Concept Builders, inc.
but was not allowed to do so on the ground that it was occupied by Hydro
Pipes Philippines, Inc. and not concept builders. Unable to remove the
personal properties he found thereat, the Sheriff asked for a ―break-
open‖ order which was denied by the Labor Arbiter after a third party
claim was filed by Hydro, which was reversed by the NLRC on appeal.
ISSUE: WON the break-open order should be issued?
HELD: Yes. The conditions under which the juridical entity may be
disregarded vary according to the particular 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
stockholders) and M. McConnel, WP Cochrane and Ricardo Rodriguez
(previous stockholders) completely dominated and controlled the corporation
the doctrine of piercing the veil of corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations;
2. Identity of directors and officers;
3. The manner of keeping corporate books and records;
4. Methods of conducting the business.
The SEC en banc explained the ―instrumentality rule‖ which the courts
have applied in disregarding separate juridical personality of
corporations as follows:
―Where on corporation is so organized and controlled and its affairs
are conducted so that it is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the ―instrumentality‖
may be disregarded. The control necessary to invoke the rule is not
majority or even complete stock control but such domination of
finances, policies, and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own and is a business
conduit of its principal. It must be kept in mind that the control must be
shown to have been exercised at the time the acts complained of took
place. Moreover, the control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is made‖
The test in determining the applicability of piercing the veil of
corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only in finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive
legal duty or dishonest and unjust act in contravention of plaintiff’s
legal rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust los complained of.
The absence of one of the elements prevents piercing the corporate veil. In
applying the ―instrumentality‖ or ―alter-ego‖ doctrine, the courts
are concerned with reality and not form, with how the corporation operated
and the individual defendant’s relationship to that operation. Thus, the
question of whether a corporation is mere alter-ego, a mere
sheet of paper corporation, a sham or a subterfuge is purely one of fact.
In this case, while petitioner claimed that it ceased on operations on April 29,
1986, it filed an information sheet with the SEC on May 15, 1987 stating that
its office address is at 355 Maysan Road, Valenzuela Metro Manila. On the
other hand, third-party claimant Hydro, on the same day, filed an information
sheet with the same address, both information sheets filed by the same
Virgilio O. Casino. Both companies have the same president, the same BOD,
the same corporate officers and substantially the same subscribers.
Clearly, petitioner ceased its business operations in order to evade the
payment to private respondents of back wages and to bar their reinstatement
to their former position. Hydro is obviously a business conduit of petitioner
corporation and its emergence was skilfully orchestrated to avoid the
financial liability attached to petitioner orporaiton.
MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) – Petitioners,
original incorporators of Park Rite Co., Inc. was ordered to pay the
unsatisfied balance of a judgment rendered in favor of lot owners whose
property they used in the operations of their parking business without the
owners’ consent.
ISSUE: WON the incorporators may be held liable for obligations of the
corporation?
HELD: Yes. The Court has already answered the question in the affirmative
wherever the circumstances have shown that the corporate entity is being
used as an alter-ego or business conduit for the sole benefit of the
stockholders, or else to defeat public convenience, justify wrong, protect
fraud, or defend crime.
The evidence shows that Cirilio Paredes and Ursula Tolentino (present
and that the functions of the corporation were solely for their benefit, as
shown that the other shareholders were merely qualifying shares. This is
strengthened by the fact that the office of Cirilio Paredes and that of Park
Rite Co., Inc. were located in the same building, in the same floor, and in the
same room. This is further shown by the fact that the funds of the
corporation were kept by Cirilio Paredes in his own name. The corporation
itself had no visible assets, as correctly found by the trial court, except
perhaps the toll house, the wire fence around the lot and the signs thereon It
was for this reason that the judgment against it could not be fully satisfied.
While the mere ownership of all or nearly all of the capital stock of
a corporation does not necessarily mean that it is a mere
business conduit of the stockholder, that conclusion is amply
unjustified where it is shown, as in this case before us, that the
operations of the corporation were so merged with the
stockholders as to be practically indistinguishable from them. To
hold the latter liable for the corporation’s obligations is not to ignore the
corporation’s separate entity, but merely to apply the established principle
that such entity cannot be invoked or used for purposes that could not
have been intended by the law that created the separate personality.
TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE
OF BRANCH XVIII of the Court of First Instance of Manila,
GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG
COMPANY, respondents
(GR No. L-41337; 163 SCRA 205; June 30, 1988)
FACTS: For failure of private respondent Graphic Publishing Inc. to pay
paper products purchased from petitioner (doing business under the name
and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of
Manila. A writ of Execution was issued levying a printing machine which
private respondent Philippine American Drug Company claimed as its own.
PADCO filed a third party claim and asked the court to nullify the auction sale
already conducted, which herein respondent judge granted.
ISSUE: WON the respondent judge should be upheld?
HELD: No. It is true that a corporation, upon coming into being, is invested
by law with a personality separate and distinct from that of the persons
composing it as well as from any other legal entity to which it may be
related. As a matter of fact, the doctrine that a corporation is a legal entity
distinct and separate from the members and stockholders who compose it is
recognized and respected in all cases which are within reason and the law.
However, this separate and distinct personality is merely a
fiction created by law for convenience and to promote justice.
Accordingly, this separate personality of the corporation may be
disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for fraud or illegality, or to
work an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors. Corporations
are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission
of injustice and inequity. Likewise, this is true when the
corporation is merely an adjunct, business conduit or alter-ego of
another corporation. In such case, the fiction of separate and
distinct corporate entities should be disregarded.
In the instant case, petitioner’s evidence established that PADCO never
engaged in the printing business; that the BOD and the officers of PADCO
and Graphic are the same; and that PADCO holds 50% share of stock of
Graphic. The printing machine in question was in the premises of Graphic,
long before PADCO even acquired its alleged title from Capitol Publishing.
Considering the above, respondent judge should have pierced PADCO’s veil of
corporate identity.
CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the
common predecessor-in-interest of the parties. He and other American
citizens organized the Tiaong Milling and Plantation Company and in the
course of its corporate existence all other incorporators were bought out by
Cease and his children. The corporation’s charter expired but there were no
records as to its liquidation. Upon Cease’s death, Ernesto, Teresita, Cecilia (3
of the 5 children) and Bonifacia Terante re-incorporated under FL Cease
Plantation Company, to the objection of Benjamin and Florence who wanted
actual division of Forrest Cease’s shares. The latter two filed a civil case
asking to declare the corporation identical to FL Cease and that its
properties be divided among Fl Cease’s children as his intestate heirs which
was granted by the trial court.
ISSUE: WON the assets of the corporation are also the properties of Forrest
L. Cease?
HELD: Yes. In sustaining respondent’s theory of ―merger of Forrest
Cease and the Tiaong Milling as one personality‖, or that ―the company is
only the business conduit and alter-ego of the deceased FL Cease and the
registered properties of Tiaong Milling are actually properties of FL Cease
and sould be divided equally among his children‖, the trial court did aptly
apply the familiar exception to the general rule by disregarding the legal
fiction of distinct and separate corporate personality and regarding the
corporation and the individual members one and the same. In shredding
the fictitious corporate veil, the trial judge narrated the undisputed factual
premise:
―While the records show that originally, the incorporators were aliens,
friends or third-parties in relation of one to another, in the course of its
existence, it developed into a close family corporation. The BOD and
stockholders belong to one family the head of which FL Cease always
retained the majority and hence, the control and management of its
affairs. In fact, during the reconstruction of its records before the SEC,
only 9 nominal shares out of 300 appear in the name of his 3 eldest children
then and another person close to them (Ternate). It is likewise
noteworthy to observe that as his children increase or perhaps become
of age, he continued distributing his shares among them adding
Florence, Teresa and Marion until at the time of his death, only 190
were left to his name. Definitely, only the members of his family benefited
from the corporation.
The accounts of the corporation and therefore its operation, as well as that
of the family appears to be indistinguishable and apparently joined together.
As admitted by the defendants, the corporation ―never‖ had any account
with any banking institution or if any account was carried in a bank on its
behalf, it was in the name of FL Cease. In brief, the operation of the
Corporation is merged with those of the majority stockholders, the latter
using the former as his instrumentality and for the exclusive benefit of all
his family. From the foregoing indication, therefore, there is truth in
plaintiffs’ allegation that the corporation is only a business conduit of his
father and an extension of his personality, they are once and the same
thing. Thus, the assets of the corporation are also the estate of FL
Cease, the father of the parties herein who are al legitimate children of full
blood‖
Were we to sustain petitioners, the legal fiction of separate corporate
personality shall have been used to delay and ultimately deprive and defraud
the respondents of their successional right to the estate of their deceased
father.
D. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
1. Absent any of the following circumstances, the courts will not be
justified in disregarding the corporate entity;
a. The corporation is used or being used to defeat public
convenience;
b. Justify wrong;
c. Protect fraud;
d. Defend crime;
e. Confuse legitimate issues;
f. Circumvent the law;
g. Perpetuate deception; or
h. An alter-ego, adjunct or business conduit for the sole benefit of a
stockholder or a group of stockholders or another corporation.
2. The wrong doing must be clearly and convincingly established.
 It cannot be justified by speculation and can never be presumed.
3. The petitioner must seek to impose a claim against the stockholders or
officers directly liable, otherwise piercing the veil of corporate fiction
would not be available nor justified.
CRUZ VS. DALISAY (supra) – It is well-settled doctrine, both in law and in
equity that as a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or members.
The mere fact that one is president of a corporation does not
render the property he owns or possesses the property of the
corporation, since the president, as individual, and the corporation
are separate entities
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA 405;
April 18, 1989) – Petitioner Feliciano Coprada, as president of Akron,
purchased 13 trucks from private respondent (EB Marcha Transport Co., Inc.)
for and in consideration of P525,000 as evidenced by a deed of absolute sale.
In a side agreement, the parties agreed on a down payment of P50,000 and
the balance to be paid within 60 days. They further agreed that until the
balance is paid, the down payment shall accrue as rentals for the 13 trucks;
and in case of failure to pay the balance shall constitute a chattel mortgage
lien; and the parties may allow 30 day extension; and private respondent
may ask for the revocation of the contract and re-conveyance of the said
trucks. The obligation is further secured by a promissory note executed by
Coprada, where it is stated that the balance shall be paid from the proceeds
of a loan from DBP which was never applied for. A complaint was later on
filed by private respondent for the recovery of the P525, 000 or the return of
the 13 trucks against Akron and its officers and directors including herein
petitioner which was granted by the CFI of Rizal. Petitioner denied any
participation the transaction and alleging that Akron has distinct
corporate personality. He was, however, declared in default for failure to
attend pre-trial.
ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable?
HELD: No. The facts of the case show that there is no cogent basis to pierce
the corporate veil of Akron and hold petitioner personally liable for
its obligation to private respondent. While it is true that he is a member of
the board at the time the resolution to purchase the trucks were adopted, it
does not appear that said resolution was intended to defraud anyone.
It was Coprada who negotiated with respondent and the one who
signed the promissory note. The word ―We‖ in the said promissory note
must refer to the corporation and COprada and not of its stockholders
and directors. Petitioner did not sign such note so he cannot be personally
bound thereby. Thus, if there was any fraud or misrepresentation that was
foisted on private respondent in that there was forthcoming loan from the
DBP when in fact there as none, it is Coprada who should account for the
same and not the petitioner.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to
a complaint for money claims which was ultimately decided by the
NLRC against PHILSA Construction and Trading Co. (recruiter) and
Arieb Enterprises (employer), a writ of execution was issed by the POEA
which was returned unsatisfied as PHILSA was no longer operating and
was financially incapable of satisfying the judgment.
At the motion of private respondent, an alias writ was issued against the
properties of Mr. Francisco del Rosario and if insufficient, against the cash
and/or surety bond of the Bonding Company concerned.
Petitioner appealed to the NLRC which was denied together with his MR.
ISSUE: WON the writ of execution must be upheld?
HELD: No. Under the law, a corporation is bestowed juridical personality,
separate and distinct from its stockholders. But when the juridical personality
of the corporation is used to defeat public convenience, Justify wrong,
protect fraud or defend crime, the corporation shall be considered as
a mere association of persons, and its responsible officers
and/or stockholders shall be held individually liable. For the same
reasons, a corporation shall be liable for he obligation of a stockholder or a
corporation
and its successor-in-interest shall be considered as one and the liability of the
former shall attach to the latter.
But for the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established.
It cannot be presumed. In this regard, we find the NLRC decision wanting.
1. PHILSA allowed its license to expire so as to evade payment of private
respondent’s claim – not supported by facts. The license expired in 1985,
it was delisted in 1986, there was no judgment yet in favour of PR. An
intent to evade payment of his claims cannot therefore be
implied from the expiration of PHILSA‘s license and its delisting.
2. Organization of PHILSA International Placemen and Services Corp. and its
registration with POEA implies fraud – it was organized and registered in
1981, several years before private respondent filed his complaint with the
POEA in 1985. The creation of the second corporation could
not therefore have been in anticipation of PR‘s money claims and
the consequent adverse judgment against PHILSA.
3. Substantial identity of the incorporators of the two corporations – does
not necessarily imply fraud.
*Distinguished from other cases*
LA CAMPANA – the two companies were substantially owned by the same
person. They had one office, one management, and a single payroll for
both businesses. The laborers were also interchangeable.
CLARAPOLS – 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 old was transferred to the new
corporation.
AC RANSOM – The distinguishing mark of fraud were clearly apparent in
AC Ransom, when such corporation ceased operation after the decision of
the CIR and new one replacing it which was owned by the same family,
engaging in the same business and operating in the same compound. In
the present case, not only has there been failure to establish
fraud, but it has also not been shown that petitioner is the
corporation officer responsible for PR‘s predicament. It must be
emphasized that the claims were actually directed against the employer,
PHILSA became liable only because of its undertaking to be jointly and
severally bound with the foreign employer, as required by POEA rules.
INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205
SCRA 697; Feb. 3, 1992) - On April 1987, petitioner and Indophil Textile
Mills, Inc. executed a CBA effective from April 1, 1987 to March 31,
1990. On
November 3, 1987, Indophil ACRYLIC MANUFACTURING CORP was
formed and registered with the SEC and in 1988 became operation and hired
workers according to its own criteria and standards.
In 1989, the workers of ACRYLIC unionized and a CBA was executed. In
1990, petitioner union claimed that the plant facilities build and set up by
ACRYLIC should be considered an extension or expansion of the facilities of
TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining
unit. Public respondent voluntary arbitrator Calica declared that the
CBA of petitioner DOES NOT extend to employees of ACRYLIC.
ISSUE: WON the veil of corporate entity should be pierced?
HELD: No. 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 of a corporation will be considered as the
corporation, that is, liability will attach directly to the officers and
stockholders.
In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
devise to evade the application of the CBA between petitioner and
TEXTILE MILL. While we do not discount the possibility of the
similarities of the businesses of the two corporations, neither are we
inclined to apply the doctrine invoked by petitioner.
1. The fact that the business of Indophil Textile Mills and Indphil Acrylic is so organized and
Manufacturing are related;
2. That some of the employees of PR are the same persons manning and
providing for auxilliary services to the units of ACRILYC, and that;
3. The physical plants, offices and facilities are situated in the same
compound.

It is our considered opinion that these facts are not sufficient

to justify piercing the corporate veil of ACRILYC.

UMALI VS. CA – ―the legal corporate entity is disregarded only if its

sought to hold the officers and stockholders directly liable for a corporate
debt or obligation‖. In the instant case, petitioner does not seek to
impose a claim against the members of ACRILYC.

PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31,
2001) - PNB International Finance Ltd. (IFL), a wholly-owned subsidiary
of PNB, organized and doing business in HK, extended a letter of credit in
favor of respondent RITRATTO in the amount of US$300K , later increased
to 1.14M, to 1.29M, to 1.425M and decreased to 1,421,316.18, secured
by a real estate mortgage constituted in 4 parcels of land in Makati City.

As of April 1998, the outstanding obligation of respondents stood at

US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its
attorney-in-fact PNB, notified respondents of the foreclosure of all the real
estate mortgages and that the properties would be sold at a public auction.

Respondents filed a complaint for injunction for which a TRO was issued
and later on a writ of preliminary injunction, which petitioner assailed with
the CA through petition for certiorari.

The CA dismissed the petition.

ISSUE: WON the corporate entity of IFL may be disregarded?

HELD: No. Respondents, therefore do not have any cause of action against
it. The trial court erred in disregarding the corporate entity by saying that IFL
is a wholly owned subsidiary of PNB and that it is a mere alter-ego or
business conduit of the latter.

The mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions,
a subsidiary‘s separate existence may be respected, and the
liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective businesses.

KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence
of the parent and subsidiary on the ground that the latter was formed
merely for the purpose of evading the payment of higher taxes. In the case
at bar, respondents failed to show any cogent reason why
the separate entities of PNB and IFL should be disregarded.

While there exists no definite test of general application in determining when

a subsidiary may be treated as a mere instrumentality of the parent
corporation some factors have been identified that will justify the application
of the treatment of the doctrine of piercing the corporate veil:

1. As a general rule, the stock ownership alone by one corporation ofhte

stock of anoher does not thereby render the dominant corporation liable
for the torts of the subsidiary unless the separate corporate
existence of the subsidiary is a mere sham, or unless the
control of the subsidiary is such that it is by an instrumentality
or adjunct of the dominant corporation (Garrett vs. Southern Railway
Co.; Tennessee SC);

2. The doctrine of piercing the corporate veil is an equitable doctrine

developed to address situations where the separate corporate personality of
a corporation is abused or used for wrongful purpose. The doctrine
applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or when it is
used as a shield to confuse legitimate issues or where the corporation
controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another
corporation;
3. The test in determining the doctrine of piercing the veil of corporation
fiction:
a. Control, not mere majority of complete control, but complete
domination, not only of finances, but of policy and business
practices in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind,
will or existence of its own;
b. Such control must have been used by the defendant to
commit fraud, or wrong to perpetuate the violation of a statutory
or other positive legal duty, or dishonest and unjust act in
contravention to plaintiff‘s legal rights; and
c. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any one of these elements prevents ―piercing
the corporate veil‖. In applying the ―instrumentality‖ or ―alter-ego‖
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant‘s
relationship to the operation. (Concept Builders, Inc vs. NLRC)
Aside from the fact that IFL is a wholly owned subsidiary, there is no showing
of the indicative factors that the it is a mere instrumentality of PNB. Neither is
there a demonstration that any of the evils sought to be prevented
by the doctrine of piercing the corporate veil based on the alter-
ego or instrumentality doctrine finds application in the case at bar.
The injunction suit was directed against PNB, as agent of IFL and not as
parent. A suit against an agent, cannot, without compelling reasons be
considered a suit against the principal, for he is not the real party in interest
HELD: It cannot be said that TDI and Tanduay are one and the same, as
seems to be the impression of respondents when they impleaded petitioners
as party-respondents in their complaint.
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 SolGen, Twin Ace is part of the
Allied Banking 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 Rhum has built over the years. Twin Ace or Tanduay
Distillers and TDI are distinct and separate corporations. There
is nothing to suggest that the owners of TDI, have any common
relationship as to identify it with Allied Banking Group which runs
Tanduay Distillery.
The genuine nature of the sale to Twin Ace is evidenced by the fact that
Twin Ace was only a subsequent interested buyer. PRs 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 complaint 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 was never made a party to the case.
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its
assets, equiment and machinery. Thus, Tanduay Distillers or Twin-Ace
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.
The fiction of separate and distinct corporate entites cannot, in the instant
provided under the Rules of Court.
YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN,
ROQUE ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private
respondents were employees of Tanduay Distillery, Inc. (TDI). On March
29, 1988, 22 employees of TDI, including PRs, received a
memorandum from TDI, terminating their services for reasons of
retrenchment, because First Pacific Metro Corporation is buying TDI’s
assets, which purchase did not push through.
On June 1, 1988, after employees had ceased as such, Twin Ace Holdings,
Inc. took over the business and assumed the name Tanduay Distillers
(Tanduay).
Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs
holding the retrenchment illegal, which was affirmed by the NLRC. Petitioners
filed an opposition against the motion for execution (which was directed
towards them and TDI) contending that Tanduay is a separate entity distinct
from TDI, and respondents James Yu and Wilson Young, which was
dismissed by the NLRC.
ISSUE1: WON the order of execution is void?
HELD: Yes. The decision dated May 24, 1989, was already final and
executory and cannot be amended or corrected except for clerical errors or
mistakes. An examination of the said decision does not in any manner
obligate Tanduay or even petitioners Yu and Young to reinstate PRs. Only
TDI was held liable upto the time of change of ownership. The order of
execution in effect amended the decision. It is beyond the power and
competence of Labor Arbiter Cueto to amend a final decision. The writ of
execution must not go beyond the scope of judgment.
ISSUE2: WON NLRC committed grave abuse of discretion in holding
petitioner Yu and Young liable?
case, be disregarded and brushed aside, there being not the
lease indication that the second corporation was a dummy or
servces as a client of the first corporate entity.
AMENDMENT OF THE CORPORATE CHARTER
Sec. 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and capacity:
xxx
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
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
The steps to be followed for an effective amendment of the articles of
incorporation would thus be:
1. Resolution by at least a majority of the board of directors or trustees;
2. Vote OR WRITTEN ASSENT of the stockholders representing at
least
2/3 of the outstanding capital stocks or members in case of a non-stock
corporation. (Note: non-voting shares are considered in determining the
voting and quorum requirement in case of amendments of the articles of
incorporation as provided in Sec. 6);
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amended articles together shall contain all the
provision 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;
b. A copy thereof, duly certified under oath by the corporate secretary
and a majority of the directors or trustees stating the fact that such
amendments have been approved by the required vote of the
stockholders or members;
c. Favorable recommendation of the appropriate government
agency concerned in the case where the corporation is
under its supervision such as banking and insurance companies,
etc.
When to take effect? (1) Upon approval by the SEC; or (2) From the date of
filing if not acted upon within 6 months for a cause not attributed to the
corporation (does not apply to increasing or decreasing the capital stock or
shortening the corporate term, which shall require the approval of the SEC
[Sec. 38 and 120])
SPECIAL AMENDMENTS
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
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.
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.
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
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.
SEC. 37&38 vs. SEC. 16:
1. In the former a meeting of the stockholders would be REQUIRED, unlike in
Sec. 16, where the ―written assent‖ would suffice.
2. Former requires the approval of the SEC.
NOTE: When the amendment of the corporate charter involves
shortening the life of the corporation with the effect of dissolution, Sec.
120 would apply, requiring approval by the SEC.
GROUNDS FOR DISAPPROVAL 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;
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
the right to change his name under certain conditions, there is
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.
PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli):
1. Names of the incorporations and the incorporating directors or trustees;
2. Name of the treasurer originally or first elected by the subscribers or
members to act as such;
3. Number of shares and the amount originally subscribed and paid out of
the original authorized capital stock of the corporation; and
4. Date and place of execution of the articles of incorporation and the
signatories and acknowledgment thereof.
CHANGE IN CORPORATE NAME
Change in corporate name is included in the general power to amend and
maybe effected with compliance to Sec. 16.
Any change in the corporate identity or name does not affect the rights and
obligations of the corporation. A mere change in the name of
the corporation does not affect the identity of a corporation nor in
any manner affect the rights, privileges and obligations
previously acquired or incurred by it.
PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant
vs.
MARIA CARMEN HARTIGAN, CGH and O. ENGKEE, defendants-
appellees (GR No. L-26370; 74 SCRA 252; July 31, 1970)
FACTS: Plaintiff changed its name from ―The Yek Tong Lin Fire and
Marine Insurance Co., Ltd‖ (Yek Tong).
The complaint alleges that under its old name, PFIC signed as co-maker
together with Hartigan, a promissory note for P5,000 in favor of China
Banking Corporation (Chinabank). Plaintiff agreed to act as such upon
application of the defendant, who together with Antonio Chua and Chang
Ka Fu, signed an indemnity agreement in favor of the plaintiff.
Defendants admitted the execution of the indemnity agreement but argued
that it was made in favor of Yek Tong and not PFIC. They claim that there
was no privity of contract between plaintiff and defendants and consequently,
the plaintiff has no cause of action against them considering that the plaintiff
does not allege that PFIC and Yek Tong are one and the same or that the
plaintiff has acquired the rights of the latter.
CFI of Manila dismissed the complaint.
ISSUE: WON the trial court correctly dismissed the case?
HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No. 1459)
explicitly permits the articles of incorporation to be amended. The law does
not only authorize corporations to amend their charter; it also lays down the
procedure for such amendment; and, what is more relevant to the present
discussion, it contains provisos restricting the power to amend when it comes
to the term of their existence and the increase or decrease of the capital
stock. There is no prohibition therein against the change of name. The
inference is clear that such a change is allowed, for if the legislature had
intended to enjoin corporations from changing names, it would have
expressly stated so in this section or in any other provision of the law.
No doubt, the name of the corporation is peculiarly important
as necessary to the very existence of a corporation. The general
rule as to corporation is that each corporation shall have a name
by which it is to sue and be sued and do all legal acts. The
name of the corporation in this respect designates the corporation in the
same manner as the name of an individual designates the person. Since
an individual has
no compelling reason why a corporation may not enjoy the same
right. The sentimental considerations which individuals attach to their
names are not present in corporations and partnerships. Of course, as in
the case of an individual, such change may not be made
exclusively by the corporation‘s own act. It has to follow the
procedure prescribed by law for the purpose, and this is what is
important and indispensably prescribed – strict adherence to such
procedure.
RED LINE TRANSPORT VS. RURAL TRANSIT CO. – what was held as
contrary to public policy is the USE by one corporation of the name of
another corporation as its trade name. We are certain no one will disagree
that such an act can only result in confusion and open the door to frauds and
evasions and difficulties of administration and supervision. Surely, the Red
Line case was not one of change of name.
The change of name of a corporation DOES NOT result in its dissolution.
There is unanimity in authorities: ―An authorized change in the name of
a corporation has no more effect upon its identity as a corporation
than change of name of natural person has upon his identity. It
does not affect the rights of the corporation or lessen or
add to its obligations. After a corporation has effected a change
in its name it should sue and be sued in its new name‖ (13 Am. Jur.
276-277)
A mere change in the name of a corporation, either by the legislature or by
the corporators or stockholders under legislative authority, does not,
generally speaking, affect the identity of the corporation, nor in
any way affect the rights, privileges, or obligations previously
acquired or incurred by it. Indeed, it has been said that a change of
name by a corporation has no more effect upon the identity of the
corporation than a change of name by a natural person has upon the
identity of such person. The corporation, upon such change in its
name, is in no sense a new corporation, nor the successor of the
original one, but remains and continues to be the original
corporation. It is the same corporation with a different name, and
its character is in no respect changed. ... (6 Fletcher, Cyclopedia of
the Law of Private Corporations, 224-225, citing cases).
REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31, 1992) –
A change in the corporate name does not make a new corporation,
and whether effected by special act or under a general law, has no effect
on the identity of the corporation, or on its property rights or
liabilities. The corporation continues, as before, responsible in its new name
for all debts or other liabilities which it had previously contracted or incurred.
AMENDMENT OF THE CORPORATION TERM
For purposes of amending the corporate term, the following procedure is to
be observed (Sec. 37):
1. Approval by a majority vote of the board of directors or trustees;
2. Written notice of the proposed action and the time and place of
meeting shall be served to each stockholder or member either by mail or
by personal service;
3. Ratification by the stockholders or members representing at least
2/3;
4. In case of extension of corporate term, it should be for periods not
exceeding 50 years in any single instance, and provided that no
extension can be made earlier than 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 SEC.
5. In cases of extension of corporate term, a dissenting stockholder
may exercise appraisal rights under the conditions prescribes by
Sec. 81 and 82 of the Code.
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC.,
petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent
(G.R. No. L-23606 July 29, 1968)
least one (1) share of the capital stock of the corporation of which he is a
FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of 50 years
which expired on Jan. 15, 1962.
On July 15, 1963, during the period within which it is to liquidate, the board
of directors resolved to amend its articles of incorporation extending its
corporate life for another 50 years which was approved by the stockholders
but denied by the SEC.
ISSUE: WON the extension of corporate term should be allowed?
HELD: No. The privilege of extension is purely statutory. All the
statutory conditions precedent must be complied with in order
that the extension may be effectuated. And, generally, these
conditions must be complied with, and the steps necessary to effectuate
an extension must be taken, during the life of the corporation, and
before the expiration of the term of existence as originally fixed by its
charter or the general law, since, as a rule, the corporation is ipso facto
dissolved as soon as the time expires. So where the extension is by
amendment of the articles of incorporation, the amendment must be
adopted before that time.
The logic of this position is well-expressed in a four square case decided by
the CA of Kentucky:
―But section 561 (section 2147) provides that, when any
corporation expires by the terms of its articles of incorporation, it may
be thereafter continued to act for the purpose of closing up its business,
but for no other purpose. The corporate life of the Home Building
Association expired on May 3, 1905. After that date, by the mandate
of the statute, it could continue to act for the purpose of closing up its
business, but for no other purpose. The proposed amendment was not
made until January 16, 1908, or nearly three years after the corporation
expired by the terms of the articles of incorporation. When the
corporate life of the corporation was ended, there was nothing to
extend. Here it was proposed nearly three years after the corporate life
of the association had expired to revivify the dead body, and to make
that relate back some two years and eight months. In other words,
the association for two years and eight months had only existed for the
purpose of winding up its business, and, after this length of time, it was
proposed to revivify it and make it a live corporation for the two years and
eight months daring which it had not been such.
The law gives a certain length of time for the filing of records in this court,
and provides that the time may be extended by the court, but under this
provision it has uniformly been held that when the time was expired, there
is nothing to extend, and that the appeal must be dismissed... So, when
the articles of a corporation have expired, it is too late to adopt an
amendment extending the life of a corporation; for, the corporation
having expired, this is in effect to create a new corporation ..."
OTHER MATTERS SUBJECT TO AMENDMENT:
1. Purpose clause – by changing, altering or including other purpose or
purposes;
2. Principal Office;
3. Number of Directors;
4. Shares of stock and their classification;
5. Restrictions as well as preference;
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
A. POWERS OF THE BOARD
Sec. 23. The board of directors or trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations formed under
this Code shall be exercised, all business conducted and all property
of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who shall hold office
for one (1) year until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on
the books of the corporation. Any director who ceases to be the owner of at
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.
The Board of Directors (or trustees or other designation allowed under
Sec. 138) is the supreme authority in matter of management of the
regular and ordinary business affairs of the corporation.
However, this authority does not extend to the fundamental changes in the
corporate charter such as amendments or substantial changes thereof, which
belong to the stockholders as a whole. The equitable principle therefore
is that the stockholders may have all the profits but shall turn over
the management of the enterprise to the Board of Directors.
CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS
Unless the law so provides, corporate powers may be delegated
to individual directors or other officers or agents. Whether or not the
acts of the individual director, officer or agent would bind the corporation
depend on the nature of the agency created or the poers conferred upon
such person by the statute, the corporate charter, the by-laws, the corporate
action of the board or stockholders, or whether it is necessary or incidental to
one’s office.
The general rule is that a corporation is bound by the acts of
its corporate officers who act within the scope of the 5
classification of powers of corporate agents, which are:
1. Those expressly conferred or those granted by the articles of
incorporation, corporate by-laws or by the official act of the board of
directors;
2. Those that are incidental or those acts as are naturally and ordinarily
done which are reasonable and necessary to carry out the corporate
purpose or purposes;
3. Those that are inherent or acts that go with the office;
4. Those that are apparent or those acts which although not actually
granted, the principal knowingly allows or permits it to be done; and
5. Powers arising out of customs, usage or emergency.
J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-
appellants
(G.R. No. 11897 September 24, 1918)
FACTS: The Board of Directors were apprised of the fact the plaintiff JF
Ramirez, who is based in Paris and represented by his son Jose Ramirez, had
control of agencies for two different marks of films, ―Éclair Films‖ and
―Milano Films‖.
Negotiations began between Jose Ramirez and the board of directors of
Orientalist Co. where Ramon Fernandez, one of the members of the board
and TOC’s treasurer was chiefly active.
Near the end of July 1913, Jose Ramirez offered to supply from Paris the
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an
informal conference with the BOD except one, and with approval of those
whom he had communicated, accepted the offer through letters signed by
Fernandez in his capacity as treasurer.
Upon arrival of the said films, it turned out that TOC was without funds, so
the first drafts, taken in the name of TOC were received and paid by its
president, Hernandez, through his own funds and such films were treated by
him as his own property; and in fact, they never came into the possession of
TOC and were rented by Hernandez to TOC as they are exhibited in the
Oriental Theater.
Other films arrived together with their drafts, taken in the name of TOC
through its president, which were not paid and gave rise to the present
action. TOC was declared the principal debtor and Ramon Fernandez, the
guarantor.
ISSUE: WON the corporation could be held liable for the contract?
HELD: Yes. 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.
In dealing with corporations, the public at large is bound to
rely to a large extent upon outward appearances. If a man is 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 person
competent to bind the corporation, or had acquiesced in a contract
and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may ever
have been granted.
The failure of the defendant corporation to make an issue in its answer with
regard to the authority of Ramon Fernandez to bind it, and particularly to
deny specifically under oath the genuineness and due execution of the
contracts sued upon have the effect of eliminating the question of his
authority from the case.
It is declared under Sec. 28 (now 23) that corporate powers shall
be exericsed, and all corporate business conducted by the
board of directors, and this principle is recognized in the by-
laws of the corporation in question which contain a provision
declaring that the power to make contracts shall be vested in the
board of directors.
It is true that it is also true in the by-laws, that the president shall have the
power and it shall be his duty, to sigh contract; but this has reference
rahter to the formality of reducing to proper form the contract
which are authorized by the board and is not intended to confer an
independent power to make contract binding on the corporation.
The fact that the power to make corporate contracts is thus vested in the
board of directors does not signify that a formal vote of the board must
always be taken before contractual liability can be fixed upon a corporation;
for a board can create liability, like an individual, by other
means than by a formal expression of its will.
Participation of the stockholders. The letter accepting the offer was
dispatched in a meeting of the board called by Ramon Fernandez, where 4
members, including the president was present. The minutes add that terms
of this offer were approved; but at the suggestion of Fernandez it was
decided to call a special meeting of the stockholders to consider the matter
and definite action was postponed. From the meeting of the stockholders, it
can be inferred that this body was then cognizant that the offer had already
been accepted. It is not, however, necessary to find the judgment of the
stockholder proceedings, even if the assumption is that they did not approve
of the contract.
Both upon the principle and authority it is clear that the action of
the stockholders, whatever its character, must be ignored. The
theory of a corporation is that the stockholders may have all the profits
but shall turn over the complete management of the enterprise
to their representatives and agents, called directors. Accordingly,
there is little for the stockholders to do beyond electing directors, making
by-laws, and exercising certain other special powers defined by law. In
conformity with this idea, it is settled that contract between a
corporation and third person must be made by the director and
not by the stockholders. The corporation, in such matters, is represented
by the former and not by the latter. It results that where a meeting of the
stockholders is called for the purpose of passing on the propriety of
making a corporate contract, its resolutions are at most advisory and not
in any wise binding on the board.
BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) –
Petitioners, directors of respondent upto March 1929, sought to recover 1%
(to each plaintiff) of the profits of the copany for the year 1929, under and in
accordance with an amendment to the by-laws which was made at the
general meeting of the stockholders on Feb. 1929, to which the lower court
rendered in their favor.

ISSUE: WON the amendment has a binding effect as to grant plaintiffs’
claim?
HELD: No. Sec. 20 of the Corporation Law limits the authority of a
corporation to adopt by-laws which are not consistent with the provisions of
the law. The appellees contend that the articled in question is merely a
provision of the compensation of directors which is not only consistent with
but expressly authorized by Sec. 21 of the Corporation Law.
We cannot agree with this contention. The authority conferred upon
corporations in that section refers only to providing compensation for the
future services of directors, officers, and employees thereof after the
adoption of the by-law or other provisions in relation thereto, and cannot in
any sense be held to authorize the giving, as in this case, of continuous
compensation to particular directors after their employment has terminated
for part services rendered gratuitously by them to the corporation. To permit
the transaction involved in this case would be to create an obligation
unknown to law, and to countenance a misapplication of the funds of the
defendant building and loan association to the prejudice of the substantial
rights of its shareholders.
Irrespective of the above, the conclusion is the same. The article which the
appellees rely upon is merely a by-law provision adopted by the stockholders
of the defendant corporation, without any action having been takin in
relation thereto by its board of directors. The law is settled that contracts
between a corporation and third person must be made by or
under the authority of its board of directors and not by its
stockholders. Hence, the action of the stockholders in such matters is only
advisory and not in any wise binding on the corporation. There could not
be a contract without mutual consent, and it appears that the
plaintiffs did not consent to the provisions of the by-law in
question, but, on the contrary, they objected to and voted
against it in the stockholders‘ meeting in which it was adopted.
QUALIFICATIONS AND DISQUALIFICATIONS (see discussion under
DIRECTORS/TRUSTEES in chapter 4)
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
(GR No. 93695; 205 SCRA 752; Feb. 4, 1992)
FACTS: A complaint for a sum of money was filed by International
Corporate Bank, Inc. against the private respondents who, in turn, filed a
third-party complaint against Alfa Integrated Textile Mills, Inc.
The trial court ordered the issuance of alias summons upon Alfa through
DBP, who is said to be the transferee of Alfa’s management by virtue of a
voting trust agreement.
DBP declined to receive the summons saying it is not authorized, Alfa having
a personality separate and distinct. The trial court, in turn ordered private
respondents to take the appropriate steps to serve the summons to Alfa
which they made through the officers and later on, was later on declared to
be proper service of summons.
After the second motion for reconsideration, the trial court reversed itself,
saying that the service of summons upon the petitioners were not proper,
them not being officers of the corporation anymore. On appeal, the CA
reversed the trial court.
ISSUE: WON the petitioners can still be authorized to receive the summons
despite the voting trust agreement with DBP?
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more
definitive meaning. By its very nature, a VTA results in the separation of the
voting right of a stockholder from his other rights such as the right to receive
dividends, the right to inspect the books of the corporation, the right to
sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation.
However,
of shares of stock standing, at the time fixed in the by-laws, in his own name
in order to distinguish a VTA from proxies and other voting pool and
agreements, it must pass three criteria or tests, namely: (1) the voting rights
of the stock are separated from other attributes or ownership; (2) that the
voting right granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to
acquire voting control of the corporation.
The execution of VTA, therefore, may create a dichotomy
between the equitable and beneficial ownership of the corporate
shares of stockholder, on the one hand and the legal title
thereto, on the other hand.
By virtue of the VTA, the petitioners are no longer directors. Under the old
and new Corporation Code, the most immediate effect of a VTA on the status
of a stockholder who is a party to its execution is that he becomes only an
equitable or beneficial owner, from being the legal titleholder or owner of the
shares subject of the VTA.
Under the old code, the eligibility of a director, strictly speaking, cannot be
adversely affected by a VTA inasmuch as he remains the owner (although
beneficial or equitable only) of the shares subject of the VTA pursuant to
which a transfer of the stockholder’s shares in favor of the trustee is
required. No disqualification arises by virtue of the phrase ―in his own
right‖ provided under the Old Code, which has been omitted.
Hence, this omission requires that in order to be eligible as director, what is
material is the legal title to, not beneficial ownership, of the stock as
appearing on the books of the corporation.
The petitioners ceased to be the owners of at least one share standing in
their names on the books of Alfa as required under Sec. 23 of the new Code.
They also ceased to have anything to do with the management of the
enterprise. The petitioners ceased to be directors.
Considering the VTA, DBP as trustee, became the stockholder of record with
respect to the said shares of stocks.
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 256;
Nov. 29, 1968) – A complaint was filed by herein petitioner-plaintiff
Detective and Protective Bureau against defendant-respondent Fausto
Alberto, alleging that defendant illegally seized and took control of all the
assets as well as the books, records, vouchers and receipt of the corporation
from the accountant-cashier, concealed them illegally and refused to allow
any member of the corporation to see and examine the same. That
on a meeting, the stockholders removed defendant as managing director
and elected Jose dela Rosa.
Alberto, on the other hand, stated that Jose dela Rosa could not be elected
managing director because he did not own any stock in the corporation.
ISSUE: WON dela Rosa may be elected managing director?
HELD: No. There is no record showing that Jose dela Rosa owned a share of
stock in the corporation. If he did not own any share of stock, certainly he
could not be a director pursuant to Sec. 30 of the Corporation Law
and consequently he cannot be a managing director by virtue of the by-
laws of the corporation that the manager shall be elected by the BOD
among its members.
Accordingly, Faustino Alberto could not be compelled to vacate his office
and cede the same to dela Rosa because the by-laws provide that the
Directors shall serve until the election and qualification of their duly qualified
successor.
ELECTION AND VOTING
Sec. 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
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 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.
NOTE:
1. Majority of the outstanding capital stock, whether in person or by
written proxy must be present at the election of the directors; or
majority of members entitled to vote, in the case of a non-stock
corporation. If the required quorum is not obtaining, the meeting may
be adjourned;
2. On the request of any voting stockholder or member, the election may
be held by ballot otherwise viva-voce would suffice.
3. The candidates receiving the highest number of votes shall be elected.
CUMULATIVE VOTING:
1. Cumulative voting gives the stockholder entitled to vote the right to
give a 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 among the candidates as he may see fit.
2. This is granted by law to each stockholder with voting rights. However,
in non-stock corporations, cumulative voting is generally not allowed,
UNLESS allowed by the AOI or by-laws.
3. Under this method, if there are 10 directors to be elected, a holder of
1,000 shares will have 10,000 votes which he may cast in favor of one
candidate or may apportion to any number of candidate he may wish;
4. PURPOSE: to allow the minority to have a rightful representation in the
board of directors.
Sec. 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.
NOTE:
1. Except in a close corporation where the corporate officers may be
elected directly by the stockholders, the Code requires the BOD to elect
the said officers;
2. The officers that may be elected are
the: a. President – who must be a director;
b. Treasurer – who may or may not be a director;
c. Secretary – who should be a resident and citizen of the
Philippines;
d. Such other officers as may be provided for in the by-laws.
3. Any two or more positions may be held concurrently by the same
person, except:
a. The president and the secretary;
b. The president and the treasurer.
B. VALIDITY AND BINDING EFFECT OF ACTIONS OF
CORPORATE OFFICERS
Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he
has authority to make contract and do acts within the course of its ordinary
Sec. 25. Corporate officers, quorum
xxx
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.
QUORUM: requirement for a valid board meeting is the majority of
the number of the board fixed in the AOI, and a decision of at least a
majority of the directors/trustees present in a meeting at which there is a
quorum shall be a valid corporate act, except:
1. Election of officers, which shall require the majority of all the members
of the board; and
2. Unless the AOI or the by-laws provide for a greater quorum/voting
requirement.
Every action of the board without a meeting and without the required voting
and quorum requirement will not bind the corporation unless
subsequently ratified, expressly or impliedlly.
Individual directors, however, can rightfully be considered as agents of the
corporation. And although they cannot bind the corporation by their
individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of
authority; (2) when expressly conferred; or (3) where the officer or agent is
clothed with actual or apparent authority.
YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) –
Constacio B. Malagna, President and Chairman of the Board of private
respondent Prime White Cement Corporation (PWCC), sent a letter-offer
(Exhibit A) to Mr. Yao for the delivery of cement, which was accepted
by the latter by delivering a check for P243,000.
ISSUE: WON the letter-offer sent by Malagna binds the corporation?
HELD: No. A corporation can act only through its officers and agents, all acts
within the powers of said corporation may be performed by agents of his
selection and except in so far as limitations or restrictions may be imposed by
special charter, by-law or statutory provisions, the same general provision of
law which govern the relation of agency for natural person govern the officer
or agent of a corporation, of whatever status or rank, in respect to his power
to act for the corporation; and the agents once appointed, or members
acting in their stead, are subject to the same rules, liabilities and incapacities
as are agents of individuals and private persons.
Moreover, a corporate officer or agent may represent and bind the
corporation in transactiosn with third person to the extent that authority has
been conferred upon him, and this includes powers which have been (1)
intentionally conferred, and (2) also such powers as, in the usual course of
business, are incidental thereto, or may be implied therefrom, (3) powers
added by custom and usage, as usually pertaining to the particular
officer or agent, and (4) such apparent powers as the corporation has
caused persons dealing with the officer or agent to believe that it has
conferred.
While Mr. Maglana was an officer, the by-laws do not in any way confer upon
the president the authority to enter into contracts for the corporation
independently of the BOD. That power is expressly lodged in the latter.
Nevertheless, to expedite or facilitate the execution of the contract, only the
President shall sign the contact for the corporation. No greater power can be
implied from such express, but limited delegated authority. Neither can it be
logically claimed that any power greater than that expressly conferred is
inherent in Mr. Maglana’s position as president and chairman of the
corporation.
business," We find such inapplicable in this case. We note that the private
corporation has a general manager who, under its By-Laws has,
inter alia, the following powers: "(a) to have the active and direct
management of the business and operation of the corporation,
conducting the same accordingly to the order, directives or resolutions of
the Board of Directors or of the president." It goes without saying then that
Mr. Maglana did not have a direct and active and in the management of the
business and operations of the corporation.
Petitioner's last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it
and had caused persons dealing with it to believe that he was conferred with
such power. The rule is of course settled that "[a]lthough an officer or
agent acts without, or in excess of, his actual authority if he
acts within the scope of an apparent authority with which
the corporation has clothed him by holding him out or permitting
him to appear as having such authority, the corporation is bound
thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed
to exercise a particular authority with respect to the business,
or a particular branch of it, continuously and publicly, for a
considerable time." Also, "if a private corporation intentionally or
negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that
such apparent authority in real, as to innocent third persons
dealing in good faith with such officers or agents." This "apparent
authority may result from (1) the general manner, by which the
corporation holds out an officer or agent as having power to act or, in
other words, the apparent authority with which it clothes him to act in
general or (2) acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, whether within or without the scope of
his ordinary powers.
It was incumbent upon the petitioner to prove that indeed the private
respondent had clothed Mr. Maglana with the apparent power to execute
Exhibit "A" or any similar contract. This could have been easily done
by evidence of similar acts executed either in its favor or in
favor of other parties. Petitioner miserably failed to do that. Upon the
other hand, private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being approved
by the Board of Directors; such approval may only be given after
the contract passes through, at least, the comptroller, who is the NIDC
representative, and the legal counsel.
LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) –
Petitioner corporation approved two resolutions providing for the gratuity pay
of its employees. Except for Asuncion Lopez-Gonzales, who was then abroad,
the remaining member of the board convened a special meeting and passed
a resolution adopting the above-mentioned resolutions. Private respondents
requested for the full payment of the gratuity pay which was granted.
At that time, however, petitioner Asuncion was still abroad, and allegedly
sent a cablegram objecting to certain matters taken up by the board in her
absence.
Notwithstanding a corporate squabble between Asuncion and Arturo Lopez,
the first two installments of the gratuity pay of private respondents were
paid. Also, petitioner corporation had prepared the cash vouchers and checks
for the thir installment. For some reason, said voucher was cancelled by
petitioner Asuncion.
A complaint was filed before the labor arbiter who decided in favor of private
respondents.
ISSUE: WON the gratuity pay should be paid?
HELD: Yes. The general rules is that a corporation, through its board of
directors, should act in the manner and within the formalities,
if any, prescribed by its charter or by the general law. Thus,
the
officer or agent who has general control and management of
directors must act as a body in a meeting called pursuant to the law or the
corporation’s by-laws, otherwise, any action taken therein may be questioned
by any objecting director or shareholder.
Be that as it may, jurisprudence tells us that an action of the board
of directors during a meeting, which was illegal for lack of notice,
may be ratified either (1) expressly, by the action of the
directors in subsequent legal meeting, or (2) impliedly, by the
corporations‘ subsequent conduct.
Ratification by directors may be by an express resolution or vote to that
effect, or it may be implied from adoption of the act, acceptance or
acquiescence. Moreover, the unauthorized acts of an officer of a corporation
may be ratified by the corporation by conduct implying approval and
adoption of the act in question. Such ratification may be expressed or may
be inferred from silence and inaction.
In the case at bench, it was established that petitioner corporation did
not issue any resolution revoking nor nullifying the board resolution
granting gratuity pay to private respondents. Instead, they paid the
gratuity pay, particularly, the first two installments thereof.
Despite lack of notice to Asuncion, we can glean from the records that she
was aware of the corporation’s obligations under the said resolution. More
importantly she acquiesced thereto by affixing her signature on two cash
vouchers. The conduct of petitioners had estopped them from assailing the
validity of the said board resolutions.
PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924)
– W. Neumark, president of defendant corporation borrowed P15000
from plaintiff which was delivered by means of a check in favor of
defendant and deposited in BPI and the amount of it credited to the
corporation’s current account.
ISSUE: WON the corporation is responsible for the money borrowed by its
president?
HELD: Yes. W. Neumark is the principal stockholder, president and general
business manager of the defendant corporation. On behalf of the
corporation, he solicited a loan and was given a check, which was endorsed
by him in his capacity as president and deposited to the corporation’s
account. It may be true that a large part of the amount so deposited was
diverted by Neumark to his own use, but that does not alter that the money
was borrowed for the corporation and was placed in its possession.
It is conceded that Neumark was not expressly authorized by the board of
directors to borrow the money in question and the general rule is that a
business manager or other officer of a corporation, has no implied power to
borrow money on its behalf. But much depends upon the circumstances of
each particular case and the rule state is subject to important exceptions.
Thus, where a general business manager of a corporation is
clothed with apparent authority to borrow money and the amount
borrowed does not exceed the ordinary requirements of the
business, it has often been held that the authority is
implied and that the corporation is bound.
YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) – CC Chen or
TC Chen, General Manager of defendant corporation Kong Li Po, entered
into an agreement with the plaintiffs by which the latter bound themselves
to do the necessary printing for the newspaper. Later on, the new general
manager, Tan Tian Hong, discharged plaintiffs with no special reasons.
Aggrieved, plaintiffs sought to recover full payment of the remaining
term of the contract, which was originally for 3 years, as stated therein.
ISSUE: WON Chen had the power to bind the corporation under a contract
of that character?
HELD: No. The general rule is that 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 be delegated to other officers or agents of the
corporation, and it is well settled that except where the authority
of employing servants and agents is expressly vested in the BOD/T,
an
the corporation‘s business, or a specific part thereof, may bind
the corporation as are usual and necessary in th conduct of
such business. But the contracts of employment must be
reasonable.
Chen, as general manager of Kong Li Po, had implied authority to bind the
defendant corporation by a reasonable and usual contract of employment
with the plaintiffs, but we do not think that contract here in question can be
so considered. Not only is the term of employment usually long, but the
conditions are otherwise so onerous to the defendant that the possibility
of the corporation being thrown into insolvency thereby is
expressly contemplated in the same contract. This fact, in itself was, in
our opinion, sufficient to put the plaintiffs upon inquiry as to the extent of
the business manager’s authority; they had not the right to presume that he
or any other single officer or employee of that corporation had implied
authority to enter into a contract of employment which might bring about its
ruin.
TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963)
– Trinidad Francisco, in consideration of loan extended by GSIS, mortgaged
her property in QC. For being in arrears in her installments, GSIS
extrajudicially foreclosed the mortgage.
Plaintiff’s father, Atty. Vicente Francisco sent a letter to Rodolfo Andal,
general manager of GSIS, offering to redeem the property which was replied
to by Andal through a telegram saying ―GSIS BOARD APPROVED
YOUR REQUEST RE REDEMTPION OF FORECLOSED PROPERTY OF
YOUR DAUGHTER‖
Later, inasmuch as, according to the defendant GSIS, the remittances made
by Atty. Francisco were allegedly not sufficient to pay off her daughter’s
arrears, the one year redemption period has expired, said defendant
consolidated title to the property in its name.
ISSUE: WON the telegram sent by the Andal binds the corporation?
HELD: Yes. The terms of the offer were clear and over the signature of
Andnal, plaintiff was informed that the proposal has been accepted. There
was nothing in the telegram that hinted at any anomaly, or gave grounds to
suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying
upon it. There is no denying that the telegram was within Andal’s apparent
authority, but eh defense is that he did not sign it, but that it was sent by the
board secretary in his name and without his knowledge. Assuming this to be
true, how was appellee to know it? Corporate transactions
would speedily come to a standstill were every person dealing
with a corporation were held duty-bound to disbelieve every
act of its responsible officers, no matter how regular they should
appear on their face.
Indeed, it is well-settled that If a private corporation intentionally
or negligently clothes its officers or agents with apparent power
to perform acts for it, the corporation will be estopped to deny
that such apparent authority is real, as to innocent third persons
dealing in good faith with such officers or agents.
Hence, even if it were the board secretary who sent the telegram, the
corporation could not evade the binding effect produced by the telegram.
The error in the wording cannot be taken seriously. All the while GSIS
pocketed the various remittances, and kept silent as to the true facts as it
now alleges. This silence, taken together with the unconditional acceptance
of three other subsequent remittances from plaintiff constitutes in itself a
binding ratification of the original agreement.
THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug.
10, 1965) – National Coconut Corporation (NACOCO) embarked on copra
trading activities led by its General Manager Maximo Kalaw and the other
defendants as members of the board. Due to natural calamities, the
business of copra became unprofitable. Kalaw made a full disclosure of
the situation and apprised the baord of the impending losses on the
contracts already entered into, but no action was taken. But later on, the
contracts were unanimously approved by the Board.
acquiesced in and took advantage of the benefits afforded by said
agreement. Such acts are equivalent to an implied ratification of
The buyers threated damage suits, but some were settled. Louis Dreyfus &
Co. Ltd. Actually sued but was also culminated in an out-of-court settlement.
NACOCO now seeks to recover the sum paid to Louis from general manager
and board chairman Kalaw and the other members who approved the
contracts. It charges Kalaw with negligence and bad faith and/or breach of
trust for having approved the contracts, which was dismissed by the trial
court.
ISSUE: WON the contracts executed by Kalaw binds the corporation?
HELD: Yes. A rule that has gained acceptance through the years is that a
corporate officer ―entrusted‖ with the general management
and control of its business, has implied authority to make any
contract or do any other act which is necessary or appropriate to
the conduct of the ordinary business of the corporation. As such
officer, he may, without any special authority from the BOD
perform all acts of an ordinary nature, which by usage or
necessity are incident to his office, and may bind the corporation
by contracts in matters arising in the usual course of business.
Long before the disputed contracts came into being, Kalaw contracted by
himself alone as general manager – for forward sales of corpra (which is a
necessity in the business) which were profitable. So pleased was NACOCO;s
BOD that it voted to grant Kalaw special bonus in recognition of the signal
achievement rendered by him.
These previous contacts, it should be stressed, were signed by Kalaw without
prior authority from the board. Said contracts were known all along to the
board members. Nothing was said by them. The aforesaid contracts stand to
prove one thing. Obviously, NACOCO’s board met difficulties attendant to
forward sales by leaving the adoption of means to end, to the sound
discretion of NACOCO’s general manager Maximo Kalaw.
Where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization
of the BOD. In varying language, existence of such authority is
established, by proof of the course of business, the usages and practices
of the company and by the knowledge which the BOD has, or must be
presumed to have, of acts and doings of its subordinates in and about the
affairs of the corporation.
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCO’s behalf without prior board approval. If the
by-laws were to be literally followed, the board should give its stamp of
prior approval on all corporate contracts. But the Board itself, by its
acts and through acquiescence, practically laid aside the by-law
requirement of prior approval.
BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) –
As a consequence of P200,000 worth of ECA allocated to the Bowen & Co.,
Inc., it required a letter of credit in the amount of P100,000 with the PNB.
As the corporation did not have at the time the necessary funds to put
up the required cash marginal deposit of P60,000, its president Geoffrey
Bowen, obligating the corporation and himself in his personal capacity,
offered to pay Fracisco Buenaseda 37 ½% of the profits to be realized from
the sale of the ECA procurement materials, should he be able to obtain
and produce the amount necessary to cover the cash marginal deposit –
which Buenaseda was able to do.
The corporation refused to pay, Buenaseda filed an action in the CFI to
recover the same.
ISSUE: WON the agreement was binding?
HELD: Yes. It is not here pretended that the BOD of the defendant
corporation had no knowledge of the agreement between Bowen and
plaintiff. Indeed, at the time the said Agreement was made, the BOD of the
corporation was composed of Bowen himself, his wife, Buenaseda and two
others, with Bowen and his wife controlling the majority of the stocks of the
corporation. The Board did not repudiate the agreement but on the contrary,
the agreement by the BOD and bound the corporation even without
formal resolution passed and recorded.

It is agreed by the respondents, defendants below, that the profits of the
corporation form part of its assets and payment of a certain percentage
of the profits requires a declaration of dividends and/or resolution of the
BOD. The agreement is untenable. Although the plaintiff is a stockholder
of the corporation he does not, however, claim a share of the profits
as such stockholder, but under the agreement between him and the
president of the corporation which has been impliedly ratified by the BOD.
IN SUMMARY: An unauthorized act, or the act of a single director, officer or
agent of a corporation may be ratified either expressly or impliedly.
1. Express ratification is made through a formal board action;
2. Implied ratification can either be (a) silence or acquiescence; (b)
acceptance and/or retention of benefits, or (c) by recognition
or adoption.
C. REMOVAL AND FILLING UP OF VACANCIES
Sec. 28. Removal of directors or trustees. - Any director or trustee of
a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation,
by a vote of at least two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either at a regular meeting of
the corporation or at a special meeting called for the purpose, and in
either case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be
called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of
the outstanding capital stock, or, if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special meeting upon such demand or
fail or refuse to give the notice, or if there is no
secretary, the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member of the corporation
signing the demand. Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with or without
cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they
may be entitled under Section 24 of this Code.
 (VVCC). From 1997-2001, the requisite quorum could not be obtained so
NOTE:
1. By-laws may provide for casues or grounds for removal of a director; 
2. A director representing the minority may not be removed except for
those causes;
3. A director NOT representing the minority may be removed even without
a cause.
REQUIREMENTS FOR A VALID REMOVAL:
1. The removal should take place at a general or special meeting duly call
for that purpose;
2. The removal must be by the vote of the stockholders holding or
representing 2/3 of the outstanding capital stock or the
members entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the
intention to propose such removal at the meeting either by
publication or on written notice to the stockholders or members.
JURISDICTION OF THE COURT: The law, as it stands now, grants
the proper court, the power and authority to hear and decide cases
―involving controversies in the election or appointment of directors,
trustees, officers, or managers of such corporation, partnership or
association.‖
DEADLOCK: In the case of deadlock in a close corporation, the SEC is
also authorized to issue an Order as it deems appropriate ―canceling,
altering or enjoining any resolution or other act of the corporation or
its board of
end of the term due to the fact that a successor has not been elected and has
failed to qualify.
directors or ―directing or prohibiting‖ any act the corporation or the
other board of directors thereby effectively taking away the rights of the
directors to act as manager of the corporation.
VACANCY:
1. If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the
filling of the vacancy by the election of a replacement at the same
meeting;
2. If it occurs NOT by removal, Sec. 29 applies.
Sec. 29. Vacancies in the office of director or trustee. - Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, may be
filled by the vote of at least a majority of the remaining directors or trustees,
if still constituting a quorum; otherwise, said vacancies must be filled by
the stockholders in a regular or special meeting called for that purpose. A
director or trustee so elected to fill a vacancy shall be elected only or the
unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members duly called for the
purpose, or in the same meeting authorizing the increase of directors
or trustees if so stated in the notice of the meeting.
If the VACANCY is either resulting from (1) expiration of term; or (2) other
causes other than removal, the BOARD OF DIRECTORS, if still constituting
a quorum, may fill the vacancy.
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA,
RAY GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their
capacities as members of the Board of Directors of Valle Verde Country
Club, Inc., and JOSE RAMIREZ, Petitioners
vs.
Victor Africa, Respondend
(GR No. 151969; Sept. 4, 2009)
FACTS: February 27, 1996: Ernesto Villaluna, Jaime C.
Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas
III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto
Sunico, and Ray Gamboa were elected as BOD during the Annual
 Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc.
they continued to act as directors in a hold-over capacity.
On September 1, 1998, Dinglasan resigned, BOD still constituting a
quorom elected Eric Roxas (Roxas) followed by Macalintal.
On March 6, 2001, Jose Ramirez (Ramirez) was elected by the
remaining BOD. Respondent Africa (Africa), a member of VVCC, questioned
the election of Roxas and Ramirez as members of the VVCC Board with the
Securities and Exchange Commission (SEC) and the Regional Trial Court
(RTC) as contrary to Sec. 23 and 29 of the Corporation Code.
The RTC decided in favor of Africa.
ISSUE: WON the appointment of Roxas and Ramirez made by the remaining
members of the Board, still constituting a quorum, were valid?
HELD: No. The resolution of this legal issue is significantly hinged on the
determination of what constitutes a director’s term of office.
The holdover period is not part of the term of office of a member
of the board of directors. The word ―term‖ has acquired a definite
meaning in jurisprudence. In several cases, we have defined ―term‖
as the time during which the officer may claim to hold the office
as of right, and fixes the interval after which the several incumbents
shall succeed one another. The term of office is not affected by the
holdover. The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent
holds over in office beyond the
Term is distinguished from tenure in that an officer’s ―tenure‖
represents the term during which the incumbent actually holds
office. The tenure may be shorter (or, in case of holdover, longer) than
the term for reasons within or beyond the power of the incumbent.
Based on the above discussion, when Section 23 of the Corporation Code
declares that ―the board of directors…shall hold office for one (1) year
until their successors are elected and qualified,‖ we construe the
provision to mean that the term of the members of the board of
directors shall be only for one year; their term expires one year after
election to the office. The holdover period – that time from the lapse of one
year from a member’s election to the Board and until his successor’s
election and qualification – is not part of the director’s original term of
office, nor is it a new term; the holdover period, however, constitutes part
of his tenure. Corollary, when an incumbent member of the board of
directors continues to serve in a holdover capacity, it implies that the office
has a fixed term, which has expired, and the incumbent is holding the
succeeding term.
After the lapse of one year from his election as member of the VVCC Board in
1996, Makalintal’s term of office is deemed to have already expired. That he
continued to serve in the VVCC Board in a holdover capacity cannot be
considered as extending his term. This holdover period is not to be
considered as part of his term, which, as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which,
by the terms of Section 29 of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the purpose.
To assume – as VVCC does – that the vacancy is caused by Makalintal’s
resignation in 1998, not by the expiration of his term in 1997, is both illogical
and unreasonable. His resignation as a holdover director did not change the
nature of the vacancy; the vacancy due to the expiration of Makalintal’s term
had been created long before his resignation.
The powers of the corporation‘s board of directors emanate
from its stockholders
This theory of delegated power of the board of directors similarly explains
why, under Section 29 of the Corporation Code, in cases where the vacancy
in the corporation’s board of directors is caused not by the expiration of a
member’s term, the successor ―so elected to fill in a vacancy shall be
elected only for the unexpired term of the his predecessor in office.‖ The
law has authorized the remaining members of the board to fill in a
vacancy only in specified instances, so as not to retard or impair the
corporation’s operations; yet, in recognition of the stockholders’ right to
elect the members of the board, it limited the period during which the
successor shall serve only to the ―unexpired term of his predecessor in
office.‖
It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the director‘s term of office. When
a vacancy is created by the expiration of a term, logically, there is no
more unexpired term to speak of. Hence, Section 29 declares that it shall
be the corporation’s stockholders who shall possess the authority to fill in a
vacancy caused by the expiration of a member’s term.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the
BOD to the SEC:
Sec. 26. Report of election of directors, trustees and officers. -
Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission, the
names, nationalities and residences of the directors, trustees, and
officers elected. Should a director, trustee or officer die, resign or in any
manner cease to hold office, his heirs in case of his death, the secretary,
or any other officer of the corporation, or the director, trustee or
officer himself, shall immediately report such fact to the Securities and
Exchange Commission
PURPOSE: to give public information, under sanction of oath responsible
treasurer or cashier, as member of an executive committee,
officers, of the nature of the business, financial condition and operational
status of the company together with information on its key officers or
managers so that hose dealing with it and those who intend to do business
with it may know or have the means of knowing facts concerning the
corporation’s financial resources and business responsibility‖
D. COMPENSATION OF DIRECTORS
Sec. 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.
GENERALLY: Directors are not entitled to receive any compensation,
EXCEPT:
1. Reasonable per diems;
2. As provided in the by-laws or upon a majority vote of the stockholders;
and
3. If they are performing functions other than that of a director.
(3) above: Sec. 30 is clear on the point when it provides ―as such
directors‖. Therefore, special and extraordinary service rendered, outside of
the regular duties, may form the basis for a claim of special compensation,
such as when a director acts as a general counsel.
REASON: the office of a director is usually filled up by those chiefly
interested in the welfare of the institution by virtue of their interest in stock
or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF
COMPENSATION? The courts will not generally undertake to review the
fairness of official salaries, at the suit of a stockholder unless wrongdoing and
oppression or possible abuse of fiduciary position are shown.
When the recipient does not stand in the dual relation of the (1) one
compensated and (2) a participant in fixing his own compensation, it
is considered outside the proper judicial function to go into business
policy question of the fairness or reasonableness of compensation as fixed
by the board. Otherwise, it will call for a scrutiny of the reasonableness or
fairness of the compensation. Likewise, even if consented to by the
majority of stockholders, the courts may still look into such
reasonableness if: (1) it would amount to giving away corporate funds in
the guise of compensation as against the interest of the dissenting minority;
or (2) in fraud of creditors, either amounting to wastage of assets.
CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA
593; June 30, 1970) – This is a complaint filed by herein petitioner CCE for
the refund of certain amounts received by respondent when he served as
member of the board of directors of CCE, which were said t be per diems and
transportation expenses, representation expenses and cummutable
discretionary funds.
ISSUE: WON the BOD had the power to appropriate funds for the expenses
claimed by respondent?
HELD: No. The by-laws expressly reserved unto the stockholders the power
to determine the compensation of the members of the BOD, and the
stockholders did restrict such compensation to (1) actual transportation
expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
Even without the express prohibition, the directors are not entitled to
compensation for ―The law is well-settled that directors
of corporations presumptively serve without compensation and in
the absence of an express agreement or a resolution thereto, no
claim can be asserted therefor. Thus it has been held that there
can be no recovery of compensation, unless expressly provided
for, when director serves as president or vice-president, as
secretary or
as chairman of a building committee, or similar offices.
Thus, the directors, in assigning themselves additional duties, such as the
visitation of FACOMAS, acted within their power, but, by voting
for themselves compensation for such additional duties, they acted in
excess of their authority, as express in the by-laws.
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L.
VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F.
VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-
TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON.
JUDGE PORFIRIO PARIAN, respondents
(GR No. 113032; 278 SCRA 216; Aug. 21, 1997)
FACTS: In a special board meeting, a resolution was passed providing for
compensation of officers. A few years later, petitioners Homero Villasis,
Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
complaint for falsification of public documents (for submission of an
income reflecting the resolution as passed on 1985, when in fact it was
passed in 1986) and estafa (for the disbursement of funds by effecting
payment to the aforesaid salaries) against herein respondents who were
members of the Board of Trustees who were also officers of the
corporation. The trial court acquitted respondents in both charges without
civil liability. The motion for reconsideration on the civil aspect being denied,
petitioners filed this petition.
ISSUE: WON the resolution granting compensation to OFFICERS of the
corporation is valid?
HELD: Yes. The proscription under Sec. 30, is against granting compensation
to directors/trustees of a corporation is not a sweeping rule. Worthy of note
is the clear phraseology of Sec 30 which states ―… [T]he directors shall
not receive any compensation, as such directors, …‖ The phrase as
such directors is not without significance for it delimits the scope
of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as
directors/trustees. In the case at bench, the Resolution granted
monthly compensation to private respondents not in their capacity as
members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of WIT.
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting
the compensation to 10% of the net income before income tax does not
likewise find application in this case since the compensation is being given
to private respondents in their capacity as officers of WIT and not as board
members.
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) –
The members of the board of El Hogar Filipino receives 5% of the net profit
as shown in the balance sheet and is distributed in proportion to their
attendance to meetings of the board. A complaint was filed against the, and
the sixth cause of action alleged that the directors, instead of serving without
pay, or receiving nominal pay or a fixed salary - as the complainant
supposes would be proper – have been receiving large compensation in
varying amounts.
ISSUE: WON the courts may declared the by-law provision null and void?
HELD: No. The Corporation Law does not undertake to prescribe
the rate of compensation for the directors of corporations. The
power to fixed the compensation they shall receive, if any, is left to the
corporation, to be determined in its by-laws (Act No. 1459, sec. 21).
Pursuant to this authority the compensation for the directors of El Hogar
Filipino has been fixed in section 92 of its by-laws, as already stated.
The justice and propriety of this provision was a proper matter for
the shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the amount
paid as compensation to the directors has increased beyond what
would probably be necessary
ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be
held civilly and criminally liable?
to secure adequate service from them is matter that cannot
be corrected in this action; nor can it properly be made a basis for
depriving the respondent of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been
made, or the rule adopted in the by-laws has been found to work harmful
results, the remedy is in the hands of the stockholders who have the power
at any lawful meeting to change the rule. The remedy, if any, seems to lie
rather in publicity and competition, rather than in a court proceeding. The
sixth cause of action is in our opinion without merit.
E. LIBABILITY OF CORPORATE OFFICERS
The general rule is that unless the law specifically provides a corporate
officer or agent is not civilly or criminally liable for acts done by him as such
officer or agent, or when absent bad faith or malice.
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994)
– Melchor dela Cuesta, doing business under the name Farmers
Machineries, sold a tractor to Tramat Mercantile, Inc. In payment, David
Ong, Tramat’s president and manager issued a check for P33,500. Tramat
sold the tractor, together with an attached lawn mower fabricated by it, to
NAWASA. David Ong put a stop payment on the check when NAWASA
refused to pay on the account that aside from the defects on the lawn
mower, the engine (sold by dela Costa) was a reconditioned unit.
De la Costa filed an action for recovery of money which was granted by the
court.
ISSUE: WON Ong should be held jointly and severally liable?
HELD: No. 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 gross negligence in directing its affairs, or (c) for conflict
of interest, resulting in damages to the corporation, its stockholders or other
persons;
2. He consents to the issuance of watered 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;
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.
RICARDO A. LLAMADO, petitioner,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
(GR No. 99032; 270 SCRA 423; March 26, 1997)
FACTS: Private complainant Leon Gaw delivered to the accused Ricardo
Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid in
6 months with 12% interest. As security, the accused issued and signed a
postdated check which was later on stopped and dishonored for being drawn
against insufficient funds. Gaw filed a complaint for violation of BP Blg. 22.
Pascual remained at large and the trial on the merits against Llamado was
conducted. The trial court convicted Llamado.
HELD: Yes. Petitioner denies knowledge of the issuance of the check without
sufficient funds and involvement in the transaction with private complainant.
However, knowledge involves a state of mind difficult to establish. Thus, the
statute itself creates a prima facie presumption, i.e., that the drawer had
knowledge of the insufficiency of his funds in or credit with the bank at the
time of the issuance and on the check's presentment for payment. Petitioner
failed to rebut the presumption by paying the amount of the check within five
(5) banking days from notice of the dishonor. His claim that he signed the
check in blank which allegedly is common business practice, is hardly a
defense. If as he claims, he signed the check in blank, he made himself
prone to being charged with violation of BP 22. It became incumbent
upon him to prove his defenses. As Treasurer of the corporation who
signed the check in his capacity as an officer of the corporation, lack of
involvement in the negotiation for the transaction is not a defense.
Petitioner's argument that he should not be held personally liable for the
amount of the check because it was a check of the Pan Asia Finance
Corporation and he signed the same in his capacity as Treasurer of the
corporation, is also untenable. The third paragraph of Section 1 of BP Blg. 22
states:
―Where the check is drawn by a corporation, company or
entity, the person or persons who actually signed the check in
behalf of such drawer shall be liable under this Act‖
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS,
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997)
FACTS: Private respondents were employees of Crispa, Inc. who were
dismissed due to alleged retrenchment. They filed an illegal dismissal
complaint with the NLRC against Crispa, Inc., Valeriano Floro (major
stockholder, incorporation and director of Crispa) and petitioners, who were
high ranking officials and directors of Crispa. The Lbor Arbiter dismissed the
complaint but ordered petitioners, Floro and Crispa to pay separation pay.
ISSUE: WON petitioners can be held liable?
HELD: Yes. A corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its behalf and, in general,
from the people comprising it. The general rule is that obligations
incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. There are times, however, when solidary
liabilities may be incurred but only when exceptional circumstances
warrant such as in the following cases:
―1. When directors and trustees or, in appropriate cases,
the officers of a corporation: (a) vote for or assent to
patently unlawful acts of the corporation; (b) act in bad
faith or with gross negligence in directing the corporate
affairs; (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or members,
and other persons;
2. When a director or officer has consented to the issuance of
watered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written
objection thereto;
3. When a director, trustee or officer has contractually agreed
or stipulated to hold himself personally and solidarily liable
with the corporation; or
4. When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate action.‖i
In labor cases, particularly, corporate directors and officers
are solidarily liable with the corporation for the
termination of employment of corporate employees done with
malice or in bad faith. In this case, it is undisputed that petitioners have
a direct hand in the illegal dismissal of respondent employees. They were
the ones, who as high-
ranking officers and directors of Crispa, Inc., signed the Board Resolution
retrenching the private respondents on the feigned ground of serious
business losses that had no basis apart from an unsigned and unaudited
Profit and Loss Statement which, to repeat, had no evidentiary value
whatsoever. This is indicative of bad faith on the part of petitioners for
which they can be held jointly and severally liable with Crispa, Inc. for all the
money claims of the illegally terminated respondent employees in this case.
F. THREE-FOLD DUTY OF DIRECTORS
Directors owe a three-fold duty to the corporation: (1) Obedience; (2)
Diligence and (3) Loyalty.
Sec. 31. Liability of directors, trustees or officers. - Directors
or trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence, as to which equity
imposes a disability upon him to deal in his own behalf, he shall be liable as a
trustee for the corporation and must account for the profits which otherwise
would have accrued to the corporation.
OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting
or assenting, either willfully or knowingly, to patently unlawful acts
thereby making the responsible director liable for damages resulting
therefrom;
DILIGENCE: Under the second part of Sec. 31, the directors are required to
manage the corporate affairs with reasonable care and prudence. This is
because the liability of a corporation is not limited to willful breach of trust or
excess of power, but extends also to negligence. Their liability rests upon the
common law rule which renders liable every agent who violates his authority
or neglects his duty to the damage of his principal.
The degree of diligence is relative. The more fair and satisfactory rule is that
degree of care and diligence which an ordinary prudent director could
reasonably be expected to exercise in a like position under similar
circumstances.
BUSINESS JUDGMENT RULE: Although directors are commonly said to be
responsible both for reasonable care and also prudence, the formula is
continually repeated that they are not liable for losses due to imprudence
or honest error of judgment. The business judgment rule in effect states
that questions of policy and management are left solely to the honest
decision of the board of directors and the courts are without authority to
substitute its judgment as against the former. The directors are business
managers and as long as they act in good faith, its actuations are not subject
to judicial review.
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
(GR No. L-15092; 5 SCRA 36; May 18, 1962)
FACTS: Appellants have been sugar planter adhered to defendat-appellees
sugar central mill under identical milling contracts with a 55% share of the
resulting product. There was a proposal to increase the planter’s share to
60% which was adopted by defendant in an Amended Milling Contract and
consequently a Board Resolution.
In 1953, the appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a
total annual production exceeding one-third of the production of all the sugar
central mills in the province, had already granted increased participation (of
62.5%) to their planters, and that under paragraph 9 of the resolution of
August 20, 1936, heretofore quoted, the appellee had become obligated to
grant similar concessions to the plaintiffs (appellants herein). The appellee
Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging
that the stipulations contained in the resolution were made without
consideration; that the resolution in question was, therefore, null and void ab
initio, being in effect a donation that was ultra vires and beyond the powers
of the corporate directors to adopt. The trial court decided in favor of
defendant, thus the present appeal.
ISSUE: WON the resolutions passed by the bard are valid and binding?
HELD: Yes. There can be no doubt that the directors of the appellee
company had authority to modify the proposed terms of the Amended
Milling Contract for the purpose of making its terms more acceptable to
the other contracting parties.
As the resolution in question was passed in good faith by the
board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the
court has no authority to review them.
―They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of
such duty. Whether the business of a corporation should be operated at
a loss during depression, or close down at a smaller loss, is a purely
business and economic problem to be determined by the directors of
the corporation and not by the court. It is a well-known rule of law that
questions of policy or of management are left solely to the honest
decision of officers and directors of a corporation, and the court is
without authority to substitute its judgment of the board of directors; the
board is the business manager of the corporation, and so long as it acts
in good faith its orders are not reviewable by the courts. (Fletcher on
Corporations, Vol. 2, p. 390).‖
And it appearing undisputed in this appeal that sugar centrals of La Carlota,
Hawaiian Philippines, San Carlos and Binalbagan (which produce over one-
third of the entire annual sugar production in Occidental Negros) have
granted progressively increasing participations to their adhered planter at an
average rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
Generally: a director is not liable for the acts of their co-directors, unless: (1)
He connives or participates; or (2) He is negligent in not discovering or acting
to prevent it. Thus, absent of actual knowledge of the wrongful activities, on
the part of the co-directors, the same cannot be imputed to the other
director unless in the exercise of reasonable care attending his
responsibilities, he should have been aware of suspicious circumstances
demanding correlative action.
LOYALTY: refers to the proscription imposed on directors on acquiring any
personal or pecuniary interest in conflict with their duty as director. Their
relationship is regarded as ―fiduciary relation‖. As fiduciaries, they are
obliged to act with utmost candor and fair dealing for the interest of the
corporation and without selfish motives.
Sec. 34. Disloyalty of a director. - Where a director, by virtue of
his office, acquires for himself a business opportunity which should belong to
the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding
the same, unless his act has been ratified by a vote of the stockholders
owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall
HELD: Yes. A director upon whose action the value of the shares depends
be applicable, notwithstanding the fact that the director risked his own funds
in the venture.
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following
instances:
1. When a director or trustee ―acquires any personal or pecuniary
interest in conflict with (his) duty as such director or trustee‖;
2. When he ―attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect to 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‖; and
3. When he, ―by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby
obtaining profit to the prejudice of such corporation‖.
FORBIDDEN PROFITS: Forbidden in the sense that directors and officers
are fiduciary representatives of the corporation and as such they are not
allowed to obtain any personal profit, commission, bonus or gain for their
official actions. This may also refer to those arising from transactions of
directors with third persons which may involve misappropriation of corporate
opportunities and disloyal diverting of business. Directors and officers are
corporate insiders and cannot, therefore, utilize their strategic position for
their own preferment or use their powers and opportunities for their personal
advantage to the exclusion of the interest which they represent.
CORPORATE OPPORTUNITY DOCTRINE: it places a director of
a corporation in the position of a fiduciary and prohibits him from seizing
a business opportunity and/or developing it at the expense and with
the facilities of the corporation. He cannot appropriate to himself
opportunity which in fairness should belong to the corporation.
RATIFICATION:
1. The second paragraph of Sec. 31 which makes a director liable to
account for profits if he attempts to acquire or acquires any interest
adverse to the corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability upon him to deal in
his own behalf is not subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity which
should belong to the corporation, he is bound to account for such profits
unless his act is ratified by the stockholders owing or representing at
least 2/3 of the outstanding capital stock.
Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M.
a. If it was offered first to A, and A made a profit of P90M, this would fall
under Sec. 34 and may be subject to ratification; A merely acquired a
business opportunity owing to the corporation.
b. If it was offered to REALTY CORP., and A, later on offered to buy it for
P95 and sold it making a profit of P5M, it would fall under Sec. 31 and
not subject to ratification, A should return the profits to REALTY CORP.
It was a matter reposed in him in confidence.
STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the
Philippine Islands, on behalf of the government, made an offer of purchase
for the total sum of $6,,043,219.47 in gold for all the friar lands, though
owned by different owners.
While this state of things existed, and before the final offer had been made
by the Governor, the defendant, although still holding out for a higher price
for the lands, took steps to purchase the 800 shares of stock in his own
company from Mrs. Strong, which he knew were in the possession of F.
Stuart Jones, as her agent. The defendant employed Krauffman and the
latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr.
Sloan, the husband, did not know who wanted to buy the shares nor did
Jones when he was spoken to. Jones would not have sold at the price he
did had he known it was the defendant who was purchasing, because, as
he said, it would show increased value, as the defendant would not
be likely to purchase ore stock unless the price was going up.
ISSUE: WON it was the duty of the defendant to disclose to the agent of the
plaintiff the facts bearing upon or which might affect the value of the stock?
cannot avail of his knowledge of what his own action will be to acquire
shares from those whom he intentionally keeps in ignorance of his
expected action and the resulting value of the shares.
Even though a director may not be under the obligation of a fiduciary
nature to disclose to a shareholder his knowledge affecting the value of the
shares, that duty may exist in special cases, and did exist upon the facts in
this case.
In this case, the facts clearly indicate that a director of a corporation owning
friar lands in the Philippine Islands, and who controlled the action of the
corporation, had so concealed his exclusive knowledge of the impending sale
to the government from a shareholder from whom he purchased, through an
agent, shares in the corporation, that the concealment was in violation of his
duty as a director to disclose such knowledge, and amounted to deceit
sufficient to avoid the sale; and, under such circumstances, it was immaterial
whether the shareholder's agent did or did not have power to sell the stock.
In addition to his ownership of almost three-fourths of the shares of the
stock of the company, the defendant was one of the five directors of the
company, and was elected by the board the agent and administrator
general of such company, "with exclusive intervention in the
management" of its general business.
Concealing his identity when procuring the purchase of stock, by his agent,
was in itself stock evidence of fraud on the part of the defendant. The
concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful machination
to obtain the purchase without giving information whatever as to the state
and probable result of the negotiations, to the vendor of the stock, and to,
in that way, obtain the same at a lower price.
G. SELF-DEALING DIRECTORS
The self-dealing director is one who deals or transacts business with his own
corporation.
Sec. 32. Dealings of directors, trustees or officers with
the corporation. - A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a quorum
for such meeting;
2. That the vote of such director or trustee was nor necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by
the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may
be ratified by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the
members in a meeting called for the purpose: Provided, That full disclosure
of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under
the circumstances.
Generally: A contract entered into by a director with his own corporation
is voidable at the latter’s option, except when all the conditions laid down
in Sec. 32 are met. On the other hand, where any of the first two conditions
is absent, the contract becomes voidable subject to the ratification of
the stockholders representing 2/3 of the outstanding capital stock –
the requirements of which are: (1) there must be a meeting called for
that purpose; (2) full disclosure of the adverse interest of the director; and
(3) the contract is fair and reasonable under the circumstances.
If the self-dealing director owns all or substantially all of the shares of stock,
thereby making ratification easily possible, the last sentence of Sec. 32
should be made to apply by determining reasonableness of the transaction to
As director, especially since he was the other party in interest, respondent
which there is no yardstick. Every case stands upon its own bottom, and the
ultimate question is whether the contract was honest and beneficial which is
always a question of fact.
PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
IAC and ALEJANDRO TE, respondents
(GR No. L-68555; 220 SCRA 103; March 19, 1993)
FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
awarded a dealership agreement whereby Te would be the exclusive dealer
and/or distributor of the corporation in the entire Mindanao. As a
consequence, Te entered into different contracts for selling white cement.
Laer on, defendant corporation decided to impose certain conditions upon the
dealership agreement.
Several demands to comply with the agreement were made by Te to the
corporation but was refused and Te was constrained to cancel the contracts
he entered into.
Defendant corporation entered into an exclusive dealership agreement with
Napoleon Co for the marketing of white cement in Mindanao. Hence, this
suit.
ISSUE: WON the dealership agreement entered into by Te with his own
corporation is valid and binding?
HELD: No. In the instant case respondent Te was not an ordinary
stockholder; he was a member of the Board of Directors and Auditor of the
corporation as well. He was what is often referred to as a "self-dealing"
director.
A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interests conflict with those
of the corporation, he cannot sacrifice the latter to his own advantage
and benefit. As corporate managers, directors are committed to seek
the maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders.
Granting arguendo that the "dealership agreement" involved here would be
valid and enforceable if entered into with a person other than a director or
officer of the corporation, the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation changes the
whole situation. First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement" entered into in July,
1969, was to sell and supply to respondent Te 20,000 bags of white cement
per month, for five years starting September, 1970, at the fixed price of
P9.70 per bag. Respondent Te is a businessman himself and must have
known, or at least must be presumed to know, that at that time, prices
of commodities in general, and white cement in particular, were not stable
and were expected to rise. At the time of the contract, petitioner
corporation had not even commenced the manufacture of white cement,
the reason why delivery was not to begin until 14 months later. He must
have known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact, respondent Te's
own Memorandum shows that in September, 1970, the price per bag
was P14.50, and by the middle of 1975, it was already P37.50 per bag.
Despite this, no provision was made in the "dealership agreement" to allow
for an increase in price mutually acceptable to the parties. Instead, the
price was pegged at P9.70 per bag for the whole five years of the contract.
Fairness on his part as a director of the corporation from whom he was to
buy the cement, would require such a provision. In fact, this unfairness in
the contract is also a basis which renders a contract entered into by the
President, without authority from the Board of Directors, void or voidable,
although it may have been in the ordinary course of business. We
believe that the fixed price of P9.70 per bag for a period of five years was
not fair and reasonable. Respondent Te, himself, when he
subsequently entered into contracts to resell the cement to his "new dealers"
Henry Wee and Gaudencio Galang stipulated as follows:
The price of white cement shall be mutually determined by us but in no
case shall the same be less than P14.00 per bag (94 lbs)
Te's bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, it is to Us quite
clear that he was guilty of disloyalty to the corporation; he was attempting
in effect, to enrich himself at the expense of the corporation. There is
no showing that the stockholders ratified the "dealership agreement" or
that they were fully aware of its provisions. The contract was therefore not
valid and this Court cannot allow him to reap the fruits of his disloyalty.
CHARLES W. MEAD, plaintiff-appellant,
vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE
ENGINEERING AND CONSTRUCTION COMPANY, defendant-appellants
(GR No. 6217; 21 Phil. 95; Dec. 26, 1911)
FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed
the Philippine Engineering and Construction Company, the
incorporators being the only stockholders and directors of the company.
When Mead left for China, the other directors entered into an agreement
where all the rights in a ―wrecking contract‖ with the naval authorities
were sold to defendant. The defendant, in turn, sold these rights with R.W.
Brown, HDC jones, John Macleod and TH Twentyman, and retaining one
sixth interest, formed Manila Salvage Association.
ISSUE: WON officers or directors of the corporation may purchase the
corporate property?
HELD: Yes. While a corporation remains solvent, we can see no reason why
a director or officer, by the authority of a majority of the stockholders or
board of managers, may not deal with the corporation, loan it money or buy
property from it, in like manner as a stranger. So long as a purely
private corporation remains solvent, its directors are agents or trustees
for the stockholders. 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;
and if they are themselves creditors while the insolvent corporation is
under their management, they will not be permitted to secure to
themselves by purchasing the corporate property or otherwise any personal
advantage over the other creditors. Nevertheless, a director or officer may
in good faith and for an adequate consideration purchase from a majority
of the directors or stockholders the property even of an insolvent
corporation, and a sale thus made to him is valid and binding upon the
minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs.
Marbury, supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of
Arkansas, 15 How., 304; Richards vs. New Hamphshire Insurance
Company, 43 N. H., 263; Morawetz on Corporations (first edition), sec.
579; Haywood vs. Lincoln Lumber Company et al., 64 Wis., 639; Port
vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage Company, 21
Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
That a director of a joint-stock corporation occupies one of those
fiduciary relations where his dealings with the subject-matter of his trust
or agency, and with the beneficiary or party whose interest is confided
to his care, is viewed with jealousy by the courts, and may be set aside
on slight grounds, is a doctrine founded on the soundest morality, and
which has received the clearest recognition in this court and others.
(Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co.
vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb.,
553; Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The
general doctrine, however, in regard to contracts of this class, is, not
that they are absolutely void, but that they are voidable at the
election of the party whose interest has been so represented by the
party claiming under it. We say, this is the general rule; for there may
be cases where such contracts would be void ab initio; as when an
agent to sell buys of himself, and by his power of attorney conveys to
himself that which he was authorized to sell. but even here, acts which
amount t a ratification by the principal may validate the sale
2. Representative or Class Suit – in which one or more members of a class
sue for themselves as a class or for all to whom the right was denied,
The sale or transfer of the corporate property in the case at bar was made by
three directors who were at the same time a majority of stockholders. If a
majority of the stockholders have a clear and a better right to sell the
corporate property than a majority of the directors, then it can be said that a
majority of the stockholders made this sale or transfer to the defendant
McCullough.
What were the circumstances under which said sale was made? The
corporation had been going from bad to worse. The work of trying to raise
the sunken Spanish fleet had been for several months abandoned. The
corporation under the management of the plaintiff had entirely failed in this
undertaking. It had broken its contract with the naval authorities and the
$10,000 Mexican currency deposited had been confiscated. It had no money.
It was considerably in debt. It was a losing concern and a financial failure. To
continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter
insolvency. The majority of the stockholders or directors sold the assets of
this corporation, thereby relieving themselves and the plaintiff of all
responsibility. This was only the wise and sensible thing for them to do. They
acted in perfectly good faith and for the best interests of all the stockholders.
"It would be a harsh rule that would permit one stockholder, or any minority
of stockholders to hold a majority to their investment where a continuation of
the business would be at a loss and where there was no prospect or hope
that the enterprise would be profitable."
We therefore conclude that the sale or transfer made by the quorum of the
board of directors — a majority of the stockholders — is valid and binding
upon the majority-the plaintiff.
H. INTERLOCKING DIRECTORS
An interlocking director is a director in one corporation who deals or
transacts with another corporation of which he is also a director. In such
case, there may effectively be a dual agency, a divided allegiance where
allegiance in one corporation may subordinated to the other.
The prevailing view is that these contracts entered into where there is an
interlocking director is not voidable merely by reason of conflicting duties or
interest as to corporations represented, even when a majority or all of the
directors are common to both corporations. It is recognized that such will be
upheld if there is no bad faith or unfairness or collusion.
Sec. 33. Contracts between corporations with interlocking
directors. – (1) Except in cases of fraud, and provided (2) the contract
is fair and reasonable under the circumstances, a contract between
two or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the
interlocking director in one corporation is substantial and his interest in
the other corporation or corporations is merely nominal, he shall be
subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital
stock shall be considered substantial for purposes of interlocking directors.
NOTE:
1. The contract between corporations with interlocking director is valid
absent fraud and provided it is reasonable under the circumstances;
2. If the interest of the interlocking director in one corporation exceeds
20% and in the other merely nominal, the contract becomes voidable at
the latter corporation’s option. In effect, the director would be treated
as a self-dealing director under Sec. 32;
3. If the interest in both companies is either both substantial or both
nominal, Sec. 33 will apply.
I. DERIVATIVE SUIT
In case of a wrongful or fraudulent act of a director, officer or agent,
stockholders have the following options:
1. Individual or Personal Action – for direct injury to his rights, such as
denial of his right to inspect corporate books and records or pre-emptive
rights;
either as an individual action or a derivative suit; and a
3. Derivative Suit – an action based on injury to the corporation – to
 enforce a corporate right – wherein the corporation itself is joined as a
necessary party, and recovery is in favor of and for the corporation. It is
a suit granted to any stockholder to institute a case to remedy a wrong
done directly to the corporation and indirectly to stockholders.
CANDIDO PASCUAL, plaintiff-appellant,
vs.
EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
(GR No. L-5174; 19 Phil. 83; March 17, 1911)
FACTS: During 1903-1907, the defendant-appellees, without the knowledge
and acquiescence of the stockholders deducted their compensation from
gross income instead of from the net profits of the bank, the same with their
predecessors for the years 1899-1902.
Plaintiff-appellant brings this action in his own right as a stockholder of the
bank, for the benefit of the bank and all the stockholders, in behalf of the
corporation, which, even though, nominally a defendant, is to all intents
and purposes the real plaintiff in this case as shown in the prayer of
the complaint.
ISSUE: WON plaintiff has capacity to sue?
HELD: Yes. In suits of this character the corporation itself and not the
plaintiff stockholder is the real party in interest. The rights of the individual
stockholder are merged into that of the corporation. It is a universally
recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation
itself for the benefit of all the stockholders. Text writers illustrate this rule by
the familiar example of one person or entity owning all the stock and still
having no greater or essentially different title than if he owned but one single
share. Since, therefore, the stockholder has no title, it is evident that what he
does have, with respect to the corporation and his fellow stockholder, are
certain rights sui generis. These rights are generally enumerated as being,
first, 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. (Purdy's Beach on Private Corporations, sec.
554.)
The right of individual stockholders to maintain suits for and on behalf of the
corporation was denied until within a comparatively short time, but his right
is now no longer doubted. Accordingly, in 1843, in the leading case of Foss
vs. Harbottle, a stockholder brought suit in the name of himself and other
defrauded stockholders, and for the benefit of the corporation, against the
directors, for a breach of their duty to the corporation. This case was decided
against the complaining stockholder, on the ground that the complainant had
not proved that the corporation itself was under the control of the guilty
parties, and had not proved that it was unable to institute suit. The court,
however, broadly intimated that a case might arise when a suit instituted by
defrauded stockholders would be entertained by the court and redress given.
Acting upon this suggestion, and impelled by the utter inadequacy of suits
instituted by the corporation, defrauded stockholders continued to
institute these suits and to urge the courts of equity to grant relief. These
efforts were unsuccessful in clearly establishing the right of stockholders
herein until the cases of Atwol against Merriwether, in England, 1867,
and of Dodge vs. Woolsey, in this country, in 1855. These two great and
leading cases have firmly established the law for England and America,
that where corporate directors have committed a breach of trust
either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the
wrong, a single stockholder may institute that suit, suing on
behalf of himself and other stockholders and for the benefit of
the corporation, to bring about a redress of the wrong done
directly to the corporation and indirectly to the stockholders.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder
in the bank (corporation) has a right to maintain a suit for and on behalf of
the
corporation Teal and Company is under the complete control of
the principal defendants in the case, and, in these circumstances,
bank, but the extent of such a right must depend upon when, how, and for
what purpose he acquired the shares which he now owns. In the
determination of these questions we can not see how, if it be true that the
bank is a quasi-public institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November,
1903; that the defendants, as members of the board of directors and board
of government, respectively, during each and all the years 1903, 1904, 1905,
1906, and 1907, did fraudulently, and to the great prejudice of the bank and
its stockholders, appropriate to their own use from the profits of the bank
sums of money amounting approximately to P20,000 per annum.
It is self-evident that the plaintiff in the case at bar was not, before he
acquired in September, 1903, the shares which he now owns, injured or
affected in any manner by the transactions set forth in the second cause of
action. His vendor could have complained of these transactions, but he did
not choose to do so. The discretion whether to sue to set them aside, or to
acquiesce in and agree to them, is, in our opinion, incapable of transfer. If
the plaintiff himself had been injured by the acts of defendants' predecessors
that is another matter. He ought to take things as he found them when he
voluntarily acquired his ten shares. If he was defrauded in the purchase of
these shares he should sue his vendor. (Thus, he may sue for the second half
of 1903 to 1907 but not for the years 1989 to the first half of 1903.)
So it seems to be settled by the Supreme Court of the United States, as a
matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
devolved upon him since by operation of law, cannot maintain suits of this
character, unless such transactions continue and are injurious to the
stockholder, or affect him especially and specifically in some other way.
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.
ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH,
defendants-appellees.
(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)
FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company
(Company), entered into a Memorandum of Agreement and Voting Trust
Agreement with defendant Asia Banking Corporation (Bank) with
the understanding that it was intended for the protection of all parties
thereto from outside creditors, but that they were not intended to be
enforced according to the letter thereof, and that they did not contain
the true agreement between the Bank and the Company which was to
finance the company without interference from the above-named creditors.
That shortly after, Mullen caused the removal of the plaintiffs as directors of
the Company and their replacement. The defendants thereafter gave pledges
and mortgages from the Company to the Bank and entered into contracts as
directed by the Bank, and permitted the Bank to foreclose the same and to
sell the property of the Company itself and permitted the Bank to institute
suits against the Company, in which the Company was not represented by
anyone having its interest at heart and in which reason the Bank occupied
both plaintiff and defendant and tricked and deluded the courts into giving
judgment in which the rights of the real parties were concealed and unknown
to the courts.
Thereafter, defendants incorporated Philippine Motors Corporation where
all the assets and goodwill of the Company were transferred by the Bank.
ISSUE: WON the plaintiffs have the legal capacity to bring an action?
HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily
sue in equity to redress wrongs done to the corporation, but that the action
must be brought by the Board of Directors, the appellees argue — and the
court below held — that the corporation Teal and Company is a necessary
party plaintiff and that the plaintiff stockholders, not having made any
demand on the Board to bring the action, are not the proper parties plaintiff.
But, like most rules, the rule in question has its exceptions. It is alleged in the
complaint and, consequently, admitted through the demurrer that
the
it is obvious that a demand upon the Board of Directors to
institute an action and prosecute the same effectively would have
been useless, and the law does not require litigants to perform
useless acts. (Exchange bank of Wewoka vs. Bailey, 29 Okla., 246;
Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham
vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning Brewing Co., 259 Pa.,
510; Hawes vs. Contra Costa Water Company, 104 U. S., 450.)
The conclusion of the court below that the plaintiffs, not being stockholders
in the Philippine Motors Corporation, had no legal right to proceed
against that corporation in the manner suggested in the complaint
evidently rest upon a misconception of the character of the action. In this
proceeding it was necessary for the plaintiffs to set forth in full the
history of the various transactions which eventually led to the alleged loss
of their property and, in making a full disclosure, references to the
Philippine Motors Corporation appear to have been inevitable. It is to be
noted that the plaintiffs seek no judgment against the corporation itself at
this stage of the proceedings.
In our opinion the plaintiffs state a good cause of action for equitable relief
and their complaint is not in any respect fatally defective. The judgment
of the court below is therefore reversed, the defendants demurrer is
overruled, and it is ordered that the return of the record to the Court
within ten days from the return of the record to the Court of First Instance.
So ordered
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc.,
plaintiff-appellant,
vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees
(GR No. L-22399; 19 SCRA 671; March 30, 1967)
FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a
derivative suit against defendant Pablo Roman, then President of the Bank,
for granting certain loans to fictitious and non-existing persons and to
their close friends, relatives and/or employees, who were in reality their
dummies on the basis of fictitious or inflated appraised value of real estate
properties, in connivance with other officials.
The complaint alleged that Miguel Cuaderno, then Central Bank
Governor, acting upon the complaint, and the Monetary Board ordered an
investigation and found violations of the General Banking Act, but no
information was filed until his retirement; that to neutralize the
impending action against him, Pablo Roman engaged Miguel Cuaderno as
technical consultant and selected Bienvenido Dizon as Chairman of the
Board of the Bank; that such appointment was done in bad faith and
without intention to protect the interest of the Bank but were only
prompted to protect Pablo Roman.
The complaint, therefore, prayed for a writ of preliminary injunction
against eh Monetary Board in confirming such appointments, but was
dismissed by the lower court.
ISSUE: WON the court below erred in dismissing the complaint?
HELD: Yes. The defendants mainly controvert the right of plaintiff to
question the appointment and selection of defendants Cuaderno and
Dizon, which they contend to be the result of corporate acts with which
plaintiff, as stockholder, cannot interfere. Normally, this is correct,
but Philippine jurisprudence is settled that an individual stockholder is
permitted to institute a derivative or representative suit on
behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever (1) the officials
of the corporation refuse to sue, or (2) are the ones to be sued
or (3) hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest (Pascual vs. Del Saz Orozco,
19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs.
Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-
appellant's action here is precisely in conformity, with these principles.
He is neither alleging nor vindicating his own individual interest
or prejudice, but the interest of the
HELD: No. A derivative suit is an action brought by
minority shareholders in the name of the corporation to
Republic Bank and the damage caused to it. The action he
has brought is a derivative one, expressly manifested to be for
and in behalf of the Republic Bank, because it was futile to
demand action by the corporation, since its Directors were
nominees and creatures of defendant Pablo Roman (Complaint, p.
6). The frauds charged by plaintiff are frauds against the Bank that
redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as
technical consultant, and of Bienvenido Dizon to head the Board of Directors
of the Republic Bank, were made only to shield Pablo Roman from criminal
prosecution and not to further the interests of the Bank, and avers that both
men are Roman's alter egos. There is no denying that the facts thus pleaded
in the complaint constitute a cause of action for the bank: if the questioned
appointments were made solely to protect Roman from criminal prosecution,
by a Board composed by Roman's creatures and nominees, then the moneys
disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or
diversion of corporate funds, since the Republic Bank would have no interest
in shielding Roman, and the directors in approving the appointments would
be committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover
those paid out for the purpose, as prayed for in the complaint in this case
(Angeles vs. Santos, supra.).
Defendants urge that the action is improper because the plaintiff was not
authorized by the corporation to bring suit in its behalf. Any such authority
could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any
demand for intra-corporate remedy would be futile, as expressly
pleaded in the complaint. These circumstances permit a stockholder to
bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no
other stockholder has chosen to make common cause with
plaintiff Perez is irrelevant, since the smallness of plaintiff's
holdings is no ground for denying him relief (Ashwander vs. TVA, 80
L. Ed. 688). At any rate, it is yet too early in the proceedings for the
absence of other stockholders to be of any significance, no issues having
even been joined.
ISSUE2: WON the Corporation should be a plaintiff or defendant?
HELD2: The English practice is to make the corporation a party plaintiff,
while in the United States, the usage leans in favor of its being joined as
party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be
raised against either method. (1) Absence of corporate authority
would seem to militate against making the corporation a party
plaintiff, while (2) joining it as defendant places the entity in the
awkward position of resisting an action instituted for its
benefit. What is important is that the corporation' should be
made a party, in order to make the Court's judgment binding
upon it, and thus bar future relitigation of the issues. On what
side the corporation appears loses importance when it is
considered that it lay within the power of the trial court to direct
the making of such amendments of the pleadings, by adding or
dropping parties, as may be required in the interest of justice
(Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to
dismiss an action. (Ibid.)
ISSUE3: WON the action of the plaintiff amounts to a quo warranto
proceeding?
HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of
the Republic Bank's board of directors. The suit is aimed at preventing the
waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the
corporation's bank business. Whether the complaint's allegations to such
effect are true or not must be determined after due hearing.
WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra,
under Compensation of Directors) – Petitioners assert that the
motion for reconsideration of the civil aspect of the RTC decision acquitting
respondents is a derivative suit brought by them as minority stockholders of
WIT for and on behalf of the corporation
ISSUE: WON the appeal may be considered as a derivative action?
redress wrongs committed against it, for which the directors
refuse to sue. It is a remedy designed by equity and has been
the principal defense of the minority shareholders against
abuses by the majority. Here, however, the case is not a derivative
suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097
and 37098 filed with the RTC of Iloilo for estafa and falsification of
public document. Among the basic requirements for a
derivative suit to prosper is that the minority shareholder who is
suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative
cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. This is necessary to
vest jurisdiction upon the tribunal in line with the rule that it is the allegations
in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not
complied with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that "this is a
petition for review on certiorari on pure questions of law to set aside a
portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since
the trial court's judgment of acquittal failed to impose any civil liability
against the private respondents. By no amount of equity considerations,
if at all deserved, can a mere appeal on the civil aspect of a criminal case
be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted
by petitioners, which it is not, the same is outrightly dismissible for having
been wrongfully filed in the regular court devoid of any jurisdiction to
entertain the complaint. The ease should have been filed with the Securities
and Exchange Commission (SEC) which exercises original and exclusive
jurisdiction over derivative suits, they being intra-corporate disputes, per
Section 5 (b) of P.D. No. 902-A.
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO
ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO,
RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.
(GR No. 85339; 176 SCRA 447; Aug. 11, 1989)
FACTS: Eduardo de los Angeles was a director appointed by PCGG who
sequestered the shares of Andres Soriano III claiming it to belong to Eduardo
Conjuangco, a close associate and dummy of then President Marcos. De los
Angeles initiated a derivative suit against herein respondents, in behalf of
SMC, for the revocation of a Board Resolution adopted to assume the loans
incurred by Neptunia Corporation, a foreign company, said to be a wholly-
owned subsidiary of SMC. The action was dismissed by the SEC on the
grounds that De los Angeles does not have adequate shares to represent the
interest of the stockholders and that his assumed role as a PCGG appointed
director is inconsistent with his assumed role as a representative of minority
stockholders.
ISSUE: WON De Los Angeles can institute a derivative suit?
HELD: Yes. The theory that de los Angeles has no personality to bring suit in
behalf of the corporation — because his stockholding is minuscule, and there
is a "conflict of interest" between him and the PCGG — cannot be sustained.
It is claimed that since de los Angeles 20 shares (owned by him since 1977)
represent only. 00001644% of the total number of outstanding shares (1
21,645,860), he cannot be deemed to fairly and adequately represent the
interests of the minority stockholders. The implicit argument — that a
stockholder, to be considered as qualified to bring a derivative suit, must hold
a substantial or significant block of stock — finds no support whatever in the
law. The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act
or transaction complained of, the number of his shares not
being material;
the position of Chase that Dr. Buencamino must account for the P570,000.00
used to pay the second series of payment on the subscription, the
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the latter has
failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his own
right suffices to invest him with standing to bring a derivative
action for the benefit of the corporation. The number of his
shares is immaterial since he is not suing in his own behalf,
or for the protection or vindication of his own particular right, or
the redress of a wrong committed against him, individually, but
in behalf and for the benefit of the corporation.
Neither can the "conflict-of-interest" theory be upheld. From the conceded
premise that de los Angeles now sits in the SMC Board of Directors by the
grace of the PCGG, it does not follow that he is legally obliged to vote as the
PCGG would have him do, that he cannot legitimately take a position
inconsistent with that of the PCGG, or that, not having been elected by the
minority stockholders, his vote would necessarily never consider the latter's
interests. The proposition is not only logically indefensible, non sequitur,
but also constitutes an erroneous conception of a director's role and
function, it being plainly a director's duty to vote according to his own
independent judgment and his own conscience as to what is in the best
interests of the company. Moreover, it is undisputed that apart from the
qualifying shares given to him by the PCGG, he owns 20 shares in his own
right, as regards which he cannot from any aspect be deemed to be
"beholden" to the PCGG, his ownership of these shares being precisely what
he invokes as the source of his authority to bring the derivative suit.
ELTON W. CHASE, as minority Stockholder and on behalf of
other Stockholders similarly situated and for the benefit of AMERICAN
MACHINERY AND PARTS MANUFACTURING, INC., plaintiff-appellant,
vs.
DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B.
FRANCIA and DOLORES A. BUENCAMINO, respondents.
(GR No. L-20395; 136 SCRA 365; May 13, 1985)
FACTS: Herein plaintiff-appellant Elton Chase, entered into an
agreement with Dr. Buencamino and William Cranker (already business
partners) for the establishment of a factory in Manila called American
Machinery Engineering Parts, Inc. (Amparts), where chase was to transfer
his tractor plant, ship his machineries from his former plant in
America to Manila, install said machineries at Amparts plant and he is
to be the production manager of Amparts.
For some time the three maintained harmonious relations until Chase
tendered his resignation which was accepted by Buencamino and Cranker.
Chase initially filed a case in California against Cranker for the recovery of the
purchase price of his plant, but this died a natural death. Eventually, he filed
a case before the CFI alleging various acts of frauds allegedly committed by
the other two.
ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The evidence of defendants proves very clearly that right from
the start, Chase was by them recognized as a stockholder and initial
incorporator with 600 paid up shares representing a 1/3 interest in
Amparts, and that would be enough for Chase to have the correct
personality to institute this derivative suit; the second place, it also
appears apparently undenied that Chase did not win in California so that he
did not recover the $150,000.00 that he had prayed for there against
Overseas, which if he had would really in the mind of the Court have put him
in estoppel to intervene in any manner as incorporator or stockholder of
Amparts; and in the third place and most important it should not be
forgotten that Chase has filed the present case not for his personal
benefit, but for the benefit of Amparts, so that to the Court the argument
of estoppel as against him would appear to be out of place; the estoppel
to be valid as a defense must be an estoppel against Amparts itself; the
long and short of it is that the Court is impelled and constrained to discard
all the other defenses set up by Dr. Buencamino on the principal complaint;
the result of all these would be to sustain so far,
P330,000.00 used in paying the lsst series on the subscription, plus another
sum of P245,000.00 entered as loan on his favor and against Amparts, for
the sum of P434,000.00 earned in the blackmarketing of the excess of
$140,000.00 dollars on the forwarding costs and promotional expenses, for
the sum of P391,200.00 earned in the blackmarketing of the excess of
$117,000.00 in the transaction with Bertoni and Cotti, and all these would
reach a total of P1,970,200.00; and as the appropriation of the profits for
himself was a quasi-delict, the liability therefore assuming that it had been
done with the cooperation of Cranker would have to be solidary, 2194 New
Civil Code.
CATALINA R. REYES, petitioner,
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance
of Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents.
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)
FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New
York for raw materials but were found out to consist of already finished
product for which reason the Central Bank of the Philippines stopped all
dollar allocations for raw materials for the corporation which necessarily led
to the paralyzation of the operations. It was alleged that the supplier of the
said finished goods was United Commercial Company of New York in which
Dalamal, appointed by the BOD of the Textile Mills as co-manager, had
inrterests and that the letter of credit for said goods were guaranteed by the
Indian Commercial Company and Indian Traders in which Dalamal likewise
has interests. It was further alleged that the sale of the finished products was
the business of Indian Commercial Company of Manila who cannot obtain
dollar allocations for imporations of finished goods.
An action for the appointment of a receiver was filed before the trial court
after the BOD refused to proceed against Dalamal, which was granted.
ISSUE: WON Justiniani may be allowed to institute the case for receivership
and damages?
HELD: Yes. It is not denied by petitioner that the allocation of dollars to the
corporation for the importation of raw materials was suspended. In the eyes
of the court below, as well as in our own, the importation of textiles instead
of raw materials, as well as the failure of the Board of Directors to take
action against those directly responsible for the misuse of dollar
allocations constitute fraud, or consent thereto on the part of the directors.
Therefore, a breach of trust was committed which justified the
derivative suit by a minority stockholder on behalf of the corporation.
―It is well settled in this jurisdiction that 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 stockholder may institute a suit in behalf of himself
and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. An illustration of a
suit of this kind is found in the case of Pascual vs. Del Saz Orozco (19 Phil.
82), decided by this Court as early as 1911. In that case, the Banco
Español-Filipino suffered heavy losses due to fraudulent connivance
between a depositor and an employee of the bank, which losses, it
was contended, could have been avoided if the president and directors
had been more vigilant in the administration of the affairs of the bank.
The stockholders constituting the minority brought a suit in behalf of the
bank against the directors to recover damages, and this over the objection
of the majority of the stockholders and the directors. This court held that the
suit could properly be maintained.‖ (64 Phil., Angeles vs. Santos [G.R. No. L-
43413, prom. August 31, 1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal
importation for a period of two years is also without merit. During that period
of time respondent had the right to assume and expect that the directors
would remedy the anomalous situation of the corporation brought about by
their own wrong doing. Only after such period of time had elapsed could
respondent conclude that the directors were remiss in their duty to protect
the corporation property and business.
Corporation pp. 977-980). The stockholders may not directly
We are led to agree with the judge below that the appointment of a
receiver was not only expedient but also necessary to restore the faith and
confidence of the Central Bank authorities in the administration of the
affairs of the corporation, thus ultimately leading to a restoration of the
dollar allocation so essential to the operation of the textile mills.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA,
EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-
BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First
Instance of Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN
LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.
(GR No. -40620; 90 SCRA 40; May 6, 1979)
FACTS: A writ of prelimiary injunction was filed by herein respondents as
purchasers of 1,328 shares of stock of Inocented De La Rama, inc. after
herein petitioners surreptitiously met and authorized the sale of 823 shares to
forestall the petitioner’s takeover from the previous president and vice-
president (sellers of the 1,328 shares), in violation of their pre-emptive
right. The trial court ruled in favor of respondents. Later on, private
respondents entered into a compromise agreement with the recipients for
the transfer of the 823 shares, against which the petitioners filed a motion
to dismiss which was denied.
ISSUE: WON a derivative suit is the more proper action that should have
been filed by respondents?
HELD: No. The petitioners contend that the proper remedy of the plaintiffs
would be to institute a derivative suit against the petitioners in the name
of the corporation in order to secure a binding relief after exhausting all
the possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf
of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. In the case at bar, however,
the plaintiffs are alleging and vindicating their own individual
interests or prejudice, and not that of the corporation. At any rate,
it is yet too early in the proceedings since the issues have not been
joined. Besides, misjoinder of parties is not a ground to dismiss an action.
JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL
SANTOS, defendant-appelle (86 Phil. 387; May 19, 1950) – Juan D.
Evangelista, et. al. are minority stockholders of the Vitali Lumber
Company, Inc., while Rafael Santos holds more than 50% of the stocks of
said corporation and also is and always has been the president, manager,
and treasurer thereof. Santos, in such triple capacity, through fault,
neglect, and abandonment allowed its lumber concession to lapse and
its properties and assets, among them machineries, buildings,
warehouses, trucks, etc., to disappear, thus causing the complete ruin of
the corporation and total depreciation of its stocks.
Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to
render an account of his administration of the corporate affairs and assets:
(2) to pay plaintiffs the value of their respective participation in said assets
on the basis of the value of the stocks held by each of them; and (3) to pay
the costs of suit. Evangelista, et. al. also ask for such other remedy as may
be and equitable. The trial court dismissed the action on the ground of
improper venue and lack of cause of action.
ISSUE: WON plaintiffs have a right to bring the action for their benefit?
HELD: No. The complaint shows that the action is for damages resulting
from mismanagement of the affairs and assets of the corporation by its
principal officer, it being alleged that defendant's maladministration has
brought about the ruin of the corporation and the consequent loss of value of
its stocks. The injury complained of is thus primarily to that of the
corporation, so that the suit for the damages claimed should be by the
corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
claim those damages for themselves for that would result
in the appropriation by, and the distribution among them of
part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of
the Corporation Law.
But while it is to the corporation that the action should pertain in cases of
this nature, however, if the officers of the corporation, who are the ones
called upon to protect their rights, refuse to sue, or where a demand upon
them to file the necessary suit would be futile because they are the very
ones to be sued or because they hold the controlling interest in the
corporation, then in that case any one of the stockholders is allowed to
bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But
in that case it is the corporation itself and not the plaintiff stockholder
that is the real property in interest, so that such damages as may be
recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19
Phil. 82, 85). In other words, it is a derivative suit brought by a stockholder
as the nominal party plaintiff for the benefit of the corporation, which is
the real property in interest (13 Fletcher, Cyclopedia of Corporations, p.
295).
In the present case, the plaintiff stockholders have brought the action not for
the benefit of the corporation but for their own benefit, since they ask that
the defendant make good the losses occasioned by his mismanagement and
pay to them the value of their respective participation in the corporate assets
on the basis of their respective holdings. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution
in view of the provisions of section 16 of the Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor so
that the lower court did not err in dismissing the complaint on that ground.
While plaintiffs ask for remedy to which they are not entitled unless the
requirement of section 16 of the Corporation Law be first complied with, we
note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a mere
change in the prayer. Such amendment, however, is not possible now, since
the complaint has been filed in the wrong court, so that the same last to be
dismissed.
The order appealed from is therefore affirmed, but without prejudice to the
filing of the proper action in which the venue shall be laid in the proper
province. Appellant's shall pay costs. So ordered
IN SUMMARY:
1. That the party bringing the suit should be a stockholder as of
the time the act or transaction complained of took place, or whose
shares have evolved upon him since by operation of law. This rule,
however, does not apply if such act or transaction continues and is
injurious to the stockholder or affect him specifically in some other way.
The number of his shares is immaterial since he is not suing in
his own behalf or for the protection or vindication of his own right, or
the redress of a wrong done against him, individually, but in behalf
and for the benefit of the corporation.
2. He has tried to exhaust intra-corporate remedies, he has made
a demand on the board of directors for the appropriate relief but the
latter had failed or refused to heed his plea. Demand, however,
is not required if the company is under the complete control
of the directors who are the very ones to be sued (or where it
becomes obvious that a demand upon them would have been futile
and useless) since the law does not require a litigant to perform useless
acts;
3. The stockholder bringing the suit must allege in his complaint
that he is suing on a derivative cause of action on behalf
of the corporation and all other stockholders similarly
situated, otherwise, the case is dismissible. This is because the
cause of action actually devolves on the corporation and not to a
particular stockholder.
4. The corporation should be made a party, either as party-plaintiff
or defendant, in order to make the court’s judgment binding upon it,
and thus, bar future litigation of the same issues. On what side
the corporation appears loses importance when it is considered that it
lay
within the power of the court to direct the making of amendment of the
pleading, by adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a ground to dismiss
action; and,
5. Any benefit or damages recovered shall pertain to
the corporation. This is so because in all instances, derivative
suit is instituted for and in behalf of the corporation and not for the
protection or vindication of a right or rights of a particular stockholder,
otherwise, the aggrieved stockholder should institute, instead, an
individual or personal suit to vindicate his personal or individual
right. Or, for that matter, representative or class suit for all other
stockholders whose rights are similarly situated, injured or
violated, personally or individually.
J. EXECUTIVE COMMITTEE
Sec. 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
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
Sec. 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation.
The statement of the objects, purposes or powers in the AOI results
practically in defining the scope of the authorized corporate enterprise or
undertaking. This statement both confers and also limits the actual authority
of the corporation.
Along with the powers indicated in the AOI, a corporation can also exercise
powers that may be granted by law, particularly those provided under Sec.
36 and 44 of the Corporation Code and those which may be necessary or
incidental to tis existence.
In short, corporate authority may be classified as:
1. Express powers – those expressly granted by law inclusive of the
corporate charter or AOI;
2. Implied Powers – those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers; and
3. Incidental Powers – those incidental to its existence.
A. POWER TO SUE AND BE SUED
A corporation may sue and be sued in its corporate name just like any other
person.
VENUE: the action filed against it must be instituted at the place of principal
office of the corporation.
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide:
Sec. 11. Service upon domestic private juridical entity. When
the defendant is a corporation, partnership or association organized under
the laws of the Philippines with a juridical personality, service may be
made on the president, managing partner, general manager, corporate
secretary, treasurer, or in-house counsel.
Service of summons upon persons other than those named under than those
named in the above provision is without force and effect.
DELTA MOTOR SALES CORPORATION, petitioner,
vs.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
PAMINTUAN, respondents
(GR No. L-41667; April 30, 1976)
FACTS: Herein respondent Pamintuan initiated an action against petitioner
Delta Motors for the alleged defective Toyota car sold to him and for failure
to fulfill the warranty obligation by not repairing the car.
The summons were served on Dionisia Miranda, employee of the petitioner.
Delta Motors failed to answer the complaint and was declared in default and
evidence was presented and a decision was rendered against herein
petitioner.
Petitioner filed a motion to lift the order of default and to set aside the
judgment and for new trial, which was denied.
ISSUE: WON there was proper service of summons?
HELD: No. Rule 14 of the Revised Rules of Court provides:
SEC. 13. Service upoin private domestic corporation or partnership. — If
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president,
manager, secretary, cashier, agent, or any of its directors.
For the purpose of receiving service of summons and being
bound by it, a corporation is identified with its agent or officer
who under the rule is designated to accept service of process.
"The corporate power to receive and act on such service, so far as
to make it known to the corporation, is thus vested in such officer
or agent." (Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453).
A strict compliance with the mode of service is necessary to confer
jurisdiction of the court over a corporation. The officer upon whon service is
Finance and Administrative Officer. In these cases, these persons were
made be one who is named in the statute; otherwise the service is
insufficient. So, where the statute required that in the case of a domestic
corporation summons should be served on "the president or head of the
corporation secretary treasurer, cashier or managing agent thereof", service
of summons on the secretary's wife did not confer jurisdiction over the
corporation in the foreclosure proceeding against it. Hence, the the decree of
forclosure and the deficiency judgment were void and should be vacated.
(Reader vs. District Court, 94 Pacific 2nd 858).
The purpose is to render it reasonably certain that the
corporation will receive prompt and proper notice in an action
against it or to insure that the summons be served on a
representative so integrated with the corporation that such
person will know what to do with the legal papers served on him.
In other words, "to bring home to the corporation notice of the
filing of the action". (35A C.J.S. 288 citing Jenkins vs. Lykes Bros. S.S.
Co., 48 F. Supp. 848; MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249).
In the instant case the Manila court did not acquire jurisdiction over Delta
Motor because it was not properly served with summons. The service of
summons on Dionisia G. Miranda, who is not among the persons mentioned
in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor.
Courts acquire jurisdiction over the person of a party defendant and of the
subject-matter of the action by vertue of the service of summons in the
manner required by law. Where there is no service of summons or a
voluntary general appearance by the defendant, the court acquires no
jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and
Pacific Commercial Co. vs. Tan Cueco, 36 Phil. 556).
Consequently, the order of default, the judgment by default and the
execution in Civil Case No. 97373 are void and should be set aside.
E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC,
Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION,
respondent.
(GR No. 136426; Aug. 6, 1999)
FACTS: Petitioner is a limited partnership with principal office address at
Davao City and with branch offices at Parañaque, Metro Manila and Lapasan,
Cagayan de Oro City.
Petitioner and private respondent executed a Deed of Sale with Development
Agreement wherein the former agreed to develop certain parcels of land
located at Cagayan de Oro belonging to the latter into a housing subdivision
for the construction of low cost housing units. They further agreed that in
case of litigation regarding any dispute arising therefrom, the venue shall be
in the proper courts of Makati.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Damages against petitioner, as defendant, before the RTC Makati for failure
of the latter to comply with its contractual obligation in that, other than a
few unfinished low cost houses, there were no substantial developments
therein.
Summons, together with the complaint, were served upon the defendant,
through its Branch Manager at the stated address at Cagayan de Oro City but
the Sheriff's Return of Service stated that the summons was duly served
"upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager
Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and
evidenced by the signature on the face of the original copy of the summons.
Defendant filed a motion to dismiss on the ground of improper service of
summons which was denied.
ISSUE: WON the court acquired jurisdiction?
HELD: No. Earlier cases have uphold service of summons upon a
construction project manager; a corporation's assistant manager;
ordinary clerk of a corporation; private secretary of corporate executives;
retained counsel; officials who had charge or control of the
operations of the corporation, like the assistant general manager; or the
corporation's Chief
considered as "agent" within the contemplation of the old rule. Notably,
under the new Rules, service of summons upon an agent of the corporation
is no longer authorized.
The designation of persons or officers who are authorized to accept
summons for a domestic corporation or partnership is now limited and
more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil
Procedure. The rule now states "general manager" instead of only
"manager"; "corporate secretary" instead of "secretary"; and "treasurer"
instead of "cashier." The phrase "agent, or any of its directors" is
conspicuously deleted in the new rule.
The particular revision under Section 11 of Rule 14 was explained by retired
Supreme Court Justice Florenz Regalado, thus:
. . . the then Sec. 13 of this Rule allowed service upon
a defendant corporation to "be made on the president,
manager, secretary, cashier, agent or any of its directors."
The aforesaid terms were obviously ambiguous and
susceptible of broad and sometimes illogical interpretations,
especially the word "agent" of the corporation. The Filoil
case, involving the litigation lawyer of the corporation who
precisely appeared to challenge the validity of service of
summons but whose very appearance for that purpose was
seized upon to validate the defective service, is an
illustration of the need for this revised section with limited
scope and specific terminology. Thus the absurd result in the
Filoil case necessitated the amendment permitting service only
on the in-house counsel of the corporation who is in effect an
employee of the corporation, as distinguished from an
independent practitioner. (emphasis supplied).
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court
Revision Committee, stated that "(T)he rule must be strictly observed.
Service must be made to one named in (the) statute . . .
It should be noted that even prior to the effectivity of the 1997 Rules of Civil
Procedure, strict compliance with the rules has been enjoined. In the case of
Delta Motor Sales Corporation vs. Mangosing, the Court held:
A strict compliance with the mode of service is necessary
to confer jurisdiction of the court over a corporation. The
officer upon whom service is made must be one who is
named in the statute; otherwise the service is insufficient. . . .
The purpose is to render it reasonably certain that the corporation will
receive prompt and proper notice in an action against it or to insure that
the summons be served on a representative so integrated with the
corporation that such person will know what to do with the legal papers
served on him. In other words, "to bring home to the corporation notice
of the filing of the action." . . . .
The liberal construction rule cannot be invoked and utilized as
a substitute for the plain legal requirements as to the manner
in which summons should be served on a domestic
corporation. . . . . (emphasis supplied).
Accordingly, we rule that the service of summons upon the branch manager
of petitioner at its branch office at Cagayan de Oro, instead of upon the
general manager at its principal office at Davao City is improper.
Consequently, the trial court did not acquire jurisdiction over the person of
the petitioner.
B. POWER OF SUCCESSION
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or
members thereof.
C. POWER TO ADOPT AND USE A COMMON SEAL
This right has be expressly granted by law. However, it is not mandatory but
merely permissive. This is because the corporate seal performs no further or
Later on, the CFI rendered a judgment in favor of petitioner, where the
certificate was sold at a public auction in favor of the petitioner who
greater function than to impart prima facie evidence of the due execution by
the corporation of a written document or obligation.
D. POWER TO AMEND ITS ARTICLES OF INCORPORATION
The procedures for the exercise of this right are provided under Sec. 16, Sec.
37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER
AND ITS AMENDMENTS.
As far as corporations created by special law are concerned, amendment may
NOT be considered as a matter of right. The law creating it may or may not
authorize or empower the corporation to make any changes in its AOI or
charter. However, whether empowered or not, Congress may amend or
repeal a corporate charter by virtue of its inherent authority to amend or
repeal laws under the Consitution.
E. POWER TO ADOPT BY-LAWS
The Corporation Code actually REQUIRES a corporation to adopt by-laws, not
contrary to law, morals, or public policy, within 1 month from receipt of
official notice of the issuance of the certificate of incorporation or registration
(Sec. 46).
Amendment of the by-laws are allowed subject to the procedure and
requirement provided under Sec. 48.
F. POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS
The power of a corporation to issue or sell its stocks is an inherent right of
any stock corporation except only as it may be regulated by law or by the
AOI.
Admission, as well as termination of members is a prerogative granted by law
to non-stock corporations and the manner, requirements or procedures for
such admission or termination may be contained in the AOI or by-laws.
G. POWER TO ACQUIRE OR ALIENATE REAL OR
PERSONAL PROPERTY
When a corporation is expressly empowered by law to acquire or alienate real
and/or personal properties, the limitations imposed by Sec. 36 are as follows:
Sec. 36. Xxx
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, (1) as the transaction of
the lawful business of the corporation may reasonably and
necessarily require, (2) subject to the limitations prescribed by
law and the Constitution.
The first limitation practically sets the limit of the corporate authority
to acquire, own, hold or alienate property. As it has been said the
purpose clause in the AOI grants as well as limits the powers which a
corporation may exercise. Verily, WON the acquisition of such property is
within the corporate powers or authority may reasonably be determined
from the purpose or purposes indicated in the AOI.
LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET
AL., respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion
executed a chattel mortgage covering a certificate of public convenience
grnted to him to operate taxicab service of 27 units in Manila, in favor of
petitioner, to secure a loan evidenced by a promissory note guaranteed by
Concepcion and one Placido Esteban.
Concepcion mortgaged the same certificate to cover a second loan with
Rehabilitation Finance.
Petitioner filed an action to foreclose the mortgage. While it was pending, RF
also foreclosed the second chattel mortgage where the certificate was sold at
a public auction in favor of AD Santos who applied for the approval of the
sale which was granted by the Public Service Commission.
immediately filed for approval with the Commission. AD Santos Inc., recipient
of the certificate from AD Santos, opposed the application for approval.

ISSUE: WON Petitioner may acquire the certificate of public convenience?
HELD: No. Petitioner claims in this regard that its corporate purposes are to
carry on a general mercantile and commercial business, etc., and that it is
authorized in its articles of incorporation to operate and otherwise deal in
and concerning automobiles and automobile accessories' business in
all its multifarious ramification (petitioner's brief p. 7) and to operate,
etc., and otherwise dispose of vessels and boats, etc., and to own
and operate steamship and sailing ships and other floating craft and deal in
the same and engage in the Philippine Islands and elsewhere in the
transportation of persons, merchandise and chattels by water; all this
incidental to the transportation of automobiles (id. pp. 7-8 and Exhibit B).
We find nothing in the legal provision and the provisions of petitioner's
articles of incorporation relied upon that could justify petitioner's
contention in this case. To the contrary, they are precisely the best
evidence that it has no authority at all to engage in the business of
land transportation and operate a taxicab service. That it may operate
and otherwise deal in automobiles and automobile accessories; that
it may engage in the transportation of persons by water does not mean
that it may engage in the business of land transportation — an entirely
different line of business. If it could not thus engage in the line of
business, it follows that it may not acquire an certificate of public
convenience to operate a taxicab service, such as the one in question,
because such acquisition would be without purpose and would have no
necessary connection with petitioner's legitimate business.
GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of
El Hogar Filipino erected a modern reinforced concrete office building at the
site of its old building. The acquisition of the lot and the construction of the
new office building thereon is not the subject of the second cause of
action for being ultra vires on the part of the corporation.
ISSUE: WON the erection of the building was reasonable?
HELD: Yes. With this contention we are unable to agree. Under the
Corporation Law, every corporation has the power to purchase, hold and
lease such real property as the transaction of the lawful business of the
corporation may reasonably and necessarily require. When this property was
acquired in 1916, the business of El Hogar Filipino had developed to such an
extent, and its prospects for the future were such as to justify its directors in
acquiring a lot in the financial district of the City of Manila and in
constructing thereon a suitable building as the site of its offices; and it
cannot be fairly said that the area of the lot — 1,413 square meters —
was in excess of its reasonable requirements. 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; and an intention to discriminate between
owners in this respect is not lightly to be imputed to the Legislature. The
point here involved has been the subject of consideration in many decisions
of American courts under statutes even more restrictive than that which
prevails in this jurisdiction; and the conclusion has uniformly been that a
corporations whose business may properly be conducted in a populous center
may acquire an appropriate lot and construct thereon an edifice with facilities
in excess of its own immediate requirements
and occupation of agricultural lands of the public domain, under a bona
fide claim of acquisition or ownership, for at least thirty years
It would seem to be unnecessary to extend the opinion by lengthy citations
upon the point under consideration, but Brown vs. Schleier (118 Fed., 981),
may be cited as being in harmony with the foregoing authorities. In dealing
with the powers of a national bank the court, in this case, said:
When an occasion arises for an investment in real property for either of
the purposes specified in the statute the national bank act permits
banking associations to act as any prudent person would act in making
an investment in real estate, and to exercise the same measure of
judgment and discretion. The act ought not to be construed in such a
way as to compel a national bank, when it acquires real property for a
legitimate purpose, to deal with it otherwise than a prudent land owner
would ordinarily deal with such property.
At any rate the weight of judicial opinion is so overwhelmingly in favor of
sustaining the validity of the acts alleged in the second cause of action to
have been done by the respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The ground stated in the
second cause of action is in our opinion without merit.
THE DIRECTOR OF LANDS, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
respondents
(GR No. L56613; March 14, 1988)
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of
a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and its predecessors-in-interest have been in actual, continuous, public,
peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
Director of Lands. The CFI and the CA ruled in favor of INC.
ISSUE: WON the corporation may acquire the land in question?
HELD Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may have been
quite adverse to private respondent. For the rule then prevailing under the
case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
subsequent cases involving private respondent adverted to above', is that a
juridical person, private respondent in particular, is disqualified under the
1973 Constitution from applying for registration in its name alienable public
land, as such land ceases to be public land "only upon the issuance of title to
any Filipino citizen claiming it under section 48[b]" of Commonwealth Act
No. 141, as amended. These are precisely the cases cited by petitioner in
support of its theory of disqualification.
Since then, however, this Court had occasion to re-examine the rulings in
these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437,
among others. Thus, in the recent case of Director of Lands v.
Intermediate Appellate Court, 146 SCRA 509, We categorically stated that
the majority ruling in Meralco is "no longer deemed to be binding
precedent", and that "[T]he correct rule, ... is that alienable public land
held by a possessor, personally or through his predecessors-in-interest,
openly, continuously and exclusively for the prescribed statutory period
[30 years under the Public Land Act, as amended] is converted to
private property by mere lapse or completion of said period, ipso jure."
We further reiterated therein the timehonored principle of non-impairment
of vested rights.
The crucial factor to be determined therefore is the length of time private
respondent and its predecessors-in-interest had been in possession of the
land in question prior to the institution of the instant registration
proceedings. The land under consideration was acquired by private
respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by
same by purchase from the Ramos brothers and sisters, namely: Eusebia,
Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
Commonwealth Act No. 141, as amended, "those who by themselves or
through their predecessors-in-interest have been in open, continuous,
exclusive and notorious possession
immediately preceding the filing of the application for confirmation of title
except when prevented by war or force majeure" may apply to the Court of
First Instance of the province where the land is located for confirmation of
their claims, and the issuance of a certificate of title therefor, under the Land
Registration Act. Said paragraph [b] further provides that "these shall
be conclusively presumed to have performed all the conditions essential
to a Government grant and shall be entitled to a certificate of title under
the provisions of this chapter." Taking the year 1936 as the reckoning
point, there being no showing as to when the Ramoses first took
possession and occupation of the land in question, the 30-year period of
open, continuous, exclusive and notorious possession and occupation
required by law was completed in 1966.
The completion by private respondent of this statutory 30-year period
has dual significance in the light of Section 48[b] of Commonwealth Act No.
141, as amended and prevailing jurisprudence: [1] at this point, the
land in question ceased by operation of law to be part of the public domain;
and [2] private respondent could have its title thereto confirmed
through the appropriate proceedings as under the Constitution then in
force, private corporations or associations were not prohibited from
acquiring public lands, but merely prohibited from acquiring, holding or
leasing such type of land in excess of 1,024 hectares.
If in 1966, the land in question was converted ipso jure into private land, it
remained so in 1974 when the registration proceedings were commenced.
This being the case, the prohibition under the 1973 Constitution would have
no application. Otherwise construed, if in 1966, private respondent
could have its title to the land confirmed, then it had acquired a vested
right thereto, which the 1973 Constitution can neither impair nor defeat.
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION
This is an express power granted by the law under the Code, particularly Title
IX thereof.
I. POWER TO MAKE REASONABLE DONATIONS
Ordinarily, a pure gift of funds or property by a corporation not created for
charitable purpose is not authorized and would constitute a violation of
the rights of its stockholders unless it is empowered by statute. There
are circumstances, however, under which a donation by a corporation may
be to it benefit as a means of increasing its business or promoting patronage.
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations,
subject to the following limitations:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable, scientific,
cultural or similar purpose; and
3. It shall not be in aid of political party or candidate, or for purposes of
partisan political aactivity.
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER
PLANS
It is now generally recognized in almost all jurisdiction to empower a
corporation to establish pension plans, pension trust, profit sharing plans,
stock bonus or stock option plans and other incentive plans to
directors, officers and employees. In fact, the power may include any act
to promote convenience, welfare and benefit of the employees or officers.
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb.
28, 1963) - A post office branch was opened in herein respondent’s mining
camp at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an
employee of such company, was the postmaster. Prior to the opening the
company, at the request of the Bureau of Posts, adopted a resolution
that the former would assume full responsibility for all cash received by
the postmaster. On May 11, 1954, the postmaster went on a three day leave
but never returned. As a result, an action was brought by the government to
recover P13,867.24, the amount of shortage in the accounts of the
postmaster, from the company.
cement.
ISSUE: WON the subject resolution is within the powers of the company to
adopt?
HELD: Yes. The opening of the post office branch was undertaken because
of a request submitted by respondent company to promote the convenience
and benefit of its employees. The idea did not come from the government
and the Director of Posts was prevailed upon to agree to the request only
after studying the necessity for its establishment and after imposing upon
the company certain requirements intended to safeguard and protect the
interest of the government. Accordingly, the company cannot now be
heard to complain of its liability upon the technical plea that the
resolution is ultra vires. The least that can be said is that it cannot now go
back on its plighted word on the ground of estoppel.
The resolution covers a subject which concerns the benefit, convenience and
welfare of the company’s employees and their families. There are certain
corporate acts that may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare
of the corporation. Thus, it has been held that ―although not
expressly authorized to do so a corporation may become a surety where the
particular transaction is reasonably necessary or proper to the conduct of its
business‖, and here it is undisputed that the establishment of the local post
office is a vital improvement in the living condition of its employees and
laborers who came to settle in it mining camp which is far removed
from the postal facilities or means of communication accorded to people
living in a city or municipality.
IMPLIED POWERS
Sec. 36. Xxx
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
It is a question, in each case, of the logical relation of the act to
the corporate purpose expressed in the charter. For if the act is
one which is lawful in itself and not otherwise prohibited, and is
done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense, it may be
fairly considered within the corporation‘s charter powers
(Montelibano vs. Bacolod-Murcia Milling Co., Inc. as cited in NPC vs. VERA)
I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
NECESSARY TO CARRY OUT ITS PURPOSES
TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA
198; Sept. 25, 1967) – Respondent Filipinas Cement Corporation
filed an application with herein respondent PSC for a certificate of public
convenience to install, maintain and operate an electric plant in Teresa,
Rizal for the purpose of supplying electric power and light to its cement
factory and its employees living within its compound. Herein petitioner,
operating an electric plant in Teresa Rizal filed an opposition claiming
that Filipinas is not authorized to operate the proposed electric plant
under its articles of incorporation. PSC decided in favor of Filipinas.
ISSUE: WON under its articles of incorporation, Filipinas is authorized to
operate and maintain an electric plant?
HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to
secure from any governmental, state, municipality, or provincial, city or other
authority, and to utilize and dispose of in any lawful manner, rights, powers,
privileges, franchises and concessions – obviously necessary or at least
related to the operation of its cement factory. Moreover, said AOI also
provide that the corporation may generally perform any and all acts
connected with the business of manufacturing portland cement or arising
therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat and power
plant is necessarily connected with the business of manufacturing cement. If
in the modern world where we live today electricity is virtually a necessity for
our daily needs, it is more so in the case of industries like the manufacture of
NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)
FACTS: Private Respondent Sea Lion International Port Terminal Services
Inc. filed a complaint for prohibition and mandamus with damages against
petitioner NPC and Philippine Ports Authority after NPC did not renew its
Contract for Stevedoring Services for coal-handling of NPC’s plant and in
taking over its stevedoring services.
ISSUE: WON NPC may embark in stevedoring and arrastre services?
HELD: Yes. The NPC was created and empowered not only to construct,
operate and maintain power plants, reservois, transmission lines and other
works, but also:
…to 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… (Sec. 3[1] of RA
6395, as amended)
To determine whether or not the NPC act falls within the purview of the
above provision, 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 the act
is one which is lawful in itself and not otherwise prohibited, and
is done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense, it may be
fairly considered within the corporation‘s charter powers
(Montelibano vs. Bacolod-Murcia Milling Co., Inc.)
In the instant case, it is an undisputed fact that the pier owned by NPC,
receives various shipment 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.
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988)
FACTS: 14 plaintiffs, all associate members of the International School, Inc.
brought an action for injunction against 10 members of the Board of
Trustees, after a letter of Donal Marshall, president of the board, was sent
stating that the school would be collecting a ―development fee‖ of P2,625
per enrollee for the purpose of constructing new buildings and remodel
existing ones to accommodate the increasing enrollment in the school
which would need P35M. The CFI of Manila dismissed the complaint.
ISSUE: WON the imposition of the development fee is within the powers of
the school?
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol,
expressly authorized the Board of Trustees ―upon consultation with
the Secretary of Education and Culture‖ to determine the amount of fees
and assessments which may be reasonably imposed upon its
students, to maintain or conform to the school’s standard of education.
Such consultation complied with and the Secretary expressed his
conformity with the reasonableness of the assessment. The lower court
observed that:
Xxx the expansion of the school facilities, which is to be done by improving
old buildings and/or constructing new ones, is an ordinary business
transaction well within the competence of the Board of Trustees to act upon.
Xxx Being directly related to the purpose of elevating and maintaining the
school’s standard of instruction, which is ordained in fact by PD 732, the
expansion cannot result in any radical or fundamental change in the kind of
activity being conducted by the school that might require the consent of
the members composing it.
of shares of no-par stock allotted to each stock-holder if such increase is for
J. POWER TO EXTEND OR SHORTEN CORPORATE TERM
This has been discussed in Chapter 5: CORPORATE CHARTER AND ITS
AMENDMENTS.
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.
From the above-provision and jurisprudence, the requirements and procedure
for extending or shortening the corporate term are as follows:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock (including non-voting shares) or 2/3 of
the members in case of non-stock corporations;
3. The ratification must be made at a meeting duly called for that purpose;
4. Prior written notice of the proposal to extend or shorten the corporate
term must be made stating the time and place of meeting addressed to
each stockholder or member at his place of residence, either by mail or
personal service;
5. In case of extension, the same cannot be made earlier than 5 years
prior to the original or subsequent expiry date unless there are
justifiable reasons for an earlier extension;
6. In case of extension, the same must be made during the lifetime of the
corporation;
7. Any dissenting stockholder may exercise his appraisal right;
8. Submission of the amended articles with the SEC; and
9. Approval thereof by the SEC (as required under Sec. 37 for extension,
and Sec. 120 for shortening the term with the effect of dissolution)
READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC
K. POWER TO INCREASE OR DECREASE CAPITAL STOCK; INCUR,
CREATE OR INCREASE BONDED INDEBTEDNESS
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
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.
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.
The following requirements or procedure should be complied with:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the
outstanding capital stock (including non-voting shares) or 2/3 of
the members in case of non-stock corporations at a meeting duly
called for that purpose;
3. Prior written notice of the proposal to extend or shorten the corporate
term must be made stating the time and place of meeting addressed to
each stockholder or member at his place of residence, either by mail or
personal service;
4. A certificaate in duplicate must be signed by a majority of the directors
of the corporation, countersigned by the chairman and the secretary of
the stockholders meeting, setting forth the matters contained in
subsection 1 to 7 of Sec. 38;
5. In case of increase in capital stock, 25% of such increased capital must
be subscribed and that at least 25% of the amount subscribed must be
paid either in cash or property;
6. In case of decrease of capital stock, the same must not prejudice the
right of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and
8. Approval thereof by the SEC.
METHODS OF INCREASING CAPITAL STOCK:
1. Increase the par value of the existing number of shares without
increasing the number of shares;
2. Increase the number of existing shares without increasing the par value
thereof;
3. Increasing the number of shares and at the same time increasing the
par value of the shares
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion;
petitioner, awash with profits from its business operations but confronted
with the demand of the union for wage increase, decided to evade its
responsibility towards the employees by a devised capital reduction. While
2. Payment of Debt Obligations;
3. To acquire additional assets such as providing cars to employees to
distribute the goods;
*Nothing in law prohibits increase of capital stock
REASONS FOR DECREASE:
1. To reduce or wipe out existing deficit where no creditors would thereby
by affected;
2. When the capital is more than what is necessary to procreate the
business or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their present actual
value in case where there is a decline in the value of the fixed assets of
the corporation.
TRUST FUND DOCTRINE: The subscriptions to capital stock of
the corporation constitute a fund which the creditors have a right to look
up for the satisfaction of their claims. Accordingly, if the decrease would
affect the rights of creditors, the same would not be approved by the SEC.
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan. 29,
1923) - Shortly after its incorporation, the stockholders of Cooperativa
Naval Filipina, adopted a resolution to the effect that the capital should be
reduced by 50% and the subscribers be released from the obligation to
pay their unpaid balance.
In the course of time, the company became insolvent and went into the
hands of Philippine Trust Company (Philtrust), as assignee in bankruptcy,
and by it this action was instituted to recover ½ of the stock
subscription of herein defendant who subscribed to 450 of the 1,000
authorized capital stock.
It does not appear that the formalities under the Corporation Code for the
reduction of capital stock were observed and in particular it does not appear
that any certificate was at any time filed in the Bureau of Commerce and
Industry, showing such reduction.
Respondent judge ruled in favor of Philtrust and directed respondent to pay
½ of the subscription price of his shares.
ISSUE: WON the reduction is valid and proper?
HELD: No. A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the AOI. Moreover, strict
compliance with the statutory regulations is necessary. In the case before us,
the resolution releasing the shareholders from their obligation to pay 50% of
their respective subscriptions was an attempted withdrawals of so much
capital from the fund upon which the company’s creditors were entitled
ultimately to rely and, having been effected without compliance with the
statutory requirements, was wholly ineffectual.
MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987)
-The Madrigal Central Office Employees Union sought for the renewal of
its CBA, proposing a P200 wage increase and an allowance of P100 a
month. Petitioner company requested for the deferment of its negotiation.
Meanwhile, the company effected two reductions of its capital stock by
issuing marketable securities owned by petitioner in exchange for
shareholders’ shares.
After the petitioner’s failure to sit down with the respondent union, the latter
commenced a case with the NLRC for unfair labor practice. In due time,
petitioner filed its position paper, alleging operating losses.
The Labor Arbiter rendered a decision in favor of respondent Union.
ISSUE: WON the decrease in capital stock is valid and binding?
HELD: No. What clearly emerges from the recorded facts is that the
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.
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 it
employee ranks, especially the 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.
L. POWER TO DENY PRE-EMPTIVE RIGHT
PRE-EMPTIVE RIGHT is a right granted by law to all existing stockholders
of a stock corporation to subscribe to all issues or disposition of shares of
any class, in proportion to their respective holdings, subject only to the
limitation imposed under Sec. 39, which provides:
Sec. 39. Power to deny pre-emptive right. - All stockholders of a
stock corporation shall enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock,
in exchange for property needed for corporate purposes or in payment of a
previously contracted debt.
BASIS OF RIGHT: The grant of this right is for the preservation,
unimpaired and undiluted, of the old stockholders’ relative and
proportionate voting strength and control, that is, the existing ratio of their
property interest and voting power in the corporation.
EXCEPTIONS (Under Sec. 39):
1. When shares to be issued is in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or
2. Shares to be issued in good faith with the approval of the stockholders
representing 2/3 of the outstanding capital stock either:
a. In exchange for property needed for corporate purpose; or
b. In payment of a previously contracted debt.
The exceptions will not apply to stockholders of close corporation whose pre-
emptive right, is broader if not absolute. See Sec. 102.
The right may likewise be lost by waiver, express or implied or inability or
failure to exercise it having been notified of the proposed disposition of
shares.
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent
Jamiatul Philippines – Al Islamia, Inc. was incorporated with P2,000,000
authorized capital stock divided into 20,000 shares, of which 460
belong to herein petitioner. In a stockholders meeting, an increase of the
authorized capital stock to P1,000,000 was approved, where the
previously unissued shares were all issued.
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC
alleging that the additional issue of previously unissued shares was made in
violation of his pre-emptive right and that the increase of capital stock was
illegal considering that the stockholders on record were not notified, and that
such issuance be cancelled.
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the
assets if the same is (1) necessary in the usual and regular course
of business of said corporation or (2) if the proceeds of the sale
or other disposition of such property and assets be appropriated
original unsubscribed shares, but can exercise such right with regards the
increase capitalization.
ISSUE: WON the above ruling is correct?
HELD: Yes. The issuance of the unsubscribed portion of the capital stock or
P110,980 is valid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in
a corporation is lodged in the bard of directors and no stockholders’ meeting
is necessary to consider it because such issuance does not need approval of
stockholders.
The general rule is that pre-emptive right is recognized only with respect to
new issue of shares, and not with respect to additional issues of originally
authorized shares. This is on theory that when a corporation, at its inception
offers its first shares, it is presumed to have offered all of those which it is
authorized to issue. 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 the shares left unsubscribed are reoffered, he
cannot therefore claim a dilution of interest.
With respect to the claim that the increase in the authorized capital stock was
without consent, expressed or implied, of the stockholder, it was the finding
of the Commission that a meeting was called for the purpose. The petitioner
had not sufficiently overcome the evidence of respondent that such meeting
was in fact held. What petitioner successfully proved, however, was the fact
that he was not notified of said meeting and that he never attended the
same as he was out of the country at the time, attending the Mecca
pilgrimage. Another thing that petitioner was able to disprove was the
allegation that all stockholders who did not subscribe to the increase have
waived their pre-emptive right. As far as petitioner is concerned, he had not
waived his pre-emptive right to subscribe as he could not have done so for
the reason that he was not present at the meeting and had not executed a
waiver, thereof. Not having waived such right and for reasons of equity, he
may still be allowed to subscribe to the increased capital stock proportionate
to his present shareholdings.
M. POWER TO SELL OR DISPOSE OF ASSETS
Sec. 40. Sale or other disposition of assets. - Subject to the
provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or trustees,
sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
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
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.
The conditions for the valid exercise of this power are thus as follows:
1. Resolution by a majority of the BOD/T;
2. Authorization from the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members;
3. The ratification of the stockholders or member must be made at a
meeting duly called for that purpose;
4. Prior written notice of the proposed action and of the time and place of
meeting must be made addressed to all stockholders of record, either by
mail or personal service;
5. The sale of the assets shall be subject to the provisions of existing laws
on illegal combinations and monopolies; and
6. Any dissenting stockholder shall have the option to exercise his appraisal
right.
The above requirements will not apply:
1. In case the sale is NOT covering all or substantially all of the assets of a
corporation as to render it incapable of continuing the
business or accomplishing the purpose for which it was
incorporated; or if the proceeds are to be used to continue the
conduct of the remaining business of the company;
2. If the sale is in the usual and regular course of business of the
company.
ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272 SCRA
454; May 4, 1997) – The Islamic Directorate of the Philippines
received two parcels of land from the Libyan government for the purpose
of putting up a Mosque, Madrasah (arabic school) and other religious
infrastructures. In 1972, Martial Law was declared, most of the
members of the Board of Trustees, together with petitioner Sen. Mamintal
Tamano, fled to the middle-east to escape political prosecution.
Thereafter, two Muslim groups sprung claiming to be the legitimate IDP. One
headed by Engr. Farouk Caprizo, not having been properly elected as new
members of the Board of Trustees caused to be sold, through a resolution of
IDP, the two lots to respondent Iglesia Ni Cristo.
The 1971 Board of Trustees now filed a petition to declare the sale null and
void.
ISSUE: WON the sale is valid?
HELD: No. The Caprizo Group is a fake board of trustees. IDP never gave its
consent through a legitimate Board of Trustees. Therefore, this is not a case
of vitiated consent, but one where consent on the part of one of the
contracting parties is totally wanting. Ineluctably, the subject sale is void and
produces no effect whatsoever.
The Caprizo group-INC sale is further deemed null and void ab initio because
of the Caprizo Group’s failure to comply with Sec. 40 of the Corporation Code
pertaining to the disposition of all or substantially all assets of
the corporation.
The Tandang Sora property, it appears from the records, constitutes the only
property of the IDP. Hence, its sale to a third-party is a sale or disposition of
all the corporate property and assets of IDP falling squarely within the
contemplation of Sec. 40. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by vote of at least 2/3 of the bona
fide members of the corporation should have been obtained. These twin
requirements were not met as the Caprizo Groups which voted to sell the
property was a fake Board and those whose names and signatures were
affixed by the Caprizo Group together with the sham Board Resolution
authorizing negotiation for the sale were, from all indications, not bona fide
declared which were claimed to be made to the injury and in fraud of its
members of the IDP as they were made to appear to be.
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415; Nov.
29, 1965) - The appellant secured in a civil case against Insular Famrs,
Inc. a judgment for the balance of the price of a pump sold by the former
to the latter. A writ of execution was issued but was returned unsatisfied,
saying that Insular Farms had no leviable property. Soon after appelant
filed with the same Municipal Court the present action against Pacific Farms
claiming it to be an alter ego of Insular Farms, which the court denied. On
appeal, the CFI and CA also denied the petition.
ISSUE: WON Pacific Farms should answer for the liability of Insular Farms?
HELD: No. It appears on record that the appellee purchase 1,000 shares of
stock of Insular Farms, and thereupon sold said shares of stock to certain
individuals, who forthwith reorganized said corporation and that the board
of directors thereof, as reorganized, then caused its assets, including
its leasehold right over a public land in Pangasinan to be sold to herein
appellee. These facts do not prove that the appellee is an alter ego of Insular
Farms, or is liable for its debts.
Generally where on corporation sells or otherwise transfers all o its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except: (1) where the purchaser expressly or impliedly agrees to
assumes such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is merely
a continuation of the selling corporation; and (4) where the transaction
is entered into fraudulently in order to escape liability for such debts.
In the case at bar, there is neither proof nor allegation of the
foregoing exceptions. In fact, these sales took place not only over 6 months
before the rendition of the judgment sought to be collected in the present
action, but also, appellee purchase the shares of stock of Insular Farms as
the highest bidder at an auction sale held at the instance of a bank to which
said shares had been pledged as security for the obligation of Insular
Farms in favor of said bank.
N. POWER TO ACQUIRE OWN SHARES
Sec. 41. Power to acquire own shares. - A stock corporation shall
have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out
of unpaid subscription, in a delinquency sale, and to purchase delinquent
shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code.
The limitation that the corporation must at all times have
―unrestricted retained earnings‖ is a condition for the exercise of this power,
EXCEPT:
1. Redemption of redeemable shares under Sec. 8;
2. Exercise of stockholders right to compel a close corporation to purchase
his shares for any reason under Sec. 105 when the corporation has
sufficient assets in its book to cover its debts and liabilities exclusive of
capital stock;
3. In case of deadlocks under Sec. 104.
Once purchased, the shares are considered as treasury shares and while they
remain so, they have no voting rights and dividend rights. The
corporation may (1) re-issue them even below par; (2) issue them as stock
dividends; (3) retire or cancel them and thereby remove from issue
effectively reducing the number of shares issued stated in the AOI.
STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the Board of
Directors of Trading Company approved and authorized the purchases of the
capital stock of the company from its various stockholder, herein
respondents, at par value amounting to P3,300. Petitioner assails the
recovery of the amount paid to such stockholders and the P3,000 dividends
creditors. The complaint was dismissed.
ISSUE: WON recovery can be made?
HELD: Yes. The Board of Directors acted on the assumption that it had
accounts receivable of the face value of P19,126.02 but there was no
stipulation as to the value of such accounts and P12,512.47 of which had
but little, if any value. The purchase of the stocks and the dividend
declaration further decreased the assets of the corporation. The profits
amounted only to P3,314.72. In other words, that the corporation did not
then have actual bona fide surplus from which the dividends could be
paid, and that the payment of them in full at the time would ―affect the
financial condition of the corporation‖.
It is indeed peculiar that the action of the board in the assailed acts was all
done at the same meeting of the board of directors, and it appears that the
stockholders, whose shares were purchased, were former directors and
resigned before the board approved the purchase and declaration of
dividends. In other words, the directors were permitted to resign so that they
could sell their stock to the corporation. In this situation and upon this state
of facts, it is very apparent that the directors did not act in good faith or that
they were grossly ignorant of their duties.
Creditors of a corporation have the right to assume that so long as there
are outstanding debts and liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important and we have given them consideration which they deserve.
O. POWER TO INVEST FUNDS
Sec. 42. Power to invest corporate funds in another corporation
or business or for any other purpose. - Subject to the provisions of
this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose
for which it was organized when approved by a majority of the board of
directors or trustees and 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.
―MAY INVEST FUNDS‖ has been held by the SEC to mean an investment
in the form of money, stock, bonds and other liquid assets and does not
include real properties or other fixed assets, otherwise the law would have
phrased Sec. 42 to include ―assets‖ rather than ―to invest funds‖.
SECONDARY PURPOSE: the law uses the phrase ―for any purpose
other than the primary purpose‖ signifying that even if the business or
undertaking is allowed or authorized in the secondary purpose or
purposes of the corporation, the provision of Sec. 42 would apply.
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE
FUNDS: 1. Resolution by a majority of the BOD/T;
2. Ratification by the stockholders representing 2/3 of the outstanding
capital stock (or 2/3 of members);
3. The ratification must be made at a meeting duly called for that purpose;
4. Prior written notice of the proposed investment and the time and place
of the meeting shall be made, addressed to each stockholder or member
by mail or by personal service; and
5. Any dissenting stockholder shall have the option to exercise his appraisal
right.
RATIFICATION: as a requirement, applies only to investments that
are beyond the corporation’s primary purpose, or outside the express or
implied powers of the investing corporation. Thus, if the investment is
reasonably necessary to accomplish its primary purpose, the approval of the
stockholders or members is not required.
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA 247;
Feb. 28, 1969) - Defendant Ma-ao Sugar Central Co, Inc., engaged
in the manufacture of sugar, invested P655,000 in shares of stock of
Philippine Fiber Processing Co., Inc., which is engaged in the
manufacture of sugar bags. The sale, though not previously authorized, was
ratified by the 2/3 vote of the stockholders. Claiming the business of
defendant is not related to that of Philippine Fiber, such sale was attacked
but the trial court decided on its legality.
ISSUE: WON the investment by Ma-ao Sugar constitutes a violation of Sec.
17-1/2 of the Corporation Law?
HELD: Yes. In his work entitled ―The Philippine Corporation Law‖,
Professor Sulpicio S. Guevarra of the UP College of Law, reconciled par. (9)
and (10) of Sec. 13, as follows:
―j. Power to acquire or dispose of shares or securities. – A
private corporation, in order to accomplish it purpose as stated in its
articles of incorporation, and imposed by the Corporation Law, has
the power to acquire, hold, mortgage, pledge or dispose of shares,
bonds, securities, and other evidences of indebtedness of any
domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares
of another corporation is done solely for investment and not
to accomplish the purpose of its incorporation, the vote
of approval of the stockholders is necessary‖
―40. Power to invest corporate funds. – A private corporation has
the power to invest its corporate funds in any other corporation or
business, or for any other purpose other than the main purpose for
which it was organized, provided that its board of directors has been
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders’
meeting called for that purpose. When the investment is necessary to
accomplish its purpose or purposes as stated in its articles of
incorporation, the approval of the stockholders is not necessary‖
We agree with Professor Guevarra. We therefore agree with the finding of
the lower court that the investment in question does not fall under the
purview of Sec. 17 ½ fo the Corporation Law.
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.
(GR No. L-45911; April 11, 1979)
FACTS: Petitioner John Gokongwei alleged that the respondent corporation
has been investing corporate funds in other corporations or business
outside of its primary purpose in violation of Sec. 17 ½ of the Corporation
Law.
Respondents sent notices of the annual stockholders’ meeting including in
the agenda thereof the re-affirmation of the authorization of the BOD by
the stockholders at the meeting to invest corporate funds in other
companies or businesses or for purposes other than the main purpose. An
injunction was prayed for by petitioner, but the date of hearing originally set
was cancelled. No action was taken up to the date of the filing of the instant
petition.
ISSUE: WON respondent SEC committed grave abuse of discretion in
allowing the above agenda to be taken up in the stockholders’ meeting?
HELD: No. Section 17-1/2 of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for any purpose
other than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of
the voting power. If the investment is made in pursuance of
the corporate purpose, it does not need the approval of
the stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose
of its incorporation that the vote of approval of the stockholders
holding shares entitling them to exercise at least two-thirds of
the voting power is necessary.
As stated by respondent corporation, the purchase of beer manufacturing
facilities by SMC was an investment in the same business stated as its main
purpose in its Articles of Incorporation, which is to manufacture and market
beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and marketing of
San Miguel beer thereat. Restructuring of the investment was made in 1970-
1971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central
Co., Inc., supra, appears relevant. In said case, one of the issues was the
legality of an investment made by Manao Sugar Central Co., Inc., without
prior resolution approved by the affirmative vote of 2/3 of the stockholders'
voting power, in the Philippine Fiber Processing Co., Inc., a company
engaged in the manufacture of sugar bags. The lower court said that "there
is more logic in the stand that if the investment is made in
a corporation whose business is important to the
investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power
of the Board of Directors.‖
Assuming arguendo that the Board of Directors of SMC had no authority to
make the assailed investment, there is no question that a corporation, like an
individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. This is true
because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract
which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law
that the investment must be authorized by the affirmative vote of the
stockholders holding two-thirds of the voting power. This requirement is for
the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its
ratification by said stockholders obliterates any defect which it may have
had at the outset. "Mere ultra vires acts", said this Court in
Pirovano, "or those which are not illegal and void ab initio, but
are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate
purpose. The mere fact that respondent corporation submitted the assailed
investment to the stockholders for ratification at the annual meeting of
May 10, 1977 cannot be construed as an admission that respondent
corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the
gratification of their stockholders the acts of their directors, officers and
managers.
P. POWER TO DECLARE DIVIDENDS
DIVIDENDS are corporate profits set aside, declared and ordered by the
BOD to be paid to the stockholders. It is a fruit of investment, the recurrent
return, analogous to interest and rent upon other forms of invested capital.
Sec. 43. Power to declare dividends. - The board of directors of a
stock corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided,
That any cash
to stockholders of record on a specific future date and as far as the
corporation is concerned, the registered owner is the one entitled to
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.
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
stockholders as dividends.
TYPES OF DIVIDENDS:
1. Cash dividends – payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g., bonds, notes,
shares in another corporation);
3. Stock dividends – corporation’s own shares of stock out of the
remaining unissued shares which would require the approval of the
stockholders representing 2/3 of the outstanding capital stock at a
regular or special meeting duly called for that purpose. This is to be
valued at par value or issue price.
Cash and property dividends have the effect of reducing corporate assets to
the extent of the dividends declared. In stock dividends, it would generally
not increase the proportionate interest of the stockholders of the corporation
although it will have the effect of increasing the subscribed and paid-up
capital (exception is when the stock dividend declaration would result in
fractional shares like when 1 share is declared as dividend for every 9 shares
held)
OVERISSUANCE OF SHARES: happens when a corporation issues shares
beyond its authorized capital stock, even in the form of stock dividends.
DELINQUENCY: is a requirement for the application of the second part of
the first paragraph of Sec. 43. Such that, cash dividends declared are first
applied on the unpaid balance on the subscription plus costs and expenses
and stock dividends are withheld until the subscription is fully paid.
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled
to declare dividends, except: (1) When the unrestricted retained earnings is
in excess of 100% of the paid-up capital; and (2) In the case of Mandatory
If Earned Preference Shares.
The judgment of the BOD is conclusive, EXCEPT: (1) when they act in bad
faith; (2) for a dishonest purpose; (3) they act fraudulently, oppressively,
unreasonably or unjustly; or (4) abuse of discretion can be shown as to
impair the rights of the complaining shareholders. The TEST of bad faith is to
determine if the policy of the directors is dictated by their personal interest
rather than the corporate welfare.
WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the
right of the stockholders to be paid dividends vest as soon as they have been
lawfully and finally declared by the BOD. It is not revocable unless: (1) it has
not been officially communicated to the stockholders; or (2) it is in the form
of stock dividends which is revocable any time prior to distribution because
this does not result in the distribution of assets but merely the division of
existing shares of a stockholder into smaller units or integers.
TRANSFER OF SHARES: The dividends already declared belong to
the owner at the time of declaration. Usually, however, the dividends are
payable
dividends. As against his transferor, however, the transferee has presumably
the right to such dividends and is oftentimes taken into account in
entering effecting the transfer of shares.
NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee
(GR No. L-21601; Dec. 28, 1968)
FACTS: This is a motion for reconsideration filed by respondent Lepanto
contending that the order of the SC to pay Nielson 10% of the stock
dividends, declared by Lepanto during the extension of the contract, as
compensation for services under a management contract is in violation of
the Corporation Law and that it could not be the intention of the parties that
the services of Nielson should be paid in stock dividends.
ISSUE: WON Nielson & Co. is entitled to receive stock dividends?
HELD: No. The consideration for which shares of stock may be issued are:
(1) cash; (2) property; and (3) undistributed profits. Shares of stock are
given the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or
property then those shares do not fall under the category of "stock
dividends". A corporation may legally issue shares of stock in consideration of
services rendered to it by a person not a stockholder, or in payment of its
indebtedness. A share of stock issued to pay for services rendered is
equivalent to a stock issued in exchange of property, because services is
equivalent to property. Likewise a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for cash. But a
share of stock thus issued should be part of the original capital stock of the
corporation upon its organization, or part of the stocks issued when the
increase of the capitalization of a corporation is properly authorized. In
other words, it is the shares of stock that are originally issued by the
corporation and forming part of the capital that can be exchanged for cash
or services rendered, or property; that is, if the corporation has original
shares of stock unsold or unsubscribed, either coming from the original
capitalization or from the increased capitalization. Those shares of stock may
be issued to a person who is not a stockholder, or to a person already a
stockholder in exchange for services rendered or for cash or property. But
a share of stock coming from stock dividends declared cannot be
issued to one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of
the corporation declaring or authorizing such dividend. It is, what
the term itself implies, a distribution of the shares of stock of the
corporation among the stockholders as dividends. A stock dividend of a
corporation is a dividend paid in shares of stock instead of cash, and is
properly payable only out of surplus profits. So, a stock dividend is
actually two things: (1) a dividend, and (2) the enforced use
of the dividend money to purchase additional shares of stock
at par. When a corporation issues stock dividends, it shows that
the corporation's accumulated profits have been capitalized
instead of distributed to the stockholders or retained as
surplus available for distribution, in money or kind, should
opportunity offer. Far from being a realization of profits for the
stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from surplus to assets
and no longer available for actual distribution. Thus, it is apparent that
stock dividends are issued only to stockholders. This is so
because only stockholders are entitled to dividends. They are the only ones
who have a right to a proportional share in that part of the surplus which is
declared as dividends. A stock dividend really adds nothing to the interest of
the stockholder; the proportional interest of each stockholder remains the
same. If a stockholder is deprived of his stock dividends - and
this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the
proportion of the stockholder's interest changes radically. Stock
dividends are civil fruits of the original investment, and to the
owners of the shares belong the civil fruits.
c. The contract would constitute the management or operation of all
The term "dividend" both in the technical sense and its ordinary acceptation,
is that part or portion of the profits of the enterprise which the corporation,
by its governing agents, sets apart for ratable division among the holders of
the capital stock. It means the fund actually set aside, and declared by the
directors of the corporation as dividends and duly ordered by the director, or
by the stockholders at a corporate meeting, to be divided or distributed
among the stockholders according to their respective interests.
It is Our considered view, therefore, that under Section 16 of the Corporation
Law stock dividends cannot be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson can not be
paid in shares of stock which form part of the stock dividends of Lepanto for
services it rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto and Nielson
was simply to make the cash value of the stock dividends declared as the
basis for determining the amount of compensation that should be paid to
Nielson, in the proportion of 10% of the cash value of the stock dividends
declared. And this conclusion of Ours finds support in the record.
Q. POWER TO ENTER INTO MANAGEMENT CONTRACT
Sec. 44. Power to enter into management contract. - No
corporation shall conclude a management contract with another corporation
unless such contract shall have been approved by the board of
directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the
case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1)
where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or (2) where a majority of the
members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the
managed corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled to vote, or by at least
two-thirds (2/3) of 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.
This provision was inserted to assure not only technical competence but
continuity in management policy in running corporate affairs which can be
achieved through a management contract.
REQUIREMENTS OF A VALID MANAGEMENT
CONTRACT: 1. Resolution of the BOD;
2. Approval by the stockholders representing a majority of the outstanding
capital stock or majority of the members of both the managing and the
managed corporation;
3. The approval of the stockholders or members must be made at the
meeting called for that purpose; and
4. The contract shall not be for a period longer than 5 years for any one
term, except those which relate to exploration, development or
utilization of natural resources which may be entered into for such
periods as may be provided by pertinent laws and regulations;
5. 2/3 of the stockholders or members would be required, where:
a. The stockholders representing the same interest of both the
managing and the managed corporation own or control more than
1/3 of the total outstanding capital stock of the managing
corporation;
b. A majority f the members of the BOD of the managing corporation
also constitute a majority of the directors of the managed
corporation;
or substantially all of the business of another corporation, whether
 such contracts are called service contracts. If it will not constitute
the management of all or substantially all of the business of
another corporation, the first paragraph of Sec. 44 will apply and
not that of the second, that is, only the vote of the majority is
required.
R. ULTRA VIRES ACTS
Sec. 45. Ultra vires acts of corporations. - No corporation under
this Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except
such as are necessary or incidental to the exercise of the powers so
conferred.
ULTRA VIRES ACTS are those which cannot be executed or performed by a
corporation because they are not within its express, inherent, or implied
powers as defined by its charter or AOI. Accordingly, it may be subject to a
collateral attack questioning the authority of the corporation to engage in
such particular endeavor.
CONSEQUENCES:
1. On the Corporation itself: The proper forum may suspend or revoke,
after proper notice and hearing, the franchise or certificate of
registration of the corporation for serious misrepresentation as to what
the corporation can do or is doing to the great damage or prejudice of
the general public.
2. On the rights of the Stockholders: A stockholder may bring either an
individual or derivative suit to enjoin a threatened ultra-vires act or
contract. If already performed, a derivative suit against the directors
may be filed, but their liability will depend on whether they acted in
good faith and with reasonable diligence in entering into the contract.
3. On the immediate parties:
a. If the contract is fully executed in both sides, the contract is
effective and the courts will not interfere to deprive either party of
what has been acquired under it;
b. If the contract is executory on both sides,, as a rule, neither party
can maintain an action for its non-performance; and
c. Where the contract is executory on one side only, and has been
fully performed on the other, the courts differ as to whether an
action will lie on the contract against the party who has received
benefits of performance under it. Majority of the courts, however,
hold that the party who has received benefits from the
performance is ―estopped‖ to set up that the contract is ultra
vires to defeat an action on the contract.
READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje Mining (both
in this chapter)
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335;
Dec. 29, 1954) - The Board of directors of defendant company
adopted a resolution wherein the proceeds of the insurance taken on
the life of its previous President and General Manager Enrico Privano be
set aside and used to purchase 4,000 shares to be given to Privano’s
heirs, which was approved by the stockholders in a meeting duly called for
the purpose.
The donation of the shares was later on modified to transfer all the proceeds
directly to the heirs which would become a loan of the company with 5%
interest per annum and payable after the settlement of its bonded
indebtedness, and still later, modified to be payable ―whenever the
company is in a position to meet said obligation‖.
On an opinion by the SEC, sought by the President of the corporation, Sergio
Osmena, Jr., it was opined by the SEC that the donation was void for being
ultra vires. The Board planned to adopt a different resolution to effect the
donation but failed to act on it. The heirs, through Mrs. Estefania R. Privano,
acting as guardian, demanded the settlement of the obligation.
ISSUE: WON the donation was an ultra vires act?
HELD: No. After a careful perusal of the AOI, we find that the corporation
was given broad and almost unlimited powers to carry out the purposes for
which it was organized among them, (1) ―to invest and deal with the
money of the company not immediately required, in such manner as fro time
to time may be determined‖ and (2) ―to aid in any manner any person
association, or corporation or in the affairs of the property of which this
corporation has lawful interest‖. The donation in question undoubtedly
comes within the scope of this broad power for it is a fact appearing in
the evidence that the insurance proceeds were not immediately required
when they were given away.
We don‘t see much distinction between the acts of generosity of
the benevolence extended to some employees of the corporation,
and even to some in whom the corporation was merely
interested because of certain moral or political
consideration, and the donations which the corporation has seen
fit to give the children of the late Enrico Privano from the point
of view of the power of the corporation as expressed in the AOI. And if
the former had been sanctioned and had been valid and intra-vires, we see
no plausible reaons why the latter should now be deemed ultra-vires. It
may perhaps be argued that the donation given to the children of the
late Enrico Privano is so large and disproportionate that it can hardly be
considered a pension or gratuity that can be placed ona par with the
instances above-mentioned, but this argument overlooks one
consideration: the gratuity here given was not merely motivated by pure
liberality or act of generosity, but by a deep sense of recognition of the
valuable services rendered by the late Enrico Privano which had
immensely contributed to the growth of the corporation to the extent
that from its humble capitalization it blossomed into a multi-million
corporation that it is today.
Granting that it was ultra-vires, it may be said that the same
cannot be invalidated, or declared legally ineffective for that
reason alone, it appearing that the donation represents not only
the act of the BOD but of the stockholders themselves as shown
by the fact the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of
the corporate act, if any has been obliterated thereby making the
act perfectly valid and enforceable. This is specially so if the donation is
not merely executory but executed and consummated and no creditors are
prejudiced, or if there are creditors affected, the latter has expressly given
their conformity.
ISSUE2: What is the difference between an illegal act and that which is
ultra-vires?
HELD: The former contemplates the doing of an act which is contrary to law,
morals, or public order or contravene some rules of public policy or public
duty, and are, like similar transactions between the individuals, void. They
cannot serve as basis of a court action, nor acquire validity by performance,
ratification or estoppel. Mere ultra-vires acts, on the other hand, or those
which are not illegal and void ab initio, but are merely beyond the scope of
the AOI, are merely voidable and may become binding and enforceable when
ratified by the stockholders.
Since it is not contended that the donation under consideration is illegal, or
contrary to any of the express provisions of the AOI, nor prejudicial to the
creditors of the defendant corporation, we cannot but logically conclude that
said donation, even if ultra vires in the supposition we
have adverted to, is not void, and if voidable its infirmity has been
cured by ratification and subsequent acts of the defendant
corporation. The corporation is now prevented or estopped from
contesting the validity of the donation.
IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET
AL., defendant-appellees (57 Phil. 343; Oct. 26, 1932) - Mindoro Sugar
Company (MSC) transferred all of its property to Philippine Trust
Company (PTC) in consideration of the bonds it had issued to the value
of P3,000,000, each bond being $1,000, which par value, with interest at
8% per annum, PTC guaranteed to the holders.
PTC paid Ramon Diaz upon presentation of the coupons, the stipulated
interest from the date of maturity until July 1, 1928, when its stopped
payments, alleging that it did not deem itself bound to pay such interest or
to redeem the obligation because the guarantee given for the bonds was
illegal and void.
The CFI of Manila absolved the defendants from the complaint except MSC
which was sentenced to pay the value of the bond.
ISSUE: WON PTC’s act was ultra-vires?
HELD: No. Firstly, PTC although secondarily engaged in banking, was
primarily organized as a trust corporation with full power to acquire personal
property such as the bonds in question according to both sec. 13 (par. 5) of
the Corporation Law and its duly registered by-laws and AOI; Secondly, that
being thus authoriezd to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under better, more
advantageous conditions, and thereby secure the profit derived from their
sale.
―It is not, however, ultra vires for a corporation to enter
into contracts of guaranty where it does so in the legitimate
furtherance of its purposes and business. And it is well settled
that where a corporation acquires commercial papers or bonds in the
legitimate transaction of its business it may sell them, and in furtherance of
such a sale, it may in order to make them more readily marketable,
indorse or guarantee their payment.‖
Even if PTC did not acquire the bonds in question, but only guaranteed them,
it would at any rate, be valid and the said corporation is bound to pay the
appellant their value with the accrued interest in view of the fact that they
become due on account of the lapse of 60 days, without the accrued interest
due having been paid; and the reason is that it is estopped from denying the
validity of its guarantee.
The doctrine of ultra vires as a defense, is by some courts regarded as an
ungracious and odious one, to be sustained only where the most persuasive
consideration of public policy are involved, and there are numerous decisions
and dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where it will not
advance justice but on the contrary will accomplish a legal wrong.
When a contract is not on its face necessarily beyond the scope of the power
of the corporation by which it was made, it will, in the absence of proof to
the contrary, be presumed to be valid. Corporations are presumed to
contract within their powers. The doctrine of untra vires, when invoked for
or against a corporation, should not be allowed to prevail where it would
defeat the ends of justice or work a legal wrong.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101
Phil 540; May 23, 1957) - The SEC issued an order requiring petitioner herein
and its President Alfredo Abcede to show cause why it should not be
proceeded against for making misrepresentations to the public about
the need of registering and depositing war notes, with a view of probable
redemption as contemplated in Senate Bill No. 163 and in Senate Concurrent
Resolution No. 14, for otherwise they would be valueless.
Petitioner contended that the statement was made in good faith as President
Magsaysay would soon make representations to the US to have the war
notes redeemed.
Respondent SEC found that according to its AOI, the petitioner has
the privilege to work for the redemption of the war notes of its members
alone, but that it cannot offer its services to the public for a valuable
consideration, because there is nothing definite and tangible about the
redemption of the war notes and its success is speculative that any
authority given to offer services can easily degenerate into a racket; that
under its AOI the petitioner is a civic and non-stock corporation and upon
should not engage in business for profit; that it has received war notes for
deposit, upon payment of fees, without authority in its articles to do so; that
it had previously been rendered to desist from collecting from those
registering the war notes, but notwithstanding this prohibition it has
done so in the guise of service fees. Hence the Commission ordered to
stop receiving war notes, receiving same for deposit and chargin fees
therefore.
ISSUE: WON the SEC erred in issuing the questioned order?
Notwithstanding the provisions of the preceding paragraph, by-laws may
HELD: No. The articles authorize collection of fees from members; but they
do not authorize the corporation to engage in the business of registering and
accepting war notes for deposit and collecting fees from such services. This
was the ruling of the Commission and this we find to be correct.
Neither do we find any merit in the third contention that the association has
authority to accept and collect fees for reparation claims for civilian casualties
and other injuries. This is beyond any of the powers of the association as
embodied in its articles and have absolutely no relation to the avowed
purpose of the association to work for the redemption of war notes.
ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989)
-The Vice-president of Mover Enterprises, Inc. issued a check drawn
against Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose,
for the accommodation of his client. Petitioner-payee was charged
with the knowledge that the check was issued at the instance and for
the personal account of the President who merely prevailed upon
respondent vice-president to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank. While it was the
corporation's check which was issued to petitioner for the amount
involved, petitioner actually had no transaction directly with said corporation.
ISSUE: WON private respondent, one of the signatories of the check issued
under the account of Mover Enterprises, Inc., is an accommodation party
under NIL and a debtor of petitioner to the extent of the amount of said
check?
HELD: Yes. The liability of an accommodation party to a holder for value,
although such holder does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement
of negotiable paper by a corporation without consideration and for
the accommodation of another is ultra vires. One who has taken
the instrument with knowledge of the accommodation nature thereof
cannot recover against a corporation where it is only an accommodation
party. By way of exception, an officer or agent of a corporation shall have
the power to execute or indorse a negotiable paper in the name of the
corporation for the accommodation of a third person only if specifically
authorized to do so. Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for mere accommodation a
negotiable instrument of the corporation for their individual debts or
transactions arising from or in relation to matters in which the corporation
has no legitimate concern. Since such accommodation paper cannot thus
be enforced against the corporation, especially since it is not involved in
any aspect of the corporate business or operations, the signatories thereof
(president and vice-president) shall be personally liable therefor, as well as
the consequences arising from their acts in connection therewith.
CHAPTER 8: BY-LAWS
BY-LAWS are rules and ordinances made by a corporation for its own
government; to regulate the conduct and define the duties of the
stockholders or members towards the corporation and among themselves.
They are the rules and regulations or private laws enacted by the corporation
to regulate, govern and control its own actions, affairs and concerns and tis
stockholder or members and directors and officers with relation thereto and
among themselves in their relation to it.
Sec. 46. Adoption of by-laws. - Every corporation formed under this
Code must, within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of the
members in case of non-stock corporations, shall be necessary. The by-
laws shall be signed by the stockholders or members voting for them
and shall be kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours. A copy
thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, shall be filed with the
Securities and Exchange Commission which shall be attached to the original
articles of incorporation.
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.
EFFECTIVITY: After approval of the SEC.
BY-LAWS PRIOR TO INCORPORATION: it must be signed by all the
incorporators without the need of the affirmative vote of the majority of
the outstanding capital stock or the members provided it is submitted
together with the AOI.
AFTER INCPORPORATION: Must be submitted one month after the
issuance of the certificate of incorporation and must be approved by
a majority of the outstanding capital stock or members and signed by
such stockholders or members voting for them. Failure to file within 1
month may result to suspenion or revocation of corporate franchise.
THIRD PERSONS: are generally not bound, affected or prejudiced the by-
laws, it being merely internal rules of the corporation, EXCEPT: if they have
knowledge of its existence and contents.
CONTENTS:
Sec. 47. Contents of by-laws. - Subject to the provisions of
the Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and
the manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees
and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of
all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing
stock certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.
AMENDMENT:
MR. MENDOZA. There is a provision in the latter part of the Code which
identifies and describes the consequences of violations of any provision
of this Code. One such consequences is the dissolution of the
corporation for its inability, or perhaps, incurring certain penalties.
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.
TWO MODES OF AMENDMENT:
1. By a majority vote of the directors or trustees and the majority vote of
the outstanding capital stock or members, at a regular or special
meeting called for that purpose; or
2. By the board of directors alone when delegated by stockholders owning
2/3 of the outstanding capital stock or 2/3 of the members. This power,
however, is considered revoked, when so voted by a majority of the
outstanding capital stock or members in a regular or special meeting.
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
respondents.
(GR No. 117188; Aug. 7, 1997)
FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
reason failed to file its corporate by-laws. Victorio Soliven, himslef the owner
and developer of the subdivision was the first president of the Association.
Later on, asking on the status of petitioner, Soliven discovered that the said
association was already dissolved (according to the head of the legal
department of HIGC), and accordingly caused the registration of HIGC as the
association covering Phases West I, East I and East II of the subdivision.
ISSUE: WON the Association can be considered dissolved for non-adoption
of by-laws?
HELD: Yes. As correctly postulated by the petitioner, interpretation of this
provision of Sec. 46 begins with the determination of the meaning and import
of the word "must" in this section. Ordinarily, the word "must" connotes an
imperative act or operates to impose a duty which may be enforced. It is
synonymous with "ought" which connotes compulsion or mandatoriness.
However, the word "must" in a statute, like "shall," is not always imperative.
It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable
construction of the statute in which it is used demands or requires. This is
equally true as regards the word "must." Thus, if the languages of a statute
considered as a whole and with due regard to its nature and object reveals
that the legislature intended to use the words "shall" and "must" to be
directory, they should be given that meaning.
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
be
he
ne
MR. FUENTEBELLA. But it will not automatically amount to a
dissolution of the corporation by merely failing to file the by-laws within
one month. Supposing the corporation was late, say, five days, what
would be the mandatory penalty?
 MR. MENDOZA. I do not think it will necessarily result in the automatic
or ipso facto dissolution of the corporation. Perhaps, as in the case, as
you suggested, in the case of El Hogar Filipino where a quo warranto
action is brought, one takes into account the gravity of the violation
committed. If the by-laws were late — the filing of the by-laws were late
by, perhaps, a day or two, I would suppose that might be a tolerable
delay, but if they are delayed over a period of months — as is
happening now — because of the absence of a clear requirement that
by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences.
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of
the legislature. Moreover, even without resorting to the records of
deliberations of the Batasang Pambansa, the law itself provides the answer to
the issue propounded by petitioner.
Taken as a whole and under the principle that the best interpreter of a
statute is the statute itself (optima statuli interpretatix est ipsum statutum),
Section 46 aforequoted reveals the legislative intent to attach a directory,
and not mandatory, meaning for the word "must" in the first sentence
thereof. Note should be taken of the second paragraph of the
law which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the Code
rules out mandatory compliance with the requirement of filing
the by-laws "within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by
the Securities and Exchange Commission." It necessarily
follows that failure to file the by-laws within that period does not
imply the "demise" of the corporation. By-laws may be necessary for
the "government" of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code and related
statutes. There are in fact cases where by-laws are unnecessary to
corporate existence or to the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, by-
laws are not necessary either to the existence of a corporation or to the
valid exercise of the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the government of the body;
and even where the governing statute in express terms confers upon
the corporation the power to adopt by-laws, the failure to exercise the
power will be ascribed to mere nonaction which will not render void any
acts of the corporation which would otherwise be valid. (Emphasis
supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life,
and that until by-laws have been adopted the corporation may not be
able to act for the purposes of its creation, and that the first and most
important duty of the members is to adopt them. This would seem to
follow as a matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a matter
of practical, if not one of legal, necessity. Moreover, the
peculiar circumstances attending the formation of a corporation may
impose the obligation to adopt certain by-laws, as in the case of a close
corporation organized for specific purposes. And the statute or
general laws from which the corporation derives its corporate
existence may expressly require it to make and adopt by-laws and
specify to some extent what they shall contain and the manner of
their adoption. The mere fact, however, of the existence of
power in the corporation to adopt by-laws does not ordinarily
and of necessity make the exercise
FACTS: Manuel Gonzales, the original owner of 5 shares of stock in question
of Defendant Company, assigned and transferred to herein plaintiff Fleischer.
Two days after, Dr. Miciano, secretary-treasurer of the company, offered to
of such power essential to its corporate life, or to the validity
of any of its acts.
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within
the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:
xxx xxx xxx
Failure to file by-laws within the required period.
Even under the foregoing express grant of power and
authority, there can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required
filing of by-laws embodied in Section 46 of the Corporation
Code. There is no outright "demise" of corporate existence.
Proper notice and hearing are cardinal components of due
process in any democratic institution, agency or society. In
other words, the incorporators must be given the chance to
explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code
but in another law is of no moment. P.D. No. 902-A, which took effect
immediately after its promulgation on March 11, 1976, is very much apposite
to the Code.
Accordingly, the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code and P.D. No.
902-A are statutes in pari materia. Interpretare et concordare legibus est
optimus interpretandi. Every statute must be so construed and harmonized
with other statutes as to form a uniform system of jurisprudence.
As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it," by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the
period required by law by no means tolls the automatic dissolution of a
corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate
Court, as follows:
―Non-filing of the by-laws will not result in
automatic dissolution of the corporation. Under Section 6(I) of
PD 902-A, the SEC is empowered to "suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration
of a corporation" on the ground inter alia of "failure to file by-laws
within the required period." It is clear from this provision that there
must first of all be a hearing to determine the existence of the
ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter.
In fact, under the rules and regulations of the SEC, failure to
file the by-laws on time may be penalized merely with the
imposition of an administrative fine without affecting the corporate
existence of the erring firm.‖
HENRY FLEISCHER, plaintiff-appellee,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
(GR No. L-23241; March 14 ,1925)
buy from Fleischer the said shares in behalf of the corporation, contending
that Art. 12 of the by-laws grants the company preferential right to buy
Gonzales’ shares. Plaintiff refused and requested Dr. Miciano to register said
shares in his name, and the latter refused to do so.
ISSUE: WON Fleischer is bound by the provisions of the corporation’s by-
laws?
HELD: No. Section 13, paragraph 7 (of Act 1459), empowers a corporation
to make by-laws, not inconsistent with any existing law, for the transferring
of its stock. It follows from said provision, that a by-law adopted by a
corporation relating to transfer of stock should be in harmony with the law on
the subject of transfer of stock. The law on this subject is found in section 35
of Act No. 1459. Said section specifically provides that the shares of stock
"are personal property and may be transferred by delivery of the certificate
indorsed by the owner, etc." Said section 35 defines the nature, character
and transferability of shares of stock. Under said section they are personal
property and may be transferred as therein provided. Said section
contemplates no restriction as to whom they may be transferred or sold. It
does not suggest that any discrimination may be created by the corporation
in favor or against a certain purchaser. The holder of shares, as owner
of personal property, is at liberty, under said section, to dispose
of them in favor of whomsoever he pleases, without any
other limitation in this respect, than the general provisions
of law. Therefore, a stock corporation in adopting a by-law governing
transfer of shares of stock should take into consideration the specific
provisions of section 35 of Act No. 1459, and said by-law should be made
to harmonize with said provisions. It should not be inconsistent therewith.
As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the corporation,
and are not contradictory to the general policy of the laws of the land.
(Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71
Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a corporation
must be reasonable and for a corporate purpose, and always within the
charter limits. They must always be strictly subordinate to the constitution
and the general laws of the land. They must not infringe the policy of the
state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not
disturb vested rights or impair the obligation of a contract, take away or
abridge the substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law. (People's Home Savings
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs.
Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
―The power to enact by-laws restraining the sale and transfer of
stock must be found in the governing statute or the charter. Restrictions
upon the traffic in stock must have their source in legislative enactment,
as the corporation itself cannot create such impediments. By-laws are
intended merely for the protection of the corporation, and prescribe
regulation and not restriction; they are always subject to the charter of
the corporation. The corporation, in the absence of such a power,
cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to
another, nor can it question the consideration upon which a
sale is based. A by-law cannot take away or abridge the
substantial rights of stockholder. Under a 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. (4 Thompson on
Corporations, sec. 4137, p. 674.
The jus disponendi, being an incident of the ownership of property, the
general rule (subject to exceptions hereafter pointed out and discussed) is
that every owner of corporate shares has the same uncontrollable right to
alien them which attaches to the ownership of any other species of
It is supposed, in the fourth cause of action, that the existence of this article
among the by-laws of the association is a misdemeanor on the part of the
property. A shareholder is under no obligation to refrain from selling his
shares at the sacrifice of his personal interest, in order to secure the
welfare of the corporation, or to enable another shareholder to make gains
and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to prevent or
to restrain transfers of its shares, unless such power is expressly conferred in
its charter or governing statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining
such transfers, unless derived from authority expressly granted
by the legislature, would be regarded as impositions in restraint
of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on this
question. They hold that the power of a corporation to enact by-
laws restraining the sale and transfer of shares, should not only
be in harmony with the law or charter of the corporation, but such
power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number
of the certificate, and the number of shares transferred." This restriction is
necessary in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in calling
meeting of stockholders, and for other purposes. but any restriction of the
nature of that imposed in the by-law now in question, is ultra vires,
violative of the property rights of shareholders, and in restraint of trade
And moreover, the by-laws now in question cannot have any effect on the
appellee. He had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said
by-law cannot operate to defeat his rights as a purchaser.
GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action. — It
appears that among the by-laws of the association there is an article (No. 10)
which reads as follows:
―The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares and to
return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for any
other motive, the continuation as members of the owners of such shares
is not desirable.‖
ISSUE: WON the above provision is valid?
HELD: No. This by-law is of course a patent nullity, since it is
in direct conflict with the latter part of section 187 of the
Corporation Law, which expressly declares that the board of
directors shall not have the power to force the surrender and
withdrawal of unmatured stock except in case of liquidation of the
corporation or of forfeiture of the stock for delinquency. It is
agreed that this provision of the by-laws has never been enforced, and in
fact no attempt has ever been made by the board of directors to make
use of the power therein conferred. In November, 1923, the Acting
Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to
article 10 of its by-laws and expressing the view that said article was
invalid. It was therefore suggested that the article in question should be
eliminated from the by-laws. At the next meeting of the board of directors
the matter was called to their attention and it was resolved to recommend
to the shareholders that in their next annual meeting the article in
question be abrogated. It appears, however, that no annual meeting of the
shareholders called since that date has been attended by a sufficient
number of shareholders to constitute a quorum, with the result that
the provision referred to has not been eliminated from the by-laws, and it
still stands among the by-laws of the association, notwithstanding its
patent conflict with the law.
respondent which justifies its dissolution. In this view we are unable to
concur. The obnoxious by-law, as it stands, is a mere nullity, and could not
be enforced even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an invalid
provision in the by-laws of a corporation; and if there were such, the
hazards incident to corporate effort would certainly be largely increased.
There is no merit in this cause of action.
ISSUE2: Owing to the failure of a quorum at most of the general meetings
since the respondent has been in existence, it has been the practice of the
directors to fill vacancies in the directorate by choosing suitable persons from
among the stockholders. This custom finds its sanction in article 71 of the by-
laws, which reads as follows:
―ART. 71. The directors shall elect from among the shareholders members
to fill the vacancies that may occur in the board of directors until the
election at the general meeting‖
WON Art. 71 is valid?
HELD: Yes. We are unable to see the slightest merit in the charge. No fault
can be imputed to the corporation on account of the failure of the
shareholders to attend the annual meetings; and their non-attendance at
such meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. Upon failure of
a quorum at any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and qualified.
Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of
the term of office for which the officer was elected, the general
rule is to allow the officer to holdover until his successor is duly
qualified. Mere failure of a corporation to elect officers does
not terminate the terms of existing officers nor dissolve the
corporation (Quitman Oil Company vs. Peacock, 14 Ga. App., 550;
Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil,
81 Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865; Youree
vs. Home Town Matual Ins. Company, 180 Missouri, 153; Cassell vs.
Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R., 486). The doctrine
above stated finds expressions in article 66 of the by-laws of the
respondent which declares in so many words that directors shall hold
office "for the term of one year on until their successors shall have been
elected and taken possession of their offices."
It result that the practice of the directorate of filling vacancies by the action
of the directors themselves is valid. Nor can any exception be taken to then
personality of the individuals chosen by the directors to fill vacancies in the
body. Certainly it is no fair criticism to say that they have chosen competent
businessmen of financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not disqualify a man
for filling positions of responsibility in corporate affairs.
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6)
GOKONGWEI VS. SEC (supra) - As additional causes of action, it was
alleged that corporations have no inherent power to disqualify a stockholder
from being elected as a director and, therefore, the questioned act is ultra
vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was allowed
because the questioned amendment gave the Board itself the prerogative of
determining whether they or other persons are engaged in competitive or
antagonistic business; that the portion of the amended bylaws which states
that in determining whether or not a person is engaged in competitive
business, the Board may consider such factors as business and family
relationship, is unreasonable and oppressive and, therefore, void; and that
the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors
at least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive.
ISSUE: WON the amended by-laws of SMC disqualifying a competitor from
nomination or election to the BOD are valid and reasonable?
HELD: Yes. The validity or reasonableness of a by-law of a corporation in
purely a question of law. Whether the by-law is in conflict with the law of the
land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. This rule is subject,
however, to the limitation that where the reasonableness of a by-law is a
mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and
who have exercised their authority.
It is a settled state law in the United States, according to Fletcher, that
corporations have the power to make by-laws declaring a person employed in
the service of a rival company to be ineligible for the corporation's Board of
Directors. ... (A)n amendment which renders ineligible, or if elected, subjects
to removal, a director if he be also a director in a corporation whose business
is in competition with or is antagonistic to the other corporation is valid."
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." An
exception exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only qualification, and
therefore the corporation was not empowered to add additional
qualifications. This is the exact opposite of the situation in the Philippines
because as stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot
engage in a business in direct competition with that of the corporation where
he is a director by utilizing information he has received as such officer,
under "the established law that a director or officer of a corporation
may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director.
It is also well established that corporate officers "are not permitted to use
their position of trust and confidence to further their private interests." In a
case where directors of a corporation cancelled a contract of the
corporation for exclusive sale of a foreign firm's products, and after
establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court
held that equity would regard the new contract as an offshoot of the old
contract and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the exclusion of his
principal.
The doctrine of "corporate opportunity" is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the fiduciary
was acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer
or director taking advantage of an opportunity for his own personal profit
when the interest of the corporation justly calls for protection.
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with other
firms.
It is obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner of a
competing corporation, from taking advantage of the information which
he acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two
corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge
effectively his duty, to satisfy his loyalty to both corporations and place
the performance of his corporation duties above his personal concerns.
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.
Neither are We persuaded by the claim that the by-law was Intended to
prevent the candidacy of petitioner for election to the Board. If the by-law
were to be applied in the case of one stockholder but waived in the case of
another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the Constitution
requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a
competition from election to the Board of Directors of another corporation
is valid and reasonable.
ISSUE2: WON the Corporation has the power to prescribe qualifications?
HELD2: Yes. Private respondents contend that the disputed amended by
laws were adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and present
danger that the election of a business competitor to the Board may cause
upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue — whether or not
respondent San Miguel Corporation could, as a measure of self- protection,
disqualify a competitor from nomination and election to its Board of
Directors.
It is recognized by an authorities that 'every corporation has the inherent
power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and
among themselves in reference to the management of its affairs. At common
law, the rule was "that the power to make and adopt by-laws was inherent in
every corporation as one of its necessary and inseparable legal incidents. And
it is settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this inherent
power as one of its necessary and inseparable legal incidents, independent of
any specific enabling provision in its charter or in general law, such power of
self-government being essential to enable the corporation to accomplish
the purposes of its creation.
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties and
compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section
30 of the Corporation Law, which provides that "every director must own
in his right at least one share of the capital stock of the stock corporation of
which he is a director ... " In Government v. El Hogar, the Court sustained
the validity of a provision in the corporate by-law requiring that persons
elected to the Board of Directors must be holders of shares of the paid up
value of P5,000.00, which shall be held as security for their action, on
the ground that section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the qualifications of
directors and is "highly prudent and in conformity with good practice
ISSUE3: WON stockholders have the vested right to be elected a director?
HELD: No. 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 ... ."
Under section 22 of the same law, the owners of the majority of the
subscribed capital stock may amend or repeal any by-law or adopt new by-
laws. It cannot be said, therefore, that petitioner has a vested right to be
elected director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment, alteration and
modification.
It being settled that the corporation has the power to provide for the
qualifications of its directors, it has also been settled that the
disqualification of a competitor from being elected to the Board of Directors
is a reasonable exercise of corporate authority.
CHAPTER 9: MEETINGS
Meetings applies to every duly convened assembly either of stockholders,
members, directors or trustees, managers, etc. for any legal purpose or the
transaction of business of common interest.
Sec. 49. Kinds of meetings. - Meetings of directors, trustees,
stockholders, or members may be regular or special.
A. STOCKHOLDERS‘ MEETING
Sec. 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 been chosen one of
their number as presiding officer.
The stockholders have no power to act as or for the corporation except at a
corporate meeting called and conducted according to law. This rule arises
from the need to protect the stockholder by providing them with notice of
meeting and giving them opportunity to attend the meeting, discuss the
issues and vote (an exception would be an ordinary amendment where
―written asset‖ is acceptable).
DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
fixed, on any date of April of very year as the BOD/T may determine. April,
because this is the time the Audited Financial Statements are already
available.
DATE OF SPECIAL MEETING: At any time deemed necessary or as
provided for in the by-laws.
REQUIREMENTS FOR A VALID STOCKHOLDERS‘ MEETING:
1. It Must Be Held On The Date Fixed In The By-Laws Or
In Accordance With The Law.
The date required, as previously discussed, admits of an exception, as
when the annual meeting cannot be held on the appointed time for
some valid and meritorious reasons.
2. Prior Notice Must Be Given
Sec 50 and 51 requires that written notice of regular meeting shall be
sent at least 2 weeks prior to the meeting, whereas, 1 week prior notice
is required for special meetings.
EXCEPTIONS: (a) If the by-laws provide for a different period for
sending out notice for regular or special meetings (failure to comply
would render the resolutions adopted at the option of the stockholder
who was not notified); (b) Waiver, either express or implied.
The Notice must contain the agenda or business matter/s that may be
taken up before the meeting otherwise it may become voidable at the
instance of any objecting stockholder or member.
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF
THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET
AL., petitioners,
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
(GR No. L-12282; March 31, 1959)
FACTS: A meeting electing the BOD of herein petitioner was declared null
and void by the Court in a suit filed by John Castillo, et. al.
In compliance with the order, another election was scheduled on March 28 at
5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the
meeting is composed of the same people that had conducted and supervised
the previously nullified meeting; that the election to be conducted did
not comply with the 5 day notice requirement required by the by-laws and
the constitution of the association, since the notice was posted and sent out
only on March 26 and the election was to be held on March 28.
ISSUE: WON the notice requirement is complied with?
HELD: No. Section 3, article III, of the constitution and by-laws the
association provides:
―Notice of the time and place of holding of any annual meeting, or
any special meeting, the members, shall be given either by posting the
same in a postage prepaid envelope, addressed to each member on the
record at the address left by such member with the Secretary of the
Association, or at his known post-office address or by delivering the same
person at least (5) days before the date set for such meeting. . . . In lieu
of addressing or serving personal notices to the members, notice of the
members, notice of a regular annual meeting or of a special meeting of
the members may be given by posting copies of said notice at the
different departments and plants of the San Miguel Brewery Inc., not
less than five (5) days prior to the date of the meeting. (Annex K.)‖
Notice of a special meeting of the members should be given at least five days
before the date of the meeting. Therefore, the five days previous notice
required would not be complied with.
3. It Must Be Held at the Proper Place
Sec. 51. Place and time of meetings of stockholders or members.
-Stockholders' or members' meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this section,
be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof stated
therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or called,
provided all the stockholders or members of the corporation are present or
duly represented at the meeting.
Meeting must, at all times, be held in the city or municipality where the
principal office is located, or if practicable at the principal office of
the corporation. For this purpose, Metro Manila is considered as one
city or municipality.
While there is no law allowing a STOCK corporation to hold a meeting outside
the city or municipality where the principal office is located, NON-STOCK
corporations are allowed to provide a provision in its by-laws any place of
members’ meeting provided there is proper notice (Sec. 93)
4. It Must Be Called by the Proper Party
DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
vs.
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
Manila, Branch I, and POTENCIANO GAPOL, respondents
(GR No. L-5883; Nov. 28, 1953)
FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a
stockholder’s meeting that the said corporation shall be voluntarily dissolved,
and was placed under the receivership of Gapol, the largest stockholder. A
petition for voluntary dissolution was drafted and signed by Ponce, which
was to be filed with the appropriate authorities. It was found out that
instead of filing the petition, Gapol filed a complaint in the CFI for the
accounting of the funds and assets of the corporation, and to
reimburse it the amounts expended for the purchase of a parcel of land, a
loan extended to the wife of Ponce, and an amount spent by Ponce in a
trip to the US. Gapol contends that such amount, taken from the
corporation, was misapplied, misappropriated and misspent by Ponce to
his own use and benefit, thus he prayed for the removal of Ponce as a
member of the board of directors. Such removal was rejected by the court,
but Gapol’s petition for the calling of a stockholders’ meeting, was granted.
At said meeting, a new set of board of directors was elected. Ponce filed a
petition in the lower court seeking to set aside its order, but the same was
denied. Thus, they filed for an appeal to the SC.
ISSUE: WON the Court may issue such order directing a stockholder to call a
meeting of the stockholders of a corporation?
HELD: Yes. The corporation law provides that ―whenever, from any
cause, there is no person authorized to call a meeting, or when the
officer authorized to do so refuses, fails or neglects to call a meeting, any
judge of a CFI on the showing of a good cause therefore, may issue an
order to any stockholder or member of a corporation, directing him to call
a meeting of the corporation by giving the proper notice required‖. Thus, on
the showing of good cause therefore, the court may authorize a
stockholder to call a meeting and to preside thereat until the
majority stockholders representing a majority of the stock
present and permitted to be voted shall have chosen one among
them to preside. This showing of good cause exists when the
court is apprised of the fact that the by-laws of the corporation
require the calling of a general meeting of the stockholders to
elect the board of directors but the call of the meeting has not been
done. There is no need to issue a notice of hearing, nor is there any
necessity to hold a hearing, upon the board of directors. The court here
found good cause in calling the meeting for the election of a new board,
because the chairman of the board of directors who is so authorized to call
such meeting, failed, neglected or refused to perform his duty. Having the
authority to grant such relief, the lower court did not exceed its
jurisdiction nor did it abuse its discretion in granting it.
NOTE: In a case decided by the SEC, it rules that under the present state of
law, the Ponce case will apply ONLY ―where there is no person authorized
to call the meeting:, thus an ex-parte proceeding may be allowed as
obviously there is no person to summon and no person whose right to due
process will
be violated. However, where there is an officer authorized to call the meeting
and that officer refuses, fails or neglects to call a meeting then the Ponce
case WILL NOT APPLY. This is so, because the phrase ―or when the
officer authorized to do so refuses, or fails, or neglects to call a meeting‖
has been deliberately omitted in Sec. 50 of the Corporation Code.
Likewise, in the same ruling of the SEC, the Ponce case likened the
questioned order to a writ of preliminary injunction which may be issued ex
parte, the said PI can no longer be issued without notice and hearing under
Sec. 5 of Rule 58 of the Rules of Court. Mandamus is the proper remedy.
IN SUMMARY: The following are authorized to call a
meeting: a. The person or persons authorized under the by-
laws;
b. Absent any provision in the by-laws, it may be called by the
President;
c. By the secretary on order of the president or on written demand of
the stockholders representing at least a majority of the outstanding
capital stock or majority of the members entitled to vote, or
the stockholder or member making the demand if there is no
secretary or he refuses to do so, under Sec. 28; and
d. A stockholder as empowered by the proper forum pursuant to Sec.
50
5. Quorum and Voting Requirement Must Be Met
Sec. 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.
A by-law provision may provide for a higher quorum requirement than that
prescribed in the Code, but not less. Otherwise, the by-law provision
providing for a lesser quorum requirement have no force and effect since a
by-law provision is subordinate to the statute and could not defeat the
requirements of the law. The same goes for a by-law provision providing for
a voting requirement less than that provided in the Code.
If the voting requirement is met, any resolution passed in the meeting, even
if improperly held or called will be valid if ALL the stockholders or members
are present or duly represented thereat, as provided under the last
paragraph of Sec. 51:
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.
B. DIRECTORS‘/TRUSTEES‘ MEETING
Sec. 53. Regular and special meetings of directors or trustees.
-Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon 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.
REGULAR MEETINGS: those held monthly or as the by-laws may provide;
SPECIAL MEETINGS: those that are held at any time upon call of the
President or the person authorized to do so as may be provided in the by-
laws.
PLACE: Unlike the meeting of stockholders, the meetings of
directors/trustees may be held anywhere, within or even outside the
Philippines, except when the by-laws provide otherwise.
NOTICE REQUIREMENT: is necessary for the purpose of determining the
legality of and binding effect of the resolution/s passed, EXCEPT:
1. When subsequently ratified;
2. In close corporations where a director may bid the corporation even
without a meeting;
3. When the right to a notice is waived.
The SEC has ruled that a special meeting conducted in the absence of some
of the directors and without any notice to them is illegal and the action at
such meeting although by a majority of the directors is invalid, unless
ratified.
However, if all the directors are present, their presence at the meeting
waives the want of notice.
PRESIDING OFFICER: Unless the by-laws otherwise provide, the presidnet.
Sec. 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.
QUORUM: Unless the AOI or by-laws provide for a greater majority, a
majority of the members of the BOD/T as fixed in the AOI will constitute a
quorum for the transaction of corporate business and the decision of the
majority of those present shall be valid as a corporate act. EXCEPT: election
of corporate officers as provided under Sec. 25 which required the vote of a
majority of all the members of the board.
PROXY VOTING: is not allowed for a director or trustee, since he was
supposedly elected because of his expertise in management or his business
acumen such that he is expected to personally attend and vote on matters
brought before the meeting.
C. STOCKHOLDERS‘ RIGHT TO VOTE AND MANNER OF VOTING
Being a property right, a stockholder can vote his share the way he pleases
except in the following:
1. Non-voting shares are not entitled to vote except in those instances
provided in the penultimate paragraph of Sec. 6 of the Code;
2. Treasury shares have no voting rights while they remain in the treasury
(Sec. 57);
3. Shares of stock declared delinquent are not entitled to vote at any
meeting; and
4. Unregistered transferee of shares of stock.
PROXY VOTING: is allowed or through a voting trust agreement, or by the
executor, administrator, receiver or other legal representative appointed by
the court.
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are
entitled to vote in the absence of an agreement to the contrary:
Sec. 55. Right to vote of pledgors, mortgagors, and administrators.
-In case of pledged or mortgaged shares in stock corporations, the pledgor
or mortgagor shall have the right to attend and vote at meetings
of stockholders, unless the pledgee or mortgagee is expressly given by
the pledgor or mortgagor such right in writing which is recorded on
the appropriate corporate books.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:
Sec. 56. Voting in case of joint ownership of stock. - In case of
shares of stock owned jointly by two or more persons, in order to vote the
same, the consent of all the co-owners shall be necessary, unless there
is a written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote such share or shares: Provided, That
when the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a proxy
therefor.
D. PROXY AND OTHER REPRESENTATIVE VOTING
PROXY: is a species of absentee voting by mail by a one way ballot for
the slate or proposals suggested by the management or even perhaps,
the solicitor thereof. It is the authority given by the stockholder or
member to another to vote for him at a stockholders’ or members’
meeting. The term is also used to refer to the instrument or paper
which is evidence of the authority of an agent or the holder thereof to
vote for and in behalf of the stockholder or member.
Sec. 58. Proxies. - Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members. Proxies shall be 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.
PROXY VOTING: is a right granted by law to all stockholders entitled
to vote in stock corporations and cannot, therefore, be denied. EXCEPT:
In a non-stock corporation with by-laws providing for a prohibition on the
use of proxies (Sec. 89).
REQUIREMENTS: In the absence of a by-law provision regulating the
form and execution of proxy, Sec. 58 requires:
1. The proxy must be in writing;
2. It is signed by the stockholder or member or his duly
authorized representative; and
3. It is filed on or before the schedule meeting with the
corporate secretary.
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 canceled 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.
VOTING TRUSTS DISTINGUISHED FROM PROXY

It is to be noted, however, that publicly listed companies are requreid VOTING TRUST PROXY
to observe and comply with SEC Memorandum Circular No. 5 -1996, The beneficial owner of the Legal title to the shares remain with
shares ceased to be stockholder of the beneficial owner
TYPES OF PROXIES: record of the corporation since the
1. General – gives a general discretionary power of attorney to vote shares are transferred to the trustee
for directors and all ordinary matters that my properly come Trustee votes as owner of the shares Proxy votes merely as an agent
before a meeting. It is not an authority, however, to vote for The beneficial owner is disqualified The owner of the shares may
fundamental changes in the corporate charter or for other unusual to be a director be elected as such since legal
transactions, unless so specified; title thereof remains with him
2. Special – restricts the authority to vote on specified matters only Purpose is to acquire voting control Generally used to secure voting
and may direct the manner in which the vote will be cast. of the corporation an quorum requirements or merely
for the purpose of representing
DURATION: May be fixed by the proxy’s own terms but it cannot exceed
an absent stockholder
5 years and for not more than 5 years for each renewal. Otherwise, it
Irrevocable Revocable anytime unless coupled
expires after the meeting for which it was given.
with an interest
The trustee can act and vote at Proxy can generally act as such only
VOTING TRUST: is one created by an agreement between a group
any meeting during the duration at a particular meeting
of stockholders of a corporation and a trustee, or a group of
of the VTA
identical agreements between individual stockholders and a common
Trustee may vote in person or by Proxy holder must vote in person
trustee, whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated, proxy
control over the stock owned by such stockholders, shall be lodged in Duration may exceed five years Proxy is of a shorter duration and
the trustee, either with or without reservation to the owners or persons may not exceed 5 years
designated by them the power to direct how such control shall be issued. VTA to be valid and effective, must Unless required by the by-
be notarized and filed with the SEC laws, proxies need not be notarized
Sec. 59. Voting trusts. - One or more stockholders of a stock nor is it required to be filed with the
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 READ AGAIN: LEE VS. CA
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 NATIONAL INVESTMENT AND DEVELOPMENT
agreement, said voting trust may be for a period exceeding five (5) CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and
years but shall automatically expire upon full payment of the loan. A ROBERTO S. BENEDICTO, petitioners,
voting trust agreement must be in writing and notarized, and shall specify vs.
the terms and conditions thereof. A certified copy of such agreement shall HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge
be filed with the corporation and with the Securities and Exchange of Branch VIII of the Court of First Instance of Rizal, BATJAK INC.,
Commission; otherwise, said agreement is ineffective and unenforceable. GRACIANO A. GARCIA and MARCELINO CALINAWAN JR., respondents.
The certificate or certificates of stock covered by the voting trust (G.R. No. L-34192 June 30, 1988)
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 PHILIPPINE NATIONAL BANK,
agreement. In the books of the corporation, it shall be noted that the petitioner, vs.
transfer in the name of the trustee or trustees is made pursuant to said HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the
voting trust agreement.
Court of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED, (G.R. No. L-34213 June 30, 1988)
respondents
FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a
Voting Trust Agreement with petitioner NIDC, in order to assist the former
with its financial obligations. The VTA was for a period of 5 years constituting
60% of the outstanding paid-up and subscribed shares of Batjak. 5 years
therafter, or on Aug. 31, 1970, Batjak represented by majority
stockholders, through Atty. Amado Duran, legal counsel, wrote to NIDC
inquiring if the atter was still interest in negotiating the renewal of the
VTA, but there was no reply even with the second letter sent on Sept. 22,
1970.
On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a
complete accounting of the assets, properties, management and operation of
Batjak, preparatory to their turn-over and transfer to the stockholders
of Batjak.
NIDC replied that it had no intention to comply with such demand. Batjak
filed an action for mandamus with preliminary injunction which was granted.
ISSUE: WON Batjak has the personality to enforce the voting
trust agreement executed by its stockholders and whether it may
compel the trustee to turn over the assets of the corporation?
HELD: No. In support of the third ground of their motion to dismiss, PNB
and NIDC contend that Batjak's complaint for mandamus is based on its
claim or right to recovery of possession of the three (3) oil mills, on the
ground of an alleged breach of fiduciary relationship. Noteworthy is the
fact that, in the Voting Trust Agreement, the parties thereto were
NIDC and certain stockholders of Batjak. Batjak itself was not a signatory
thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must
be prosecuted and defended in the name of the real party in interest.
Applying the rule in the present case, the action should have been filed by
the stockholders of Batjak, who executed the Voting Trust Agreement with
NIDC, and not by Batjak itself which is not a party to said agreement, and
therefore, not the real party in interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the
petition for mandamus be dismissed. A careful reading of the Voting Trust
Agreement shows that PNB was really not a party thereto. Hence, mandamus
will not lie against PNB.
Batjak has no clear right to be entitled to the writ prayed for.
What Batjak seeks to recover is title to, or possession of, real
property (the three (3) oil mills which really made up the assets
of Batjak) but which the records show already belong to NIDC. It is
not disputed that the mortgages on the three (3) oil mills were foreclosed
by PNB and NIDC and acquired by them as the highest bidder in the
appropriate foreclosure sales. Ownership thereto was subsequently
consolidated by PNB and NIDC, after Batjak failed to exercise its right of
redemption. The three (3) oil mills are now titled in the name of NIDC.
From the foregoing, it is evident that Batjak had no clear right to be
entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil. 456) citing
the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil.
367, the Court said that the writ of mandamus will not issue to give to
the applicant anything to which he is not entitled by law.
Batjak premises its right to the possession of the three (3) off mills on the
Voting Trust Agreement, claiming that under said agreement, NIDC was
constituted as trustee of the assets, management and operations of Batjak,
that due to the expiration of the Voting Trust Agreement, on 26 October
1970, NIDC should tum over the assets of the three (3) oil mills to Batjak
From the foregoing provisions, it is clear that what was assigned to NIDC was
the power to vote the shares of stock of the stockholders of Batjak,
representing 60% of Batjak's outstanding shares, and who are the
signatories to the agreement. The power entrusted to NIDC also included
the authority to execute any agreement or document that may be necessary
to express the consent or assent to any matter, by the stockholders.
Nowhere in the said provisions or in any other part of the Voting Trust
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 the paid-up and outstanding shares of stock in Batjak. This is
confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:
9. TERMINATION — Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof
shall be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.-
Under the aforecited provision, what was to be returned by NIDC as trustee
to Batjak's stockholders, upon the termination of the agreement, are the
certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first
place to NIDC, under the terms of said Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights pertaining
to the shares subject of the agreement or control over the stock. The law on
the matter is Section 59, Paragraph 1 of the Corporation Code (BP 68)
which provides:
Sec. 59. Voting Trusts — One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering upon
a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: ...
The acquisition by PNB-NIDC of the properties in question was not made or
effected under the capacity of a trustee but as a foreclosing creditor for the
purpose of recovering on a just and valid obligation of Batjak.
CHAPTER 10: STOCKS AND STOCKHOLDERS
A person may become a stockholder in a corporation in either of three ways:
1. By a contract of subscription with the corporation;
2. By purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing stockholders.
A. SUBSCRIPTION CONTRACT
A ―subscription‖, properly speaking, is the mutual agreement of
the subscribers to take and pay for the stocks of the corporation. A
―subscription contract‖, on the other hand is specifically defined in Sec. 60:
Sec. 60. Subscription contract. - Any contract for the acquisition
of unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of
this Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract.
SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes
a shareholder only upon full payment of the price. UNISSUE shares cannot
be the subject of a ―purchase‖.
―We may add that the law in force in this jurisdiction makes no distinction,
in respect to the liability of the subscriber, between shares subscribed
before incorporation is effected and shares subscribed thereafter. All like are
bound to pay full value in cash or its equivalent, and any attempt to
discriminate in favor of one subscriber by relieving him of this liability
wholly or in part is forbidden. In what is here said we have reference of
course primarily to subscriptions to shares that have not been previously
issued. It is conceivable that the power of the corporation to make terms
with the purchaser would be greater where the shares which are the subject
of the transaction have been acquired by the corporation in course of
commerce, after they have already been once issued. But the shares with
which are here concerned are not of this sort.‖ (National Exchange Co., Inc.
vs. Dexter)
EXAMPLE: If X corporation had P1M authorized capital divided into 1M
shares with a par value of P1. 500,000 has already been subscribed:
1. Z ―purchased‖ 100,000 of the UNISSUED shares paying 50%
down payment and the balance payable after 6 months, with a
condition that he will not be considered a shareholder until full
payment. – He is still liable for the balance because this will be
considered a subscription no matter how the parties refer to it and
accordingly, Z is liable as a
 shareholder therein.
2. Z was declared a delinquent shareholder and X Co. was declared as the
winning bidder by paying P100,000 and acquired the delinquent shares.
Later on, 20,000 of the shares were sold to Y – here, the shares being
from treasury and not from unissued shares, may be the proper subject
of a ―purchase‖ and thus, a condition that Y would not became
a shareholder until full payment may be valid.
ORAL: A subscription contract need not be in writing such that an oral
contract of subscription is valid and enforceable under the Statute of Frauds.
Thus, it was ruled by the SC that such an agreement does not seem to fall
within the definition of a sale under our substantive law, and is therefore
believed that an oral subscription agreement as distinguished from sale of
stock is valid and enforceable.
CONDITION: Subscriptions may be made upon a condition precedent or
upon special terms (condition subsequent). A conditional subscription,
or one made upon a condition precedent, does not make the
subscriber a stockholder, or render him to pay the amount of his
subscription, until performance of the condition. A subscription upon
special terms, on the other hand, is an absolut subscription, making the
subscriber a stockholder, and rendering him liable as such, as soon as the
subscription is accepted, the special term being an independent stipulation.
In case of doubt in the intention of the parties, a subscription should be
considered as an absolute subscription upon special terms, rather than
conditional. The policy of giving protection to creditors and other subscribers
has led to the adoption of this rule of construction favoring the immediate
liability of the subscriber.
Conditional Subscriptions are valid provided: (1) there is nothing in
the charter or enabling act prohibiting the same; and (2) providing the
conditions are not such as to render their performance beyond the
powers of the corporation or in violation of law or contrary to public policy.
NAZARIO TRILLANA, administrator-appellee,
vs.
QUEZON COLLEGE, INC., claimant-appellant
(GR No. L-5003; June 27, 1953)
FACTS: Damasa Crisostomo sent the following letter to the Board of
Trustees of the Quezon College:
June 1, 1948
The BOARD OF TRUSTEES
Quezon College
Manila
Gentlemen:
Please enter my subscription to dalawang daan (200) shares of
your capital stock with a par value of P100 each. Enclosed you will
find (Babayaran kong lahat pagkatapos na ako ay makapag-pahuli
ng isda) pesos as my initial payment and the balance payable in
accordance with law and the rules and regulations of the Quezon
College. I hereby agree to shoulder the expenses connected with
said shares of stock. I further submit myself to all lawful demands,
decisions or directives of the Board of Trustees of the Quezon
College and all its duly constituted officers or authorities (ang nasa
itaas ay binasa at ipinaliwanag sa akin sa wikang tagalog na aking
nalalaman).
Very respectfully,
(Sgd.) DAMASA CRISOSTOMO
Signature of subscriber
Nilagdaan sa aming harapan:
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO
On Oct. 26, 1948, Crisostomo died. As no payment on the subscriptions
appear to have been made, herein appellant filed a claim in her testate
proceedings for P20,000 which was opposed by the administrator, and
dismissed by the CFI.
ISSUE: WON the subscription is valid and enfroceable?
HELD: No. It appears that the application sent by Damasa Crisostomo to the
Quezon College, Inc. was written on a general form indicating that an
applicant will enclose an amount as initial payment and will pay the balance
in accordance with law and the regulations of the College. On the other
hand, in the letter actually sent by Damasa Crisostomo, the latter (who
requested that her subscription for 200 shares be entered) not only did not
enclose any initial payment but stated that "babayaran kong lahat
pagkatapos na ako ay makapagpahuli ng isda." There is nothing in the
record to show that the Quezon College, Inc. accepted the term of
payment suggested by Damasa Crisostomo, or that if there was any
acceptance the same came to her knowledge during her lifetime. As the
application of Damasa Crisostomo is obviously at variance with the terms
evidenced in the form letter issued by the Quezon College, Inc., there was
absolute necessity on the part of the College to express its agreement to
Damasa's offer in order to bind the latter. Conversely, said acceptance was
essential, because it would be unfair to immediately obligate the Quezon
College, Inc. under Damasa's promise to pay the price of the subscription
after she had caused fish to be caught. In other words, the relation
between Damasa Crisostomo and the Quezon College, Inc. had
only thus reached the preliminary stage whereby the latter
offered its stock for subscription on the terms stated in the form
letter, and Damasa applied for subscription fixing her own plan of
payment, — a relation, in the absence as in the present case of
acceptance by the Quezon College, Inc. of the counter offer of
Damasa Crisostomo, that had not ripened into an enforceable
contract.
Indeed, the need for express acceptance on the part of the Quezon College,
Inc. becomes the more imperative, in view of the proposal of Damasa
Crisostomo to pay the value of the subscription after she has harvested fish,
a condition obviously dependent upon her sole will and, therefore, facultative
in nature, rendering the obligation void, under article 1115 of the old Civil
Code which provides as follows: "If the fulfillment of the condition should
depend upon the exclusive will of the debtor, the conditional obligation shall
be void. If it should depend upon chance, or upon the will of a third person,
the obligation shall produce all its effects in accordance with the provisions of
this code." It cannot be argued that the condition solely is void, because it
would have served to create the obligation to pay, unlike a case, exemplified
by Osmeña vs. Rama (14 Phil., 99), wherein only the potestative condition
was held void because it referred merely to the fulfillment of an already
existing indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879), this Court
already held that "a condition, facultative as to the debtor, is obnoxious to
the first sentence contained in article 1115 and renders the whole obligation
void."
B. PRE-INCORPORATION SUBSCRIPTION
Pre-incorporation subscriptions make reference to subscriptions for shares of
stock of a corporation still to be formed while post-incorporation
subscriptions are those made or executed after the formation or
organization of the corporation.
Sec. 61. Pre-incorporation subscription. - A subscription for shares
of stock of a corporation still to be formed shall be irrevocable for a period of
at least six (6) months from the date of subscription, unless all of the
other subscribers consent to the revocation, or unless the incorporation
of said corporation fails to materialize within said period or within a longer
period as may be stipulated in the contract of subscription: Provided,
That no pre-incorporation subscription may be revoked after the submission
of the articles of incorporation to the Securities and Exchange Commission.
IMMEDIATE BINDING EFFECT: This new provision gives an
immediate binding effect on pre-incorporation subscriptions as against the
subscribers of the capital stock of a corporation still to be formed.
Pre-incorporation subscriptions are, in fact, mandatory as may be culled
from the provisions of Sec. 13 and 14 of the Code which mandates that
a corporation may be
registered as such only if at least 25% of its authorized capital stock has
been subscribed and that at least 25% of the subscribed capital has been
paid.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:
1. For a period of at least 6 months from the date of subscription unless
(a) all the subscribers consent to the revocation; or (b) the incorporation
fails to materialize within said period or within a longer period as may
stipulated in the contract of subscription; and
2. After submission of the AOI to the SEC.
C. STOCK ISSUANCE
Stock issuance is generally the initial and primary source of corporate
capital. Other sources may include corporate borrowings, loans and
advances from creditors or stockholders. Corporate earnings may also
be a source of corporate funds if it is reinvested or ploughed back to the
company.
Sec. 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.
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.
―ISSUE‖: is generally employed to indicate the making of a share contract
or contract of subscription, that is, transaction by which a person becomes
the owner of shares and by which new share contracts are created. It is
often associated with the execution and delivery of a share certificate
but the issuance of the shares is not dependent on the delivery of a
certificate of stock.
―PAR‖ or ―ISSUED PRICE‖: while it may not reflect the true value of
the shares which constantly fluctuates, merely indicates the amount which
the original subscribers are supposed to contribute to the corporate capital
as the basis of the privilege of profit sharing with limited liability.
PROPERTY: If shares are issued in exchange for property, the value of such
should at least be equal to the par or issued value of the stocks. Such value,
may be determined with reference to
a. REAL PROPERTY - (1) independent appraiser’s appraisal report; (2) BIR
Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax
Declaration.
b. INTANGIBLE PROPERTY – as determined by the incorporators or the
BOD subject to the approval of the SEC.
TRUE VALUE RULE: the motives and intent of those making the
valuation are disregarded and the sole and decisive factor or question is
whether or not the property or services are in fact worth the value placed on
them.
GOOD FAITH RULE: is based on the proposition that the value of
the property or services is a matter about which there can be an
honest difference of opinion. Therefore, if the parties have acted in
good faith without fraud or intentional over-valuation, the transaction
cannot be overturned even if it later becomes evident that the property or
services were in fact worth much less than the value fixed on them initially.
Most jurisdiction follow the GOOD FAITH rule.
STOCK DIVIDENDS: Sec. 62(5) which states that ―amounts
transferred from unrestricted retained earnings to stated capital‖ refer to
stock dividends where corporate earnings are capitalized rather than
being distributed as cash dividend. It merely converts income into capital,
the consideration being the retained earnings itself which would have
accrued to the stockholders in proportion to their respective stockholdings.
NO CONSIDERATION: stocks may not be issued without consideration
for the following reasons: (1) it is discriminatory against other stockholders;
and (2) it prejudices the rights of creditors under the Trust Fund Doctrine.
RECLASSIFICATION: Sec. 62(6) which provides that ―outstanding
shares exchanged for stocks in the event of reclassification or conversion‖
speaks of shares of stock surrendered to the corporation in exchange
for new or different type of shares. Example: Found Shares which, after 5
years, may be converted to common stocks.
PROHIBITED CONSIDERATIONS: Shares of stock may not be issued
in exchange for (1) promissory notes; or (2) future services – as
their realization are not certain.
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
vs.
I. B. DEXTER, defendant-appellant
(GR No. L-27872; Feb. 25, 1928)
FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following
form:
I hereby subscribe for three hundred (300) shares of the capital stock of
C. S. Salmon and Company, payable from the first dividends declared on
any and all shares of said company owned by me at the time dividends
are declared, until the full amount of this subscription has been paid
Upon subscription, defendant Dexter paid P15,000 from the dividends
declared by the company and supplemented by money supplied personally be
the subscriber. No other payment was made.
ISSUE: WON the subscription to be paid out of the dividends declared on
the shares has the effect of relieving the subscriber from personal liability
in an action to recover the value of the shares?
HELD: No. Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the Organic Act
of July 1, 1902, which, in the part here material, is substantially reproduced
in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is
among other things, declared: "That all franchises, privileges, or concessions
granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
value of the stock or bonds so issued; . . . ." (Act of Congress of July 1,
1902, sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in
the Corporation Law, enacted March 1, 1906, the following provision: ". .
. no corporation shall issue stock or bonds except in exchange
for actual cash paid to the corporation or for property actually
received by it at a fair valuation equal to the par value of the stock
or bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792,
sec. 2.)
The prohibition against the issuance of shares by corporations except for
actual cash to the par value of the stock to its full equivalent in property is
thus enshrined in both the organic and statutory law of the Philippine
Islands; and it would seem that our lawmakers could scarcely have chosen
language more directly suited to secure absolute equality stockholders with
respect to their liability upon stock subscriptions. Now, if it is unlawful to
issue stock otherwise than as stated it is self-evident that a stipulation
such as that now under consideration, in a stock subscription, is
illegal, for this stipulation obligates the subscriber to pay
nothing for the shares except as dividends may accrue upon the
stock. In the contingency that dividends are not paid, there is
no liability at all. This is a discrimination in favor of the
particular subscriber, and hence the stipulation is unlawful.
The general doctrine of corporation law is in conformity with this
conclusion, as may be seen from the following proposition taken from
the standard encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription
upon such terms as will operate as a fraud upon the other
subscribers or stockholders by subjecting the particular
subcriber to lighter burdens, or by giving him greater rights
and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital. It is
well settled therefore, as a general rule, that an agreement between a
corporation and a particular subscriber, by which the subscription is not
to be payable, or is to be payable in part only, whether it is for the
purpose of pretending that the stock is really greater than it is, or for
the purpose of preventing the predominance of certain stockholders, or
for any other purpose, is illegal and void as in fraud of other
stockholders or creditors, or both, and cannot be either enforced by
the subscriber or interposed as a defense in an action on the
subscription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from numerous
courts, with little or no diversity of opinion. As stated in the headnote to the
opinion of the Supreme Court of United States in the case of Putnan vs. New
Albany, etc. Railroad Co. as reported in 21 Law. ed., 361, the rule is that
"Conditions attached to subscriptions, which, if valid, lessen
the capital of the company, are a fraud upon the grantor of
the franchise, and upon those who may become creditors of
the corporation, and upon unconditional stockholders."
In the appellant's brief attention is called to the third headnote to Bank vs.
Cook (125 Iowa, 111), where it is stated that a collateral agreement with a
subscriber to stock that his subscription shall not be collectible except from
dividends on the stock, is valid as between the parties and a complete
defense to a suit on notes given for the amount of the subscription. A careful
perusal of the decision will show that the rule thus broadly stated in the
headnote is not justified by anything in the reported decision; for what the
court really held was that the making of such promise by the agent of the
corporation who sold the stock is admissible in evidence in support of the
defense of fraud and failure of consideration. Moreover, even if the decision
had been to the effect supposed, the rule announced in the headnote, could
have no weight in a jurisdiction like this where there is a statutory provision
prohibiting such agreements.
D. CERTIFICATE OF STOCK AND THEIR TRANSFER
Share of Stock: may rightfully be described as a profit sharing contract, a
series of units of interest and participation in a corporation in consideration
of a proportionate right to participate in dividend and other distributions.
They are personal properties and the owners thereof have the unbridled
right to transfer the same to anyone they please subject only to
reasonable charter provisions.
Certificate of Stock: is the piece of paper or document which
evidences the ownership of shares and a convenient instrument in the
transfer of the title.
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.
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
1. It must be signed by the president or vice-president and countersigned
by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or expenses, if any)
should have been paid.
RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber to shares
of stock cannot be entitled to the issuance of a certificate of stock until the
full amount of his subscription together with interest and expenses (in case
of delinquent shares) if any is due, has been paid, a subscriber, even if not
yet fully paid, is entitled to exercise all the rights of a stockholder and
the corresponding liability that attach thereunder:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not
fully paid which are not delinquent shall have all the rights of a stockholder.
In essence, the issuance of a certificate of stock is not a condition sine qua
non to consider a subscriber a stockholder. To all intents and purposes, a
subscriber is a shareholder upon subscription and entitled to the all the rights
as such, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right under Sec. 83.
NEGOTIABILITY: A certificate of stock is not regarded as ―negotiable‖
in the sense same sense as a bill or a not, even if its endorsed in blank.
Thus, while it may be transferred by endorsement coupled with delivery
thereof, it is nonetheless non-negotiable in that the transferee takes it
without prejudice to all the rights and defenses which the true and lawful
owner may have except in so far as the principles governing estoppel may
apply.
NON-REGISTRATION: of shares disposed of by the holder will not affect
the validity of the transfer at least in so far as the contracting parties are
concerned. As regards, the corporation, the transferee will not be recognized
as such stockholder and could not exercise the rights until the transfer has
been duly recorded in the stock and transfer book. As such, ―he cannot
vote or be vote for, and he will not be entitled to dividends. The corporation
may be protected when it pays dividends to the registered owner
despite a previous transfer of which it had no knowledge. The purpose of
registration therefore is two-fold: (1) to enable the transferee to exercise all
the rights of stockholder, and (2) to inform the corporation of any
change in share ownership so that it can ascertain the person entitled
to the rights and subject to the liabilities of a corporation‖ (De Erquiga vs.
CA)
REGISTRATION: is necessary to:
1. Enable the corporation to know who its stockholders are;
2. Enable the transferee to exercise his rights as a stockholder;
3. Afford the corporation an opportunity to object or refuse registration
of the transfer in cases allowed by law (as when it has unpaid claims
on the shares transferred);
4. Avoid fictitious and fraudulent transfers; and
5. Protect creditors who have the right to look upon stockholders, in case
of non-payment or watered shares, for the satisfaction of their claims.
MANDAMUS: If the corporate secretary refuses to registered or record the
transfer, mandamus will lie to compel the registration. This is because such
duty is ministerial. HOWEVER, he cannot be compelled to do so when the
transferee’s title to said shares has no prima facie validity or is uncertain.
TWO MODES OF TRANSFERRING STOCKS:
1. Endorsement and delivery of certificate of stock;
2. Notarized deed.
The SEC has, however, ruled that when a corporation has already issued
stock certificates, any transfer of the shares can only be effectively made by
endorsement and delivery of the stock certificate. A deed of transfer, sale or
assignment alone would not suffice (as affirmed by the SC in Rural Bank of
Lipa City, Inc. vs. CA) for to rule otherwise would open the door to
fraudulent or fictitious transfer which the SEC seeks to avoid. In effect,
while a formal contract of sale in a notarized document is equivalent to
actual delivery of the certificate itself, this mode of transfer is available
only if no certificate of stock has been issued.
RIGHT TO TRANSFER SHARES OF STOCK: may not be
unreasonably restricted prohibited. Thus, in Padgett vs. Bobcock &
Templeton and Fleischer vs. Botica Nolasco, the SC held that every owner of
corporate shares has the same uncontrollable right to alienate them and is
under no obligation from selling them at his sacrifice and for the welfare and
benefit of the corporation and other stockholders. But while unreasonable
restrictions may not be allowed, the right to transfer may be
―regulated‖ to give the corporation protection against colorable or
fraudulent transfer or to enable it to know who its stockholders are. Also,
as a matter of policy, the SEC allows the grant of ―preferential rights‖ to
existing stockholders and/or the corporation, giving them the first option to
purchase the shares of a selling stockholder within a reasonable period not
exceeding thirty days provided that the same is contained in the AOI
and in all the stock certificates to be issued. This is considered
―reasonable‖ since it merely suspends the right to transfer within the period
specified.
OTHER RESTRICTIONS:
1. It is not valid, except as between the parties, until recorded in the books
of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim
shall not be transferrable in the books of the corporation. Unpaid claims,
refer to claims arising from unpaid subscription and not to any
indebtedness which a stockholder may owe the corporation such as
monthly dues;
3. Restrictions required to be indicated in the AOI, bylaws and stock
certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act
requiring the approval of the government agency concerned if it will vest
unto the transferee 40% of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the
Nationalization Laws; and
6. Those covered by reasonable agreement of the parties.
TRANSFER: as used in the Corporation Code, refers to absolute
and unconditional transfer to warrant registration in the books of the
corporation in order to bind the latter and other third persons.
ENRIQUE MONSERRAT, plaintiff-appellee,
vs.
CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents
(G.R. No. 37078; September 27, 1933)
FACTS: Enrique Monserrat, president and manager of the Manila Yellow
Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his
1,200 shares in consideration of the interest shown and the financial aid
extended him (Monserrat) in the organization of the corporation. This
assignment allowed Ceron to derive the right to enjoy the profits (during his
lifetim) that may be derived from the shares but prohibited him from acts of
absolute ownership, such acts and the right to vote, reserved to Monserrat
and his heirs. Such assignment was recorded in the books of the corporation
and the corresponding shares certificate was issued to Ceron.
Later on, Ceron mortgaged the shares to herein defendant Eduardo
Matute, the latter without knowledge of the existence of the assignment.
Due to non-payment, Matute foreclosed the mortgage and the shares
were sold at a
public auction.
Monserrat claims ownership over the shares and the lower court rendered
judgment in his favor, holding that the mortgage on the shares was null and
void, but the mortgage on the usufruct is valid.
ISSUE: WON it is necessary to enter upon the books of the corporation a
mortgage constituted on shares of stock in order that such mortgage may be
valid and may have force and effect as against third persons?
HELD: No. Section 35 of the Corporation Law provides the following:
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president,
counter signed by the secretary or clerk 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 indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is entered and
noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer the number of the
certificate, and the number of shares transferred.
No share of stock against which the corporation hold, any unpaid claim
shall be transferable on the books of the corporation.
The legal provision just quoted does not require any entry except of transfers
of shares of stock in order that such transfers may be valid as against third
persons. Now, what did the Legislature mean in using the word "transfer"?
Inasmuch as it does not appear from the text of the Corporation Law that an
attempt was made to give a special signification to the word "transfer", we
shall construe it according to its accepted meaning in ordinary parlance.
The word "transferencia" (transfer) is defined by the "Diccionario de la
Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
and effect of transferring); and the verb "transferir", as "ceder o renunciar en
otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
ella" (to assign or waive the right in, or absolute ownership of, a thing in
favor of another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
the word "transfer" is defined as follows:
"Transfer" means any act by which property of one person is vested in
another, and "transfer of shares", as used in Uniform Stock Transfer Act
(Comp. St. Supp., 690), implies any means whereby one may be divested
of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136
A., 209, 210.)"
In view of the definitions cited above, the question arises as to whether or
not a mortgage constituted on certain shares of stock in accordance with Act
No. 1508, as amended by Act No. 2496, is a transfer of such shares in the
abovementioned sense.
Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
SEC. 3. A chattel mortgage is a conditional sale of personal property as
security for the payment of a debt, or the performance of some other
obligation specified therein, the condition being that the sale shall be
avoided upon the seller paying to the purchaser a sum of money or doing
some other act named. If the condition is performed according to its terms
the mortgage and sale immediately become void, and the mortgage is
hereby divested of his title.
According to the legal provision just quoted, although a chattel
mortgage, accompanied by delivery of the mortgaged thing, transfers
the title and ownership thereof to the mortgage creditor, such transfer is
not absolute but constitutes a mere security for the payment of the
mortgage debt, the
transfer in question becoming null and void from the time the mortgage
debtor complies with his obligation to pay his debt.
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac., 14, 17;
34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and Phrases, second
series, vol. 4, p. 978, the following appears:
A "transfer" is the act by which owner of a thing delivers it to another with
the intent of passing the rights which he has in it to the latter, and a
chattel mortgage is not within the meaning of such term.
Therefore, the chattel mortgage is not the transfer referred to
in section 35 of Act No. 1459 commonly known as the Corporation
law, which transfer should be entered and noted upon the books
of a corporation in order to be valid, and which, as has already
been said, means the absolute and unconditional conveyance of
the title and ownership of a share of stock.
If, in accordance with said section 35 of the Corporation Law, only the
transfer or absolute conveyance of the ownership of the title to
a share need be entered and noted upon the books of the
corporation in order that such transfer may be valid, therefore,
inasmuch as a chattel mortgage of the aforesaid title is not a
complete and absolute alienation of the dominion and ownership
thereof, its entry and notation upon the books of the corporation
is not necessary requisite to its validity.
It is obvious, therefore, that the defendant entity Erma, Inc., as a conditional
purchaser of the shares of stock in question given as security for the
payment of his credit, acquired in good faith Carlos G. Ceron's right and
title to the 600 common shares of stock evidenced by certificate No. 7
of the MYTC, and as such conditional purchaser in good faith, it is entitled
to the protection of the law.
In view of the foregoing considerations, we are of the opinion and so hold
that, inasmuch as section 35 of the Corporation Law does not
require the notation upon the books of a corporation of
transactions relating to its shares, except the transfer of
possession and ownership thereof, as a necessary requisite to
the validity of such transfer, the notation upon the aforesaid
books of the corporation, of a chattel mortgage constituted on the
shares of stock in question is not necessary to its validity.
GONZALO CHUA GUAN, plaintiff-appellant,
vs.
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO
G. SOTTO, and EMILIO VERGARA, as president, secretary and
treasurer respectively of the same, defendants-appellees
(G.R. No. L-42091; November 2, 1935)
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his
shares to Chua Chiu, such assignment recorded in the Office of the Register
of Deeds and the books of the corporation. For non-payment, the
mortgage was foreclosed and the shares were sold at a public auction
with plaintiff Chua Guan as the highest bidder.
The Company refused to cancel the certificates of stock and issue new ones
to herein plaintiff alleging that prior to the date of plaintiff’s demand, nine
attachments had been issued and served and noted on the books of the
corporation. Thus, a prayer for a writ of mandamus.
The validity of the assignments and the mortgage is not in question.
ISSUE: WON the registration of the mortgage in the registry of chattel
mortgage in the office of the register of deeds give constructive notice to the
said attaching creditors and thus gave preference to the mortgage over the
other debts?
HELD: No. In passing, let it be noted that the registration of the said chattel
mortgage in the office of the corporation was not necessary and had no legal
effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to
VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and NORTH
ELECTRIC COMPANY, INC., appellants.
whether or not shares of a corporation could be hypothecated by placing
a chattel mortgage on the certificate representing such shares we now
regard as settled by the case of Monserrat vs. Ceron, supra. But that case
did not deal with any question relating to the registration of such a
mortgage or the effect of such registration. Nothing appears in the record
of that case even tending to show that the chattel mortgage there involved
was ever registered anywhere except in the office of the corporation, and
there was no question involved there as to the right of priority among
conflicting claims of creditors of the owner of the shares
Section 4 of Act No. 1508 provides two ways for executing a valid chattel
mortgage which shall be effective against third persons. First, the possession
of the property mortgage must be delivered to and retained by the
mortgagee; and, second, without such delivery the mortgage must be
recorded in the proper office or offices of the register or registers of deeds. If
a chattel mortgage of shares of stock of a corporation may validly be made
without the delivery of possession of the property to the mortgagee and the
mere registration of the mortgage is sufficient to constructive notice to third
parties, we are confronted with the question as to the proper place of
registration of such a mortgage. Section 4 provides that in such a case the
mortgage resides at the time of making the same or, if he is a non-resident,
in the province in which the property is situated; and it also provides that if
the property is situated in a different province from that in which the
mortgagor resides the mortgage shall be recorded both in the province of the
mortgagor's residence and in the province where the property is situated.
If with respect to a chattel mortgage of shares of stock of a corporation,
registration in the province of the owner's domicile should be sufficient, those
who lend on such security would be confronted with the practical difficulty of
being compelled not only to search the records of every province in which
the mortgagor might have been domiciled but also every province in
which a chattel mortgage by any former owner of such shares might be
registered. We cannot think that it was the intention of the legislature to put
this almost prohibitive impediment upon the hypothecation of shares of
stock in view of the great volume of business that is done on the faith of the
pledge of shares of stock as collateral.
It is a common but not accurate generalization that the situs of shares of
stock is at the domicile of the owner. The term situs is not one of fixed of
invariable meaning or usage. Nor should we lose sight of the difference
between the situs of the shares and the situs of the certificates of shares.
The situs of shares of stock for some purposes may be at the domicile of the
owner and for others at the domicile of the corporation; and even elsewhere.
(Cf. Vidal vs. South American Securities Co., 276 Fed., 855; Black Eagle Min.
Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs. Kansas City
Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general rule that for
purposes of execution, attachment and garnishment, it is not the
domicile of the owner of a certificate but the domicile of the
corporation which is decisive. (Fletcher, Cyclopedia of the Law of
Private Corporations, vol. 11, paragraph 5106. Cf. sections 430 and 450,
Code of Civil Procedure.)
By analogy with the foregoing and considering the ownership of shares in a
corporation as property distinct from the certificates which are merely the
evidence of such ownership, it seems to us a reasonable construction of
section 4 of Act No. 1508 to hold that 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
sufficient. If not, the chattel mortgage should 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.
In view of the premises, the attaching creditors are entitled to priority over
the defectively registered mortgage of the appellant and the judgment
appealed from must be affirmed without special pronouncement as to costs
in this instance.
TORIBIA USON, plaintiff-appellee,
vs.
VICENTE DIOSOMITO, ET AL., defendants.
(G.R. No. L-42135; June 17, 1935)
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an attachment
was levied on Jan. 18, 1932 upon the property of defendant Vicente
Diosmomito including the question 75 shares of North Electric Company,
Inc.. On March 20, 1933, the said shares were sold at a public auction to
satisfy the claim of Uson.
In the present action, appellant HPL Jollye claims ownership of said shares.
Apparently, these shares were sold by Diosomito to Emetertio Barcelon on
Feb. 3, 1931 but the certificates were cancelled and a new one issued only
on Sep. 16, 1932. Later on, the same shares were sold to Jollye and
registered in the books on Feb. 13, 1933.
ISSUE: WON a bona fide transfer of the shares of a corporation, not
registered or noted on the books of the corporation, is valid as against a
subsequent lawful attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not?
HELD: Section 35 of the Corporation Law is as follows:
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the by-laws.
Shares of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in fact or
other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is entered
and noted upon the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred
We prefer to adopt the line followed by the Supreme Courts of Massachusetts
and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201,
and In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the court had
under consideration a statute identical with our own section 35, supra,
and the court said:
We think the true meaning of the language is, and the obvious intention of
the legislature in using it was, that all transfers of shares should be
entered, as here required, on the books of the corporation. And it is
equally clear to us that all transfers of shares not so entered
are invalid as to attaching or execution creditors of the
assignors, as well as to the corporation and to subsequent
purchasers in good faith, and indeed, as to all persons
interested, except the parties to such transfers. All transfers not
so entered on the books of the corporation are absolutely void;
not because they are without notice or fraudulent in law or
fact, but because they are made so void by statute.
To us the language of the legislature is plain to the effect that the right of
the owner of the shares of stock of a Philippine corporation
to transfer the same by delivery of the certificate, whether it
be regarded as statutory on common law right, is limited and
restricted 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."
Therefore, the transfer of the 75 shares in the North Electric
Company, Inc., made by the defendant Diosomito to the
defendant Barcelon was not valid as to the plaintiff-appellee,
Toribia Uson, on January 18, 1932, the date on which she
obtained her attachment lien on said shares of stock which still
stood in the name of Diosomito on the books of the
corporation.
CYRUS PADGETT, plaintiff-appellee,
vs.
BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendants-
appellants
(G.R. No. L-38684; December 21, 1933)
FACTS: The appellee was an employee of the appellant corporation and
rendered services as such from January 1, 1923, to April 15, 1929. During
that period he bought 35 shares thereof at P100 a share at the suggestion of
the president of said corporation. He was also the recipient of 9 shares by
way of bonus during Christmas seasons. In this way the said appellee
became the owner of 44 shares for which the 12 certificates, Exhibits F to F-
11, were issued in his favor. The word "nontransferable" appears on each
and every one of these certificates. Before severing his connections with the
said corporation, the appellee proposed to the president that the said
corporation buy his 44 shares at par value plus the interest thereon, or that
he be authorized to sell them to other persons. The corporation bought
similar shares belonging to other employees, at par value. Sometime later,
the said president offered to buy the appellee's shares first at P85 each and
then at P80. The appellee did not agree thereto.
ISSUE: WON the restriction imposed on the right to transfer the shares is
valid?
HELD: No. The opinion seems to be unanimous that a restriction imposed
upon a certificate of shares, similar to the ones under
consideration, is null and void on the ground that it constitutes
and unreasonable limitation of the right of ownership and is in
restraint of trade.
Shares of corporate stock being regarded as property, the owner of such
shares may, as a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do so is properly
restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)
Any restriction on a stockholder's right to dispose of his shares must be
construed strictly; and any attempt to restrain a transfer of shares is
regarded as being in restraint of trade, in the absence of a valid lien upon
its shares, and except to the extent that valid restrictive regulations and
agreements exist and are applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained from exercising his right
to transfer by the corporation or its officers or by other stockholders, even
though the sale is to a competitor of the company, or to an insolvent
person, or even though a controlling interest is sold to one purchaser.
(Ibid., sec. 1035, pp. 665, 666.)
In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have
discussed the validity of a clause in the by-laws of the defendant corporation,
which provided that, under the same conditions, the owner of a share of
stock could not sell it to another person except to the defendant corporation.
In deciding the legality and validity of said restriction, we held:
The only restraint imposed by the Corporation Law upon
transfer of shares is found in section 35 of Act No. 1459. This
restriction is necessary in order that the officers of the
corporation may know who are the stockholders, which is
essential in conducting elections of officers, in calling
meetings of stockholders, and for other purposes. But any
restriction of the nature of that imposed in the by-law now in
question, is ultra vires, violative of the property rights of
shareholders, and in restraint of trade. (Id., p. 592.)
It is obvious, therefore, that the restriction consisting in the word
"nontransferable", appearing on the 12 certificates, Exhibits F to F-11, is
illegal and should be eliminated.
ISSUE2: WON the corporation may be compelled to buy the shares of a
selling stockholder?
HELD: No. There is no existing law nor authority in support of the plaintiff's
claim to the effect that the defendants are obliged to buy his shares of stock
value at par value, plus the interest demanded thereon. In this respect, we
hold that there has been no such contract, either express or implied,
between the plaintiff and the defendants. In the absence of a similar
contractual obligation and of a legal provision applicable thereto, it is logical
to conclude that it would be unjust and unreasonable to compel the said
defendants to comply with a non-existent or imaginary obligation.
Whereupon, we are
likewise compelled to conclude that the judgment originally rendered to that
effect is untenable and should be set aside
LEON J. LAMBERT, plaintiff-appellant,
vs.
T. J. FOX, defendant-appellee
(G.R. No. L-7991; January 29, 1914)
FACTS: Defendant and plaintiff, became two of the largest shareholders of
John R. Edgar & Co., Inc. was incorporated. They were former creditors
who agreed to aid the financially distressed predecessor John R. Edgar &
Co.. They entered into an agreement a few days after incorporation as
follows:
Whereas the undersigned are, respectively, owners of large amounts of
stock in John R. Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation depends, now
and for at least one year next following, in the larger stockholders
retaining their respective interests in the business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of any part of their present holdings of stock
in said John R. Edgar & Co. Inc., till after one year from the date hereof.
Either party violating this agreement shall pay to the other the sum of one
thousand (P1,000) pesos as liquidated damages, unless previous consent
in writing to such sale, transfer, or other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19, 1911,
sold his stock in the said corporation to E. C. McCullough of the firm of
E. C. McCullough & Co. of Manila, a strong competitor of the said John R.
Edgar & Co., Inc.
A complaint was filed and the trial court decided in favor of defendant.
ISSUE: WON the stipulation in the contract is valid?
HELD: Yes. It is urged by the appellee in this case that the stipulation in the
contract suspending the power to sell the stock referred to therein is an
illegal stipulation, is in restraint of trade and, therefore, offends public policy.
We do not so regard it. The suspension of the power to sell has
a beneficial purpose, results in the protection of the corporation
as well as of the individual parties to the contract, and is
reasonable as to the length of time of the suspension. We do not
here undertake to discuss the limitations to the power to suspend the
right of alienation of stock, limiting ourselves to the statement that
the suspension in this particular case is legal and valid.
EMBASSY FARMS, INC., petitioner,
vs.
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT),
HON. ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch
CLVIII, (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff,
Branch CLVIII, Regional Trial Court, Pasig, Metro Manila and
EDUARDO B. EVANGELISTA, respondents
(G.R. No. 80682 August 13, 1990)
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a
Memorandum of Agreement (MOA) with the following obligations:
 EVANGELISTA:
1. To transfer to Asuncion 19 parcels of agricultural land registered in
his name, together with the stocks, equipment and facilities of
Embassy Farms, Inc. wherein 90% of the shares of stock is owned
by Evangelista;
2. To cede, transfer and convey ―in a manner absolute
and irrevocable any and all of his shares of stocks‖ in Embassy
Farms, Inc. to Asuncion or his nominees ―until the total of said
shares of stock so transferred shall constitute 90% of the paid-in
equity of said corporation‖ within a reasonable time from
signing the document.
 ASUNCION:
1. To pay Evangelista P8,630,999;
2. To organize and register a new corporation with an authorized
FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon in 1962.
capital stock of P10M which upon registration will take over all the
rights and liabilities of Asuncion.
Effective control and management of the piggery at Embassy Farms, Inc. was
transferred by Evangelista to Asuncion pursuant to clause 8 of the MOA. In
accordance with clause 15, Evangelista served as President and Chief
Executive of Embassy Farms.
Evangelista also endorsed in blank all his shares of stock including that of his
wife and three nominees with minor holdings but retained possession of said
shares and opted to deliver to Asuncion only upon full compliance of the
latter of his obligations under the MOA.
For failure to comply with his obligations, Evangelista intimated the
institution of the appropriate legal action. But Asuncion eventually
filed for the rescission of the MOA.
ISSUE: WON Evangelista has a better right to the shares and control of the
corporate affairs?
HELD: Yes. From the pleadings submitted by the parties it is clear that
although Evangelista has indorsed in blank the shares outstanding in his
name he has not delivered the certificate of stocks to Asuncion because the
latter has not fully complied with his obligations under the MOA. There
being no delivery of the indorsed shares of stock Asuncion
cannot therefore effectively transfer to other person or his
nominees the undelivered shares of stock. For an effective transfer of
shares of stock the mode and manner of transfer as prescribed by law
must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65). As
provided under Section 3 of Batas Pambansa Bilang 68, otherwise known
as the Corporation Code of the Philippines, shares of stock may be
transferred by delivery to the transferree of the certificate
properly indorsed. Title may be vested in the transferree by the
delivery of the duly indorsed certificate of stock (18 C.J.S. 928, cited
in Rivera v. Florendo, 144 SCRA 643). However, no transfer shall be valid,
except as between the parties until the transfer is properly recorded in the
books of the corporation (Sec. 63, Corporation Code of the Philippines).
In the case at bar the indorsed certificate of stock was not actually delivered
to Asuncion so that Evangelista is still the controlling stockholder of
Embassy Farms despite the execution of the memorandum of agreement and
the turn-over of control and management of the Embassy Farms to
Asuncion on August 2, 1984.
When Asuncion filed on April 10, 1986 an action for the rescission of
contracts with damages, the Pasig Court merely restored and established the
status quo prior to the execution of the MOA by the issuance of a restraining
order on July 10, 1987 and the writ of preliminary injunction on July 30,
1987. It would be unjust and unfair to allow Asuncion and his nominees to
control and manage the Embassy Farms despite the fact that Asuncion, who
is the source of their supposed shares of stock in the corporation, is not
asking for the delivery of the indorsed certificate of stock but for the
rescission of the MOA. Rescission would result in mutual restitution
(Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow
Evangelista to manage the farm. Compared to Asuncion or his nominees
Evangelista would be more interested in the preservation of the assets,
equipment and facilities of Embassy Farms during the pendency of the main
case.
ENRIQUE RAZON, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his
capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN,
respondents.
(G.R. No. 74306 March 16, 1992)
VICENTE B. CHUIDIAN, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON,
INC., respondents
(G.R. No. 74315 March 16, 1992)
However, it began operations only in 1966 since the other incorporators
withdrew from the said corporation. The petitioner then distributed the
stocks previously placed in the names of the withdrawing nominal
incorporators to some friends, among them the late Juan T. Chuidian to
whom he gave 1,500 shares.
The shares of stocks 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
Chuidian delivered to petitioner the stock certificate in 1966, and since then
petitioner had in his possession such certificate, until the time, he delivered it
for deposit with PBCom under the parties’ joint custody pursuant to their
agreement embodied in the trial court’s order.
ISSUE: WON petitioner Razon is the rightful owner of the shares?
HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals (188
SCRA 492 [1990]) we ruled:
. . . For an effective, transfer of shares of stock the mode and manner of
transfer as prescribed by law must be followed (Navea v. Peers Marketing
Corp., 74 SCRA 65). As provided under Section 3 of Batas Pambansa
Bilang, 68 otherwise known as 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 (18
C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no
transfer shall be valid, except as between the parties until the transfer is
properly recorded in the books of the corporation (Sec. 63, Corporation
Code of the Philippines; Section 35 of the Corporation Law)
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. (See Section 30, Corporation Code) 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 (See Nava v. Peers Marketing Corporation, 74 SCRA 65
[1976]) or in accordance with the provisions of law.
The petitioner failed in both instances. The petitioner 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 cannot
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.
Moreover, the preponderance of evidence supports the appellate court's
factual 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
A corporation, either by its board, its by-laws, or the act of its officers, cannot
legal services to the corporation. Petitioner Razon failed to overcome this
testimony.
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS
and FRANCISCO TRIAS, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,
FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR.,
respondents
(G.R. No. 96674 June 26, 1992)
FACTS: On June 10, 1979, 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 (represented by the Bank's
stock certificates nos. 26, 49 and 65), to execute the proper documents
therefor, and to receive and sign receipts for the dispositions.
Pursuant to said SPA, private respondent Melania Guerrero, as Attorney-in-
Fact, executed the following assignments of shares of stocks: Luz Andico
(457 shares); Wilhelmina Rosales (10 shares); Francisco Guerrero, Jr. (5
shares); and Francisco Guerrero, Sr. (1 share). The last share was
transferred 2 months before the death of Clemente.
Subsequently, Melania Guerrero presented the Deeds of Assignments and
requested for the cancellation of the certificates of stock and new ones to be
issued in the name of transferees. However, petitioner Bank refused.
Melania Guerrero filed for an action for mandamus with the SEC. Maripol
Guerrero, a legally adopted daughter of Melania and Clemente filed for
intervention claiming that two weeks before filing the action for mandamus, a
petition for the administration of the estate of Celemente has been filed and
that the deeds of assignment were fictitious and antedated. SEC denied the
motion for intervention.
Maripol filed a complaint before the CFI for the annulment of the Deeds of
Assignment.
Later on, the SEC rendered a decision granting the action for mandamus
which was affirmed by the SEC en banc and still later, by the CA.
ISSUE: WON the mandamus was properly granted for the registration of the
transfer of the 473 shares in question?
HELD: Yes. Respondent SEC correctly ruled in favor of the registering of the
shares of stock in question in private respondent's names. Such ruling finds
support under Section 63 of the Corporation Code, to wit:
Sec. 63. . . . Shares of stock so issued are personal property and may
be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise:
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 is when the corporation holds any unpaid claim against the
shares intended to be transferred, which is absent here.
create restrictions in stock transfers, because:
 . . . Restrictions in the traffic of stock must have their source in
legislative enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the
absence of such power, cannot ordinarily inquire into or pass upon the
legality of the transactions by which its stock passes from one person to
another, nor can it question the consideration upon which a sale is
based. . . . (Tomson on Corporation Sec. 4137, cited in Fleisher vs.
Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his name is
an inherent right flowing from his ownership of the stocks. Thus:
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" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher
vs. Botica Nolasco, 47 Phil. 583, 594).
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. (Fletcher, Sec. 5528, page 434).
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. (See. 5518,
12 Fletcher 394)
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. Thus, respondent Court of Appeals did not err
in upholding the Decision of respondent SEC affirming the Decision of
its Hearing Officer directing the registration of the 473 shares in the stock
and transfer book in the names of private respondents. At all events,
the registration is without prejudice to the proceedings in court to determine
the validity of the Deeds of Assignment of the shares of stock in question.
LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE
OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998)
FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso
Lim, each executed a contract of pledge covering their respective 300 shares
in favor of petitioner Lim Tay where they indorsed in blank and delivered
their shares of stock to Tay.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC
against Go Fay & Compny, Inc. to cancel the old certificates and issue a
new one in his name, which was granted by the SEC but reversed by the CA.
ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas
case will apply?
HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la
Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock
in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to record the transfer of the
shares in the corporate books and instead asked for the annulment of the
sale, claiming that he and his wife had a pre-emptive right over some of the
shares, and that his wife's shares were sold without consideration or consent.
At the outset, it must be underscored that petitioner did not
acquire ownership of the shares by virtue of the contracts of pledge. Article
At the time the Bragas questioned the validity of the sale, the contract had
already been perfected, thereby demonstrating that Telectronic Systems, Inc.
was already the prima facie owner of the shares and, consequently, a
stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be
annulled later on, Telectronic Systems, Inc. had, in the meantime, title over
the shares from the time the sale was perfected until the time such sale was
annulled. The effects of an annulment operate prospectively and do not, as a
rule, retroact to the time the sale was made. Therefore, at the time the
Bragas questioned the validity of the tranfers made by the Abejos,
Telectronic Systems, Inc. was already a prima facie shareholder of the
corporation, thus making the dispute between the Bragas and the Abejos
"intra-corporate" in nature. Hence, the Court held that "the issue is not on
ownership of shares but rather the non-performance by the corporate
secretary of the ministerial duty of recording transfers of shares of stock of
the corporation of which he is secretary."
Unlike Abejo, however, petitioner's ownership over the shares in
this case was not yet perfected when the Complaint was filed.
The contract of pledge certainly does not make him the owner
of the shares pledged. Further, whether prescription effectively
transferred ownership of the shares, whether there was a novation of the
contracts of pledge, and whether laches had set in were difficult legal
issues, which were unpleaded and unresolved when herein petitioner
asked the corporate secretary of Go Fay to effect the transfer, in his favor,
of the shares pledged to him.
In Rural Bank of Salinas: Melenia Guerrero executed deeds of
assignment for the shares in favor of the respondents in that case. When
the corporate secretary refused to register the transfer, an action for
mandamus was instituted. Subsequently, a motion for intervention was
filed, seeking the annulment of the deeds of assignment on the grounds
that the same were fictitious and antedated, and that they were in fact
donations because the considerations therefor were below the book value of
the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were
already prima facie shareholders when the deeds of assignment were
questioned. If the said deeds were to be annulled later on, respondents
would still be considered shareholders of the corporation from the time of the
assignment until the annulment of such contracts.
ISSUE2: WON petitioner is entitled to the relief of mandamus as against the
company?
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing
the corporate secretary of respondent corporation to have the shares
transferred to his name in the corporate books, to issue new certificates of
stock and to deliver the corresponding dividends to him.
In order that a writ of mandamus may issue, it is essential that
the person petitioning for the same has a clear legal right to the
thing demanded and that it is the imperative duty of the
respondent to perform the act required. It neither confers
powers nor imposes duties and is never issued in doubtful cases.
It is simply a command to exercise a power already possessed
and to perform a duty already imposed.
In the present case, petitioner has failed to establish a clear legal right.
Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have
any ownership rights at all. At the time petitioner instituted his suit at the
SEC, his ownership claim had no prima facie leg to stand on. At best, his
contention was disputable and uncertain Mandamus will not issue to
establish a legal right, but only to enforce one that is already clearly
established.
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares
automatically passed to Lim Tay?
HELD: No. On appeal, petitioner claimed that ownership over the shares had
passed to him, not via the contracts of pledge, but by virtue of prescription
and by respondents' subsequent acts which amounted to a novation of the
contracts of pledge. We do not agree.
2112 of the Civil Code states:
 ―The creditor to whom the credit has not been satisfied in due time,
may proceed before a Notary Public to the sale of the thing pledged.
This sale shall be made at a public auction, and with notification to the
debtor and the owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the first auction the
thing is not sold, a second one with the same formalities shall be held;
and if at the second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged to give
an acquittance for his entire claim.‖
Furthermore, the contracts of pledge contained a common proviso, which we
quote again for the sake of clarity:
―3. In the event of the failure of the PLEDGOR to pay the amount within
a period of six (6) months from the date hereof, the PLEDGEE is
hereby authorized to foreclose the pledge upon the said shares of stock
hereby created by selling the same at public or private sale with or
without notice to the PLEDGOR, at which sale the PLEDGEE may be the
purchaser at his option; and "the PLEDGEE is hereby authorized and
empowered at his option to transfer the said shares of stock on the
books of the corporation to his own name, and to hold the certificate
issued in lieu thereof under the terms of this pledge, and to sell the said
shares to issue to him and to apply the proceeds of the sale to the
payment of the said sum and interest, in the manner hereinabove
provided;‖
There is no showing that petitioner made any attempt to
foreclose or sell the shares through public or private auction, as
stipulated in the contracts of pledge and as required by Article
2112 of the Civil Code. Therefore, ownership of the shares could
not have passed to him. The pledgor remains the owner during the
pendency of the pledge and prior to foreclosure and sale, as explicitly
provided by Article 2103 of the same Code:
―Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof.‖
RICARDO A. NAVA, petitioner-appellant.
vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and AMPARO
CUSI, respondents-appellees
(G.R. No. L-28120; November 25, 1976)
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid
25% of the subscription. No certificate of stock was issued to him.
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value
of P100, or P2,000. Nava requested herein private respondents, officers of
Peers Marketing Corporation, to register him as owner of the shares,
but they refused, Po being delinquent in the payment of the balance
due his subscription.
Po filed an action for mandamus in the CFI of Negros but it was dismissed.
Po claims that the trial court erred in applying the ruling in Fua Cun vs.
Summers and China Banking Corporation wherein it was ruled that the
payment of one-half of the subscription does not entitle the subscriber to a
certificate for one-half of the number of shares subscribed.
ISSUE: WON Peers Marketing Corporation may be compelled by mandamus
to enter in its stock and transfer book the sale made by Po to Nava of the 20
shares forming part of Po’s subscription of 80 shares, it being admitted that
the corporation has an unpaid claim of P6,000 as the balance on said
subscription?
HELD: No. We hold that the transfer made by Po to Nava is not the
"alienation, sale, or transfer of stock" that is supposed to be recorded in the
stock and transfer book, as contemplated in section 52 of the
Corporation Law.
The delivery of the stock certificate, which represents the shares to be
alienated , is essential for the protection of both the corporation and its
stockholders (Smallwood vs. Moretti, 128 So. 2d 628).
As a rule, the shares which may be alienated are those which
are covered by certificates of stock, as shown in the following
provisions of the Corporation Law and as intimated in Hager vs. Bryan,
19 Phil. 138 (overruling the decision in Hager vs. Bryan, 21 Phil. 523. See
19 Phil. 616, notes, and Hodges vs. Lezama, 14 SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk 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 indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer, however, shall
be valid, except as between the, parties, until the transfer is entered and
noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim
shall be transferable on the books of the corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and cancelled,
and new certificates therefor issued to such person or persons, or
corporation, as such trustee or trustees, in which new certificates it shall
appear that they are issued pursuant to said agreement.
xxx xxx xxx
As prescribed in section 35, shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. "Title may be vested in the
transferee by delivery of the certificate with a written assignment or
indorsement thereof" (18 C.J.S. 928). There should be compliance with the
mode of transfer prescribed by law (18 C.J.S. 930).
The usual practice is for the stockholder to sign the form on the back of the
stock certificate. The certificate may thereafter be transferred from one
person to another. If the holder of the certificate desires to assume the legal
rights of a shareholder to enable him to vote at corporate elections and to
receive dividends, he fills up the blanks in the form by inserting his own
name as transferee. Then he delivers the certificate to the secretary of the
corporation so that the transfer may be entered in the corporation's books.
The certificate is then surrendered and a new one issued to the transferee.
(Hager vs. Bryan, 19 Phil. 138, 143-4).
That procedure cannot be followed in the instant case because, as already
noted, the twenty shares in question are not covered by any certificate of
stock in Po's name. Moreover, the corporation has a claim on the
said shares for the unpaid balance of Po's 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 incontestable.
(Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from paying
for his shares without a valuable consideration (Philippine National
Bank vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA
1366) or without the unanimous consent of the stockholders
(Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the part of the
officers of the corporation to register the twenty shares in Nava's name,
Hence, there is no cause of action for mandamus
As already stressed, in this case no stock certificate was issued to Po.
Without stock certificate, which is the evidence of ownership
of corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction (Davis vs.
Wachter, 140 So. 361).
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND
DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO
KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE
RURAL BANK OF LIPA CITY, INC., petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC,
SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L.
FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR,
AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES,
AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN
and ELENA USI, respondents
(G.R. No. 124535; September 28, 2001)
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder of
Rural Bank of Lipa City, Inc. executed a Deed of Assignment wherein he
assigned his shares, as well as those of eight stockholders under his
control with a total of 10,457 shares, in favor of stockholders of the Bank
represented by its BOD. At the same time, He and his wife executed an
agreement wherein he acknowledge their indebtedness of P4M and
stipulated that the said debt will be paid out of the proceeds of the sale of
their real property described in the agreement.
The Villanueva spouses failed to settle their obligation on the due date,
and the BOD sent a demand letter for the surrender of the said shares and
for the delivery of sufficient collateral to cover the balance of the debt,
which the Villanueva spouses ignored. Their shares were converted
into Treasury shares.
The Villanueva spouses questioned the legality of the such conversion and
filed with the SEC a petition for annulment of the stockholders’ meeting and
election of directors and officers because they were not notified of such
meeting.
The SEC hearing officer dismissed the application for issuance of a
preliminary injunction, but was granted on reconsideration. The decision was
affirmed by the SEC en banc and later by the CA.
ISSUE: WON the transfer of the shares is ineffective for non-indorsement
and non-delivery of the certificate of stocks?
HELD: Yes. The Corporation Code specifically provides:
SECTION 63. Certificate of stock and transfer of shares. — The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares
of stocks so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation so as to show
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. (Emphasis ours)
Petitioners argue that by virtue of the Deed of Assignment, private
respondents had relinquished to them any and all rights they may have had
as stockholders of the Bank. While it may be true that there was an
assignment of private respondents' shares to the petitioners, said
assignment was not sufficient to effect the transfer of shares
since there was no endorsement of the certificates of stock
by the owners, their attorneys-in-fact or any other person
legally authorized to make the transfer. Moreover, petitioners admit
that the assignment of shares was not coupled with delivery, the absence
of which is
valid?
a fatal defect. The rule is that the delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of shares
from the lawful owner to the transferee. Thus, title may be vested
in the transferee only by delivery of the duly indorsed certificate
of stock.
We have uniformly held that for a valid transfer of stocks, there must be
strict compliance with the mode of transfer prescribed by law. The
requirements are: (a) There must be delivery of the
stock certificate: (b) The certificate must be endorsed by the owner
or his attorney-in-fact or other persons legally authorized to
make the transfer; and (c) To be valid against third parties, the
transfer must be recorded in the books of the corporation. As it is,
compliance with any of these requisites has not been clearly and sufficiently
shown.
It may be argued that despite non-compliance with the requisite
endorsement and delivery, the assignment was valid between the parties,
meaning the private respondents as assignors and the petitioners as
assignees. While the assignment may be valid and binding on the petitioners
and private respondents, it does not necessarily make the transfer effective.
Consequently, the petitioners, as mere assignees, cannot enjoy
the status of a stockholder, cannot vote nor be voted for, and will
not be entitled to dividends, insofar as the assigned shares are
concerned. Parenthetically, the private respondents cannot, as yet, be
deprived of their rights as stockholders, until and unless the issue of
ownership and transfer of the shares in question is resolved with finality.
There being no showing that any of the requisites mandated by law was
complied with, the SEC Hearing Officer did not abuse his discretion in
granting the issuance of the preliminary injunction prayed for by petitioners
in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the
order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and
the Court of Appeals decision upholding the SEC en banc order, are valid and
in accordance with law and jurisprudence, thus warranting the denial of the
instant petition for review.
ALFONSO S. TAN, Petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL
SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
PATRICIA AGUILAR, Respondents
(G.R. No. 95696; March 3, 1992)
FACTS: With the withdrawal of two of the original incorporators,
petitioner Alfonso Tan assigned 50 of his 400 shares (covered by Stock
Certificate No. 2) to his brother Angel S. Tan, private respondent.
Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia
Aguilar, by virtue of Resolution No. 1981(b), while petitioner was still the
president and member of the board.
With the cancellation of Certificate of stock No. 2 and the subsequent
issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the
remaining 350 shares, Stock Certificate No. 8 was issued in the name of
petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29),
alleging that:
9. That in view of his having taken 33 1/3 interest, I was personally
requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper
endorsement in the cancelled Certificate of Stock No. 2 and Certificate No.
8, but he did not endorse, instead he kept the cancelled (1981) Certificate
of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I
delivered to Tan Su Ching.
10. That the cancellation of his stock (Stock No. 2) was known by him in
1981; that it was Stock No. 8 that was delivered in March 1983 for his
endorsement and cancellation.
Petitioner filed with the SEC a case questioning the cancellation of the
aforesaid Stock Nos. 2 and 8.
ISSUE: WON the cancellation and transfer of stock certificate no. 2 was
HELD: Yes. Petitioner claims that "(T)he cancellation and transfer of
petitioner's shares and Certificate of Stock No. 2 (Exh. A) as well as the
issuance and cancellation of Certificate of Stock No. 8 (Exh. M) was patently
and palpably unlawful, null and void, invalid and fraudulent." (Rollo, p.
9) And, that Section 63 of the Corporation Code of the Philippines is
"mandatory in nature", meaning that without the actual delivery and
endorsement of the certificate in question, there can be no transfer, or that
such transfer is null and void.
Contrary to the understanding of the petitioner with respect to the use of the
word "may", in the case of Shauf v. Court of Appeals, (191 SCRA 713, 27
November 1990), this Court held, that "Remedial law statues are to be
construed liberally." The term 'may' as used in adjective rules, is only
permissive and not mandatory.
This Court held in Chua v. Samahang Magsasaka, that "the word "may"
indicates that the transfer may be effected in a manner different from that
provided for in the law." (62 Phil. 472)
Moreover, it is safe to infer from the facts deduced in the instant case that,
there was already delivery of the unendorsed Stock Certificate No. 2, which
is essential to the issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan
and petitioner Alfonso S. Tan, respectively. What led to the problem was
the return of the cancelled certificate (No. 2) to Alfonso S. Tan for
his endorsement and his deliberate non-endorsement.
For all intents and purposes, however, since this was already
cancelled which cancellation was also reported to
the respondent Commission, there was no necessity for the
same certificate to be endorsed by the petitioner. All the acts
required for the transferee to exercise its rights over the
acquired stocks were attendant and even the corporation was
protected from other parties, considering that said transfer was
earlier recorded or registered in the corporate stock and transfer
book.
Following the doctrine enunciated in the case of Tuazon v. La Provisora
Filipina, where this Court held, that:
But delivery is not essential where it appears that the
persons sought to be held as stockholders are officers of the
corporation, and have the custody of the stock book . . . (67 Phi.
36).
Furthermore, there is a necessity to delineate the function of the stock
itself from the actual delivery or endorsement of the certificate of stock itself
as is the question in the instant case. A certificate of stock is not
necessary to render one a stockholder in corporation.
Nevertheless, a certificate of stock is the paper representative
or tangible evidence of the stock itself and of the various
interests therein. The certificate is not stock in the corporation but
is merely evidence of the holder's interest and status in the
corporation, his ownership of the share represented thereby, but
is not in law the equivalent of such ownership. It expresses the
contract between the corporation and the stockholder, but is
not essential to the existence of a share in stock or the
nation of the relation of shareholder to the corporation. (13 Am.
Jur. 2d, 769)
Under the instant case, the fact of the matter is, the new holder, Angel S.
Tan has already exercised his rights and prerogatives as stockholder and was
even elected as member of the board of directors in the respondent
corporation with the full knowledge and acquiescence of petitioner. Due to
the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and
responsibilities in the board of the respondent corporation when he was
elected as officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is not a
negotiable instrument. "Although it is sometime regarded as
quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, it is well-settled that it is
non-negotiable, because the holder thereof takes it without
prejudice to such rights or defenses as the registered owner/s or
transferror's creditor may
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffs-
appellees,
have under the law, except insofar as such rights or defenses
are subject to the limitations imposed by the principles
governing estoppel." (De los Santos vs. McGrath, 96 Phil. 577)
To follow the argument put up by petitioner which was upheld by the Cebu
SEC Extension Office Hearing Officer, Felix Chan, that the cancellation of
Stock Certificate Nos. 2 and 8 was null and void for lack of delivery of the
cancelled "mother" Certificate No. 2 whose endorsement was deliberately
withheld by petitioner, is to prescribe certain restrictions on the transfer of
stock in violation of the corporation law itself as the only law governing
transfer of stocks. While Section 47(s) grants a stock corporation the
authority to determine in the by-laws "the manner of issuing certificates" of
shares of stock, however, the power to regulate is not the power
to prohibit, or to impose unreasonable restrictions of the right
of stockholders to transfer their shares. (Emphasis supplied)
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law which
prohibits a transfer of stock without the consent or approval of all the
stockholders or of the president or board of directors is illegal as constituting
undue limitation on the right of ownership and in restraint of trade. (47 Phil.
583)
LEE E. WON alias RAMON LEE, plaintiff-appellant,
vs.
WACK WACK GOLF and COUNTRY CLUB, INC., defendant-appellee
(G.R. No. L-10122; August 30, 1958)
FACTS: The defendant corporation issued membership certificate no. 201 to
Iwao Teruyama which on April 1944, was assigned to MT Reyes and on the
same year assigned to herein plaintiff-appellant. On April 26, 1955, the
plaintiff filed an action against the defendant alleging that shortly after its
rehabilitation after the war, plaintiff asked that the assignment be registered
in the books of the defendant and that the latter refused and still refuses to
do so unlawfully.
Defendant filed a motion to dismiss on the ground that 11 years have
elapsed from the time of the assignment upto the time of the filing of the
complaint, beyond the 5 year period provided under Art. 1149 of the Civil
Code. The trial court dismissed the action and denied reconsideration.
ISSUE: WON plaintiff was bound to present and register the certificate
assigned to him within any definite or fixed period?
HELD: No. The defendant has not made herein any pretense to that effect;
but it contends that from the moment the certificate was assigned to the
plaintiff, the latter's right to have the assignment registered commenced to
exist. This contention is correct, but it would not follow that said
right should be exercised immediately or within a definite
period. The existence of a right is one thing, and the duration of
said right is another.
On the other hand, it is stated in the appealed order of dismissal that the
plaintiff sought to register the assignment on April 13, 1955; whereas
in plaintiff's brief it is alleged that it was only in February, 1955, when
the defendant refused to recognize the plaintiff. If, as already observed,
there is no fixed period for registering an assignment, how can the
complaint be considered as already barred by the Statute of Limitations
when it was filed on April 26, 1955, or barely a few days (according to the
lower court) and two months (according to the plaintiff), after the demand
for registration and its denial by the defendant. Plaintiff's right was violated
only sometime in 1955, and it could not accordingly have asserted any cause
of action against the defendant before that.
The defendant seems to believe that the plaintiff was compelled immediately
to register his assignment. Any such compulsion is obviously for the benefit
of the plaintiff, because it is only after registration that the transfer would be
binding against the defendant. But we are not here concerned with a
situation where the plaintiff claims anything against the defendant allegedly
accruing under the outstanding certificate in question between the date
of the assignment to the plaintiff and the date of the latter’s demand
for registration and issuance of a new certificate.
vs.
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED
STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY
ADMINISTRATION OF THE UNITED STATES, defendant-appellant.
REPUBLIC OF THE PHILIPPINES, intervenor-appellant
(G.R. No. L-4818; February 28, 1955)
FACTS: Plaintiff delos Santos alleges that he purchased 55,000 shares of
Lepanto Consolidated Mining Co., Inc. from Juan Campos, and later 200,000
shares from Carl Hess and much later 800,000 still from Hess (for the
account and benefit of Astraquillo). Both of the supposed vendors, now
deceased.
By virtue of vesting order P-12, title to the 1,600,000 shares in dispute was,
however, vested in the Alien Property Custodian of the US. In due course,
the Vested Property Claims Committee of the Philippine Alien
Property Administration made a ―determination‖ allowing said claims,
which were considered and hear jointly. But upon personal review of the
Philippine Alien Property Administrator, the ―determination‖ was reversed
and decreed that ―title to the shares in question shall remain in the
name of the Philippine Alien Property Administrator‖.
Consequently, plaintiffs instituted the present action to establish title to the
aforementioned shares of stock.
Defendant Attorney General of the US contends that the shares were bought
by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan,
abranch office of a Japanese company; and that Madrigal endorsed in blank
and delivered the shares to Mistsui for safe keeping; that Mitsui never sold or
otherwise disposed of the said shares; and that the stock certificates must
have been stolen or looted during the emergency from the liberation.
ISSUE: WON plaintiffs are the rightful owners of the shares?
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares
of stock in question, as testified to by De los Santos, the result, insofar as
plaintiffs are concerned, would be the same. It is not disputed that said
shares of stock were registered, in the records of the Lepanto, in the name of
Vicente Madrigal. Neither is it denied that the latter was, as regards said
shares of stock, a mere trustee for the benefit of the Mitsuis. The record
shows — and there is no evidence to the contrary — that Madrigal had never
disposed of said shares of stock in any manner whatsoever, except by turning
over the corresponding stock certificates, late in 1941, to the Mitsuis, the
beneficial and true owners thereof. It has, moreover, been established, by
the uncontradicted testimony of Kitajima and Miwa, the managers of
the Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had
neither sold, conveyed, or alienated said shares of stock, nor
delivered the aforementioned stock certificates, to anybody during said
period. Section 35 of the Corporation Law reads:
The capital stock corporations shall be divided into shares for which
certificates signed by the president or the vice-president, countersigned by
the secretary or clerk 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
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
entered and noted upon the books of the corporation so as to
show the names of the parties to the transaction, the date of the
transfer, the number of the certificate, and the number of shares
transferred.
Pursuant to this provision, a share of stock may be transferred by
endorsement of the corresponding stock certificate, coupled with its
delivery. However, the transfer shall "not be valid, except as
between the parties," until it is "entered and noted upon the books
of the corporation." no such entry in the name of the plaintiffs herein
having been made, it follows that the transfer allegedly effected by Juan
Campos and Carl Hess in their favor is "not valid, except as between"
themselves. It does not bind either Madrigal or the Mitsuis, who are not
compelled to recognize both A and D as stockholders.*
parties to said alleged transaction. What is more, the same is "not valid," or,
in the words of the Supreme Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8
N. W. 419) — which were quoted approval in Uson vs. Diosomito (61 Phil.,
535) — "absolutely void" and, hence, as good as non-existent, insofar as
Madrigal and the Mitsuis are concerned. For this reason, 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 defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses are
subject to the limitations imposed by the principles governing
estoppel.
Certificates of stock are not negotiable instruments (post, Par. 102),
consequently, a transferee under a forged assignment acquires no title
which can be asserted against the true owner, unless his own negligence
has been such as to create an estoppel against him (Clarke on
Corporations, Sec. Ed. p. 415). 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 (East Birmingham Land Co. vs. Dennis,
85 Ala. 565, 2 L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412).
In the case at bar, neither madrigal nor the Mitsuis had alienated shares of
stock in question. It is not even claimed that either had, through negligence,
given — occasion for an improper or irregular disposition of the
corresponding stock certificates.
E. FORGED AND UNAUTHORIZED TRANSFERS
FORGED AND UNAUTHORIZED TRANSFERS VS.
UNAUTHORIZED ISSUANCE OF STOCK CERTIFICATE: In the
former, what is forged or unauthorized is the transfer of the certificate
from the true and lawful owner to another person. While the latter refers
to the act of the corporation in issuing the certificate, either fraudulently or
by mistake.
In forged or unauthorized transfer:
1. The purchaser or purchasers, no matter how innocent they may have
been, will acquire no title as against the lawful owner by virtue of the
doctrine of non-negotiability of certificates of stock;
2. The purchaser will have no right or remedy against the corporation
because he took the shares not by virtue of a misrepresentation made
by the corporation but on the faith of a forged endorsement or
unauthorized transfer;
3. The corporation incurs no liability to the person in whose favor the
certificate is endorsed or issued.
4. If the old certificate is cancelled and new one is issued by the
corporation, the holder thereof may be required to return the same for
its cancellation;
5. However, if new certificates are issued and passes into the hands of a
subsequent bona fide purchaser, the latter may rightfully acquire title
thereto since the corporation will be estopped to deny the validity
thereof;
6. The subsequent purchaser in good faith took the shares, not by virtue of
a forged or unauthorized transfer but on reliance to the genuineness of
the certificate issued by the corporation or by virtue of the
representation made by the corporation that the same is valid and
therefore, compel the corporation to recognize him as a stockholder or
claim reimbursement and damages against the latter.
Example: A owns 100 shares of X Co., B stole the stock certificate and forged
A’s signature:
a. If B indorsed and sold it to C:
1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder;
3. X Co. does not incur any liability in favor of C
b. If X Co. cancelled the certificate and issued a new one to C:
1. If A later on finds out that his certificate was stolen, C may still be
required to return the new certificate;
2. If C sold it to D, an innocent purchaser, D may rightfully acquire
thereto since X Co. is estopped to deny the validity of the
certificate;
3. If A later on finds out that his certificate was stole, X Co. may be
*This is so because the A cannot be deprived of his rights as owner by virtue
of a forged transfer, and B, because of X Co.’s representation that the person
named therein is the owner of shares in the corporation.
c. If (b3) above would result in over-issuance of shares
1. Only A, the rightful owner may be recognized and A will have a
right to compel X Co. to issue him a new certificate;
2. D will be entitled to damages from the X Co.;
3. X Co. will have a right of action against the who made false
representation and in whose favor a new certificate is issued.**
**In this sense, if D sues X Co., the latter will have no valid defense, but he
may institute a third party complaint against C. If C is an innocent purchaser,
X Co., may file a fourth party complaint against B.
ISSUANCE OF STOCK CERTIFICATION
Subscriptions to shares of stock are indivisible such that a subscriber to such
shares will not be entitled to the issuance of a stock certificate until he has
paid the full amount of his subscription.
Sec. 64. Issuance of stock certificates. - No certificate of stock shall
be issued to a subscriber until the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if any is due, has
been paid.
INDIVISIBILITY: As the law stands now, subscription to shares of stock
are deemed indivisible and no certificate of stock can be issued unless and
until the full amount of his subscription including interest and expenses, if
any is paid.
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic Power Co where
a subscriber may opt to apply his partial payment to a corresponding number
of shares, will not hold true. Thus, even if under the old law, where a
corporation may, under a by-law provision or by custom, practice or
tradition, issue stock certificates covering the number of shares that might
have been correspondingly paid, this authority or practice is valid only two
years after the effectivity of the Corporation Code and after which
corporations, registered under the said law should comply with the
mandatory requirement of Sec. 64. The Corporation Code thus provides:
Sec. 148. Applicability to existing corporations. - All
corporations lawfully existing and doing business in the Philippines on the
date of the effectivity of this Code and heretofore 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, subject to the terms and conditions of its license, and shall
be governed by the provisions hereof: Provided, That if any such
corporation is affected by the new requirements of this Code, said
corporation shall, unless otherwise herein provided, be given a period of
not more than two (2) years from the effectivity of this Code within which to
comply with the same.
MANDAMUS: Once a subscriber has paid his subscription in full, he
becomes entitled to be issued a stock certificate and in the event that the
corporation refuses to do so, the stockholder may institute a case for
mandamus with damages, such issuance being ministerial.
FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of
Manila, and the CHINA BANKING CORPORATION, defendants-appellants
(G.R. No. L-19441; March 27, 1923)
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50%
of the subscription price and a corresponding receipt being issued therefor.
Such shares were mortgaged to plaintiff Fua Cun to secure a loan evidenced
by a promissory note, together with the receipt, which was endorsed and
delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank
about the transaction but was told to await action by the BOD.
corporation as fully paid-up shares, when in fact the whole amount of the
value thereof has not been paid. If the shares have thus been issued by the
In the meantime, Chua Soco became indebted to the bank, and in the action
for recovery of money, his 500 shares were attached.
Fua Cun thereupon instituted the present action maintaining that the
payment of 50% of the subscription entitled Chua Soco to 250 shares and
prayed that his lien on the shares by virtue of the chattel mortgage be
declared to have priority over the claim of defendant Bank.
The trial court rendered judgment in favor of plaintiff.
ISSUE: (1) WON Chua Soco became entitled to 250 shares or the
proportionate share to his partial payment? (2) WON plaintiff had a superior
claim over that of the Bank?
HELD: (1) No. (2) Yes. Though the court below erred in holding that Chua
Soco, by paying one-half of the subscription price of five hundred shares, in
effect became the owner of two hundred and fifty shares, the judgment
appealed from is in the main correct.
The claim of the defendant Banking Corporation upon which it brought the
action in which the writ of attachment was issued, was for the non-payment
of drafts accepted by Chua Soco and had no direct connection with the
shares of stock in question. At common law a corporation has no lien upon
the shares of stockholders for any indebtedness to the corporation (Jones on
Liens, 3d ed., sec. 375) and our attention has not been called to any statute
creating such lien here. On the contrary, section 120 of the Corporation Act
provides that "no bank organized under this Act shall make any loan or
discount on the security of the shares of its own capital stock, nor be the
purchaser or holder of any such shares, unless such security or purchase
shall be necessary to prevent loss upon a debt previously contracted in good
faith, and stock so purchased or acquired shall, within six months from the
time of its purchase, be sold or disposed of at public or private sale, or, in
default thereof, a receiver may be appointed to close up the business of the
bank in accordance with law."
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 persons to
whom notice is brought home. Such an assignment exists here, though it was
made for the purpose of securing a debt. The endorsement to the plaintiff of
the receipt above mentioned reads:
For value received, I assign all my rights in these shares in favor of
Mr. Tua Cun.
Manila, P. I., May 18, 1921.
(Sgd.) CHUA SOCO
This endorsement was accompanied by the delivery of the receipt to the
plaintiff and further strengthened by the execution of the chattel mortgage,
which mortgage, at least, operated as a conditional equitable assignment.
As against the rights of the plaintiff the defendant bank had, as we have
seen, 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
interests to the plaintiff and was therefore subject to the rights of the latter.
It follows that as against these rights the defendant bank holds no lien
whatever.
As we have already stated, the court erred in holding the plaintiff as the
owner of two hundred and fifty shares of stock; "the plaintiff's rights consist
in an equity in five hundred shares and upon payment of the unpaid portion
of the subscription price he becomes entitled to the issuance of certificate for
said five hundred shares in his favor."
The judgment appealed from is modified accordingly, and in all other
respects it is affirmed, with the costs against the appellants Banking
Corporation. So ordered.
F. WATERED STOCKS
DEFINITION: Watered stocks may be defined as one which is issued by the
corporation as fully paid, when in fact it has intentionally and knowingly
received or agreed to receive nothing at all for them, or less than their par
value, either in money, property or services, the shares are said to be
―watered‖ or ―fictitiously paid-up‖ to the extent to which they have not
been issued or are not to be paid for‖
Sec. 65. Liability of directors for watered stocks. - Any director
or officer of a corporation consenting to the issuance of stocks for
a consideration less than its par or issued value or for a consideration in
any form other than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be solidarily
liable with the stockholder concerned to the corporation and its creditors
for the difference between the fair value received at the time of issuance of
the stock and the par or issued value of the same.
RIGHT OF CORPORATION AND CREDITORS: The law does not
make any distinction as to the right of the corporation and its creditors to
enforce payment of the water in the stocks issued, thus, it applies to all
creditors whether prior or subsequent to the issuance of the watered stock.
SOLIDARY LIABILITY: All consenting directors and officers are
solidarily liable for the ―water‖ in the stock.
NON-CONSENTING DIRECTORS: may be absolved of liability by
their written dissent. Otherwise, if they did not issue such written dissent
or are passive, they may be held liable for not objecting thereto.
ISSUANCE OF WATERED STOCKS: may be effected in the following
ways: 1. For a monetary consideration less than its par or issue value;
2. For a consideration in property, tangible or intangible, valued in excess
of its market value;
3. Gratuitously or under an agreement that nothing shall be paid at all; or
4. In the guise of stock dividends when there are no surplus profits of the
corporation.
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided into:
(1) 5M shares at P1.00 par value; and (2) 1M no par value shares with
issued value at P5.00. A acquired 1M of the par value shares for P.80 and
100,000 no par value shares at P4.00:
1. WATERED STOCK: There is stock watering for both shares. Sec. 65
speaks of issuance of shares at ―less than its par or issued value‖;
2. LIABILITY FOR PAR VALUE SHARES: The directors who consented to
the issuance or were passive about it, without written dissent, are
solidarily liable with A for the difference of P.20;
3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable because
the no par value shares are ―deemed fully paid and non-
assessable‖ (Sec. 6). Accordingly, only the directors or officers
consenting to the issuance are liable.
ILLUSTRATION2: X Co. has P100M Authorized Capital Stock divided into
100M shares at P1.00 par value, there is a provision in the by-laws denying
the pre-emptive right of the shareholders. The Board of Directors subscribed
to 1M of the unissued shares at P2.00 each when the fair market value of the
shares was P12.00.
1. WATERED STOCK: No stock watering, since the shares were subscribed
for more than the par value, notwithstanding if it less than the fair
market value;
2. If 3 days later, the members of the Board sold those purchased shares
at P12.00 per share, making a profit of P10.00 per share, they cannot
be held liable for stock watering but they can be question on their duty
of loyalty. Since the whole P12.00 per share could’ve gone to the coffers
of the corporation instead of them reaping the profits for themselves.
EFFECTS OF ISSUANCE OF WATERED STOCKS:
1. The corporation is deprived of its capital thereby hurting its business
prospects, financial capability and responsibility;
2. Stockholder who paid their subscriptions in full, or promised to pay the
same, are injured and prejudiced by the reduction of their proportionate
interest in the corporation; and
to 69 of the Code; and
2. By a collection case in court as provided for in section 70.
3. Present and future creditors are deprived of the corporate assets for the
protections of their interest.
BASIS OF LIABILITY:
1. ―Trust Fund Doctrine‖ – the capital stock of the corporation is treated
as inclusive of the unpaid portion of subscriptions to said capital, as a
―trust fund‖ which the creditors have a right to look up to for the
satisfaction of their claims. Stockholders, therefore, are mandated to
pay the full value of their shares.
2. ―Fraud or Misrepresentation Theory‖ – liability is based on the
false representation made by the corporation and the stockholder
concerned to the creditors that the true par value or issued price of the
shares has been paid or promised to be paid in full.
CONSEQUENCES OF ISSUANCE OF WATERED STOCKS (FLETCHER):
1. As to the corporation – when a corporation is guilty of ultra-vires or
illegal acts which constitute an injury to or fraud upon the public, or
which will tend to injure or defraud the public, the State may institute a
quo-warranto proceeding to forfeit its charter for the misuse or abuse of
its franchise;
2. As between the corporation and the subscriber – the subscription is
void. Such being the case, the subscriber is liable to pay the full or par
or issued value thereof, to render it valid and effective;
3. As to the consenting stockholders – they are estopped from raising any
objection thereto;
4. As to dissenting stockholders – in view of the dilution of their
proportionate interest in the corporation, they may compel the payment
of the ―water‖ in the stock solidarily against the responsible
and consenting directors and officers inclusive of the holder of the
watered stock;
5. As to creditors – they may enforce payment of the difference in the
price, or the water in the stock, solidarily against the responsible
directors/officers and the stockholders concerned; and
6. As against the transferees of the watered stocks – his right is the same
as that of his transferor. If, however, a certificate of stock has been
issued and duly indorsed to a bona fide purchaser, without knowledge,
actual or constructive, the latter cannot be held liable, at least as
against the corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock certificate is
valid and subsisting. This is because a corporation is prohibited from
issuing certificates of stock until the full value of the subscriptions have
been paid and could not, therefore, deny the validity of the stock
certificate it issued as against a purchaser in good faith. Thus, Ballantine
states that whether there is any liability on the part of the transferee of
watered stock is made to depend upon whether he acquired the same
without notice, either as purchaser or donee. If he had knowledge
thereof, he is subject to the same liability as his transferor.
LIABILITY FOR INTEREST: Aside from the value of their
subscription, subscribers may likewise be required to pay interest
on all unpaid subscriptions if so imposed in the contract or in the corporate
by-laws at such rate as may be indicated thereat or the legal rate if so not
fixed. Unless so required or provided, however, the subscribers to shares
of stock, not fully paid, are not liable to pay interest on their unpaid
subscriptions.
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock
shall pay to the corporation interest on all unpaid subscriptions from the
date of subscription, if so required by, and at the rate of interest fixed in the
by-laws. If no rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate.
G. ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS
TIME OF PAYMENT: Unpaid subscription or any percentage
thereof, together with interest if required by the by-laws or the
contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD pursuant to a
―call‖ declaring any or all unpaid portion thereof to be so payable.
REMEDIES TO ENFORCE PAYMENT ON UNPAID SUBSCRIPTION:
1. By board action in accordance with the procedure laid down in Sec. 67
CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or collect
payment of unpaid subscription will not prevent the creditors or the receiver
of the corporation to institute a court action to collect the unpaid portion
thereof. This is because the capital of the corporation is the basis of the
credit of and financial responsibility of the corporation. Persons dealing with a
corporation and extending credit to it have a right to insist that the
unpaid subscription shall be paid in when this becomes necessary for the
satisfaction of their claims. This is otherwise known as the Trust Fund
Doctrine which states that subscriptions to the capital of a corporation
constitute a fund to which creditors have the right to look up to for the
satisfaction of their claims.
Sec. 67. Payment of balance of subscription. - Subject to the
provisions of the contract of subscription, the board of directors of any stock
corporation may at any time declare due and payable to the
corporation unpaid subscriptions to the capital stock and may collect
the same or such percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with
the interest accrued, if any, shall be made on the date specified in the
contract of subscription or on the date stated in the call made by the board.
Failure to pay on such date shall render the entire balance due and payable
and shall make the stockholder liable for interest at the legal rate on such
balance, unless a different rate of interest is provided in the by-laws,
computed from such date until full payment. If within thirty (30) days from
the said date no payment is made, all stocks covered by said subscription
shall thereupon become delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise.
Sec. 68. Delinquency sale. - The board of directors may, by
resolution, order the sale of delinquent stock and shall specifically state the
amount due on each subscription plus all accrued interest, and the date, time
and place of the sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the
date specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of
sale, or unless the board of directors otherwise orders, said delinquent stock
shall be sold at public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share. The stock so purchased shall be transferred to
such purchaser in the books of the corporation and a certificate for such
stock shall be issued in his favor. The remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall likewise be entitled
to the issuance of a certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to
the provisions of this Code*, bid for the same, and the total amount due
shall be credited as paid in full in the books of the corporation. Title to
all the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said corporation in
accordance with the provisions of this Code.
PROCEDURE:
1. The BOD, by a formal Resolution, declares the whole or any percentage
unpaid subscriptions to be due and payable on a specified date.
However, if the contract of subscription provides the date or dates when
payment is due, no ‖call‖ or declaration by the board is necessary;
2. The stockholders concerned are given notice of the board resolution by
the corporation either personally or by registered mail. Publication of the
notice of call is not required unless the by-laws provide otherwise.
Notice is not likewise necessary if the contract of the subscription
stipulates a specific date when any unpaid portion is due and payable;
3. Payment shall be made on the date specified in the call or on the date
provided for in the contract of subscription;
4. Failure to pay on the date required in the call or as specified in the
contract of subscription will render the entire balance due and payable
and making the stockholder liable for the interest;
5. If within 30 days from the date, no payment is made, all the stock
covered by the subscription shall become delinquent and shall be
subject to a delinquency sale;
6. The board, by resolution, orders the sale of the delinquent stock stating
the amount due and the date, time and place of the sale;
7. The sale shall be made not less than 30 days nor more than 60 days
from the date the stocks become delinquent;
8. Publication of the notice of sale must be made once a week for 2
consecutive weeks in the newspaper of general circulation in the
province or city where the principal office is located;
9. Sale at public auction, if no payment is made by the delinquent
stockholder, in favor of the bidder who offered to pay the full amount of
the balance in the subscription, inclusive of interest, cost of
advertisement and expenses for the smallest number of shares;
10. Registration or transfer of the shares of stock in the name of the bidder
and corresponding issuance of the stock certificate covering the shares
successfully bidded;
11. If there be any remaining shares, the same shall be credited in favor of
the delinquent stockholder who shall be entitled to the issuance of a
certificate of stock covering such shares;
12. If there is no bidder at the public auction, the corporation may, subject
to the provisions of the Code, bid for the same and the total amount
due shall be credited or paid in full in the corporate books; and
13. The shares so purchased by the corporation shall be vested in the latter
as treasury shares.
HIGHEST BIDDER: in the case of sale of delinquent stock, and as indicated
in number 10 above, is such bidder who shall offer to pay the full amount of
the balance on the subscription together with accrued interest, cost of
advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. It should be properly termed ―Lowest‖ Bidder because
the bidders are offering to pay the same amount, and their bids are based on
the number of shares they are willing to receive, the lowest of which is
the winning bid.
Ex. A subscribed to 100 shares of stock for P100.00 each and paid only 50%
and later on declared to be delinquent. For the full amount of P5,000 (unpaid
balance) and the interests, costs, and expenses, the following bidders are
willing to accept - X: 70 shares; Y: 80 shares; Z: 90 shares. In this case, X
would be the highest bidder. The remaining 30 shares would be credited to
A.
*NO BIDDER: If there was no bidder, the company has to have
unrestricted retained earnings in order to acquire the shares as thus
provided under Sec. 41 of the Corporation Code (Power to Acquire Own
Shares). Accordingly, if the company has no unrestricted retained earnings,
it cannot acquire the said shares by virtue of a delinquency sale, however, it
may institute an action for the recovery of the subscription price under Sec.
70.
MAY A DIRECTOR DECLARED TO BE DELINQUENT ON
HIS SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS
FUNCTIONS AS SUCH DIRECTOR? Yes. He is still a shareholder entitled
to all the rights as such, and pending the sale, the shares still stand in his
name. Even after the sale, he may still be credited to some of the shares
and he only needs 1 to qualify as a director.
QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN
THE NOTICE OR IN THE SALE ITSELF:
Sec. 69. When sale may be questioned. - No action to
recover delinquent stock sold can be sustained upon the ground of
irregularity or
defect in the notice of sale, or in the sale itself of the delinquent stock, unless
the party seeking to maintain such action first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest from
the date of sale at the legal rate; and no such action shall be maintained
unless it is commenced by the filing of a complaint within six (6) months
from the date of sale
TWO CONDITIONS:
1. The party seeking to maintain such action first pays or tenders to the
party holding the stock the sum for which the same was sold, with
interest from the date of the sale at the legal rate; and
2. The action shall be commenced by the filing of a complaint within 6
months from the date of sale.
ACTION BY THE CORPORATION:
Notwithstanding the provisions of Sec. 67 to 69, the corporation may
enforce payment of unpaid subscriptions by court action.
Sec. 70. Court action to recover unpaid subscription. - Nothing in
this Code shall prevent the corporation from collecting by action in a
court of proper jurisdiction the amount due on any unpaid subscription,
with accrued interest, costs and expenses.
CALL: Consistent with Art. 1169 of the Civil Code, a ―call‖ is a
condition precedent before the right of action to institute a recovery suit
accrues. This is because a demand is required before a debtor may incur
a delay in the performance of his obligation. As earlier said however, a call
is not necessary if the contract of subscription provides for a date or dates
when payment is due, or when the corporation has become insolvent.
MIGUEL VELASCO, assignee of The Philippine Chemical Product
Co. (Ltd.), plaintiff-appellant,
vs.
JEAN M. POIZAT, defendant-appellee
(G.R. No. L-11528; March 15, 1918)
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The
Philippine Chemical Product Co., of which 5 were paid. In an action instituted
by Miguel Velasco as assignee of the company, he seeks to recover the
balance of the subscription. The CFI rendered a judgment dismissing the
complaint. Hence, this appeal.
ISSUE: WON defendant is liable for the balance?
HELD: Yes. We think that Poizat is liable upon this subscription. A stock
subscription is a contract between the corporation on one side, and the
subscriber on the other, and courts will enforce it for or against either. It is a
rule, accepted by the Supreme Court of the United States, 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. (7 Ruling Case Law,
sec. 191.) Section 36 of the Corporation Law clearly recognizes that a
stock subscription is 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 of the
corporation. The subscriber is as much bound to pay the amount of
the share subscribed by him as he would be to pay any other
debt, and the right of the company to demand payment is no less
incontestable.
The provisions of the Corporation Law (Act No. 1459) has given recognition
of two remedies for the enforcement of stock subscriptions. The first and
most special remedy given by the statute consists in permitting
the corporation to put up the unpaid stock for sale and dispose of
it for the account of the delinquent subscriber. In this case the
provisions of section 38 to 48, inclusive of the Corporation Law are
applicable and must be followed. The other remedy is by action in
court, concerning which we find in section 49 the following provision:
―Nothing in this Act shall prevent the directors from collecting, by
action in any court of proper jurisdiction, the amount due on any
unpaid
(G.R. No. L-4824; June 30, 1953)
subscription, together with accrued interest and costs and expenses
incurred.‖
ARNALDO F. DE SILVA, plaintiff-appellant,
vs.
ABOITIZ & COMPANY, INC., defendant-appellee
(G.R. No. L-19893; March 31, 1923)
FACTS: Plaintiff de Silva subscribed to 650 shares of defendant company and
paid 200 of such subscription leaving a balance of P225,000. On April 22,
1922, he was informed by the corporate secretary that he has been declared
delinquent by the BOD and that he should pay the unpaid subscription
otherwise such shares shall be sold at a public auction.
De Silva filed a complaint in the CFI of Cebu, contending among others that
the resolution adopted was violative of Art. 46 of the by-laws stating that all
shares subscribed and were not paid at the time of the incorporation shall be
paid out of the 70% of the profit obtained until such shares are paid in full.
De Silva contends that such article provides for the operative method of
payment of the shares, and by declaring the unpaid subscription to have
become due and payable on May 31st and in publishing the notice declaring
his shares to be delinquent, the company has exceeded its executive
authority.
ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or
enforce payment of the same despite the provision of the by-laws?
HELD: Yes. It is discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the application of a part of
the 70 percent of the profit distributable in equal parts on the payment of the
shares subscribed to and not fully paid.
If the board of directors does not wish to make, or does not make, use of
said authority it has two other remedies for accomplishing the same purpose.
As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
―The first and most special remedy given by the statute consists
in permitting the corporation to put the unpaid stock for sale and dispose
of it for the account of the delinquent subscriber. In this case the
provisions of sections 38 to 48, inclusive, of the Corporation Law are
applicable and must be followed. The other remedy is by action in court.‖
Admitting that the provision of article 46 of the said by-laws maybe regarded
as a contract between the defendant corporation and its stockholders , yet as
it is only to the board of directors of the corporation that said articles gives
the authority or right to apply on the payment of unpaid subscriptions such
amount of the 70 percent of the profit distributable among the shareholders
in equal parts as may be deemed fit, it cannot be maintained that the said
article has prescribe an operative method for the payment of said
subscription continuously until their full amortization.
In the instant case, the defendant corporation, through its board of directors,
made use of its discretionary power, taking advantage of the first of the two
remedies provided by the aforesaid law. On the other hand, the plaintiff has
no right whatsoever under the provision of the above cited article 46 of the
said by-laws to prevent the board of directors from following, for that
purpose, any other method than that mentioned in the said article, for
the very reason that the same does not give the stockholders any
right in connection with the determination of the question whether or
not there should be deducted from the 70 percent of the profit distributable
among the stockholders such amount as may be deemed fit for the
payment of subscriptions due and unpaid. Therefore, it is evident that
the defendant corporation has not violated, nor disregarded any right
of the plaintiff recognized by the said by-laws, nor exceeded its authority in
the discharge of its executive functions, nor abused its discretion when it
performed the acts mentioned in the complaint as grounds thereof, and,
consequently, the facts therein alleged do not constitute a cause of action.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-
appellant,
vs.
IRINEO BALTAZAR, defendant-appellee.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee,
vs.
IRINEO BALTAZAR, defendant and appellant
(G.R. No. L-6244; June 30, 1953)
FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at
P100.000 par value per share, of the plaintiff corporation paying P15,000 and
making further payments leaving a balance of P18,500.
On July 23, 1946, the stockholders, including herein defendant, approved
Resolution No. 17 agreeing: (1) to ―call‖ of the balance of the
unpaid subscription to be paid: 50% within 60 days beginning Aug. 1,
1946; the remaining 50% 60 days beginning October 1, 1946; (2) that
all unpaid unpaid subscriptions after the due dates of both calls to be
subject to 12% interest per annum; (3) that after the expiration of a grace
period of 60 days, all unpaid subscribed shares would revert to the
corporation.
A demand was made against defendant, but was ignored. Hence this action.
ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription
HELD: No. We agree with the lower court 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. This is
clear from the provisions of section 40 of the Corporation Law, Act No. 1459,
as amended.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the
mandatory provision is not only to assure notice to all subscribers, but also to
assure equality and uniformity in the assessment on stockholders. (14 C.J.
639).
We find the citation of authorities made by the plaintiff and appellant
inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), 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. Said the court in that case:
―. . . . it is now quite well settled that when the corporation
becomes insolvent, with proceedings instituted by creditors to
wind up and distribute its assets, no call or assessment is
necessary before the institution of suits to collect unpaid balance
on subscription.‖
But when the corporation is a solvent concern, the rule is:
―It is again insisted that plaintiffs cannot recover because the suit
was not proceeded by a call or assessment against the defendant
as a subscriber, and that until this is done no right of action
accrues. In a suit by a solvent going corporation to collect a subscription,
and in certain suits provided by statute this would be true;. . . . . (Id.)‖
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17
of 1946 of the BOD released him from the obligation to pay for his
unpaid subscription?
HELD: No. There must be unanimous consent of the stockholders of the
corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section,
the general rule is that 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
stockholders or subscribers. 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 subscribed or purchased without notice of such
agreement. (18 C.J.S. 874).
―(3) Exceptions.
the credits against those who had subscribed for shares of stock.
In particular circumstances, as where it is given pursuant to a bona
fide compromise, or to set off a debt due from the corporation, a
release, supported by consideration, will be effectual as against
dissenting stockholders and subsequent and existing creditors. A release
which might originally have been held invalid may be sustained after a
considerable lapse of time. (18 C.J.S. 874).‖
In the present case, the release claimed by defendant and appellant does not
fall under the exception above 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.
In conclusion we hold that under the Corporation Law, notice of call for
payment for unpaid subscribed stock must be published, except
when the corporation is insolvent, in which case, payment is
immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
ERNESTO M. APODACA, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and
INTRANS PHILS., INC., respondents
(G.R. No. 80039; April 18, 1989)
FACTS: Petitioner, an employee of respondent company, subscribed to 1,500
shares at P100 per share. He paid an initial payment P37,500. On Sept. 1,
1975, he was appointed President and General Manager of the company but
on Jan. 2, 1986, he resigned.
He filed a complaint with the NLRC claiming unpaid wages, cost of living
allowance, the balance of his gasoline and representation expenses and his
bonus compensation for 1986. Respondent admitted that petitioner was
entitled to P17,060.07 but the same was already set-off against his unpaid
subscription. Petitioner questioned such set-off claiming that no call or notice
was made.
The Labor Arbiter decided in favor of petitioner. On appeal, such decision
was reversed by the NLRC.
ISSUE: WON the set-off was properly made?
HELD: No. Firstly, the NLRC has no jurisdiction to determine such intra-
corporate dispute between the stockholder and the corporation as in the
matter of unpaid subscriptions. This controversy is within the exclusive
jurisdiction of the Securities and Exchange Commission.
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over
the said subject matter under the circumstances of this case, the unpaid
subscriptions are not due and payable until a call is made by
the corporation for payment. Private respondents have not
presented a resolution of the board of directors of respondent corporation
calling for the payment of the unpaid subscriptions. It does not even appear
that a notice of such call has been sent to petitioner by the respondent
corporation.
What the records show is that the respondent corporation deducted the
amount due to petitioner from the amount receivable from him for the
unpaid subscriptions. No doubt such set-off was without lawful basis,
if not premature. As there was no notice or call for the payment of
unpaid subscriptions, the same is not yet due and payable.
BONIFACIO LUMANLAN, plaintiff-appellee,
vs.
JACINTO R. CURA, ET AL., defendants.
DIZON & CO., INC., ETC., appellant.
(G.R. No. L-39861; March 21, 1934)
FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at
a par value of P50.
Layag was appointed the receiver of said company, at the instance of its
creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the
unpaid subscriptions, there appearing that the company had no assets except
The CFI rendered a decision in favor of Julio Valenzuela and held Lumanlan
liable for the unpaid subscription and loans and advances together
with interests.
Pending appeal, the parties entered into an agreement where Lumanlan
would dismiss the appeal and the corporation would collect only 50% of the
amount subscribed by him for stock, provided that in case the 50% was
inufficient to pay Valenzuela he should pay an additional amount not to
exceed the judgment against him in that case. Lumanlan paid Valenzuela the
sum of P11,840 including interest.
Disregarding the agreement, appellant company asked for and order of
execution of the CFI decision which was granted and the provincial sheriff
levied upon two parcels of land of Lumanlan.
ISSUE: WON Lumanlan is still liable to the corporation?
HELD: Yes. In the promissory note given by the corporation to
Valenzuela the former obligated itself to pay Valenzuela the sum of P8,000
with interest at 12 per cent per annum and, upon failure to pay said sum
and interest when due, 25 per cent of the principal as expenses of
collection and judicial costs in case of litigation.
By virtue of these facts Lumanlan is entitled to a credit against the
judgment in case No. 37492 for P11,840 and an additional sum of P2,000,
which is 25 per cent on the principal debt, as he had to file this suit to
collect, or receive credit for the sum which he had paid Valenzuela for
and in place of the corporation, or a total of P13,840. This leaves a
balance due Dizon & co., Inc., of P1,269 on that judgment with interest
thereon at 6 per cent per annum from August 30, 1930.
It appears from the record that during the trial of the case now under
consideration, the Bank of the Philippine Islands appeared in this case as
assignee in the "Involuntary Insolvency of Dizon & Co., Inc. That bank was
appointed assignee in case No. 43065 of the Court of First Instance of the
City of Manila on November 28, 1932. It is therefore evident that there are
still other creditors of Dizon & Co., Inc. This being the case that
corporation has a right to collect all unpaid stock subscriptions and any
other amounts which may be due it.
It is established doctrine that subscriptions to the capital of
a corporation constitute a fund to which the 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 its debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469,
470.)
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE
LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC.,
GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC.,
ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN
LUMBER CO., INC., defendants-appellees.
(G.R. Nos. L-24177-85; June 29, 1968)
FACTS: In various suits decided jointly, PNB as creditor, and therefore the
real party in interest, was allowed by the lower court to substitute the
receiver of the Philippine Lumber Distributing Agency in these respective
actions for the recovery from the defendant lumber producers the balance of
their stock subscriptions.
The defendant lumber producers were convinced by the late President
Manuel Roxas to form a cooperative and ensure the stable supply of lumber
in the country and to eliminate alien middlemen. To induce them, the
president promised and agreed to invest P9.00 for every P1.00 that the
members would invest therein.
There was no appropriation made by congress for the P9.00 investment. The
President then instructed Hon. Emilio Abello, then Executive Secretary
and
FACTS: Appellant Suarez subscribed to 16 shares of Compania Hispano-
Filipina, Inc. and paid the value of 4 shares, at P100 par value each, or P400.
chairman of the BOD of PNB to grant an overdraft of P250,000 (later
increased to P350,000) which was approved by the BOD of PNB with interest
at 6%.
The Philippines did not invest the P9.00 for every peso coming from
defendant lumber producers. The loan extended by PNB was not paid.
Hence, these suits which the trial court dismissed.
ISSUE: WON the lumber producers are liable for the full value of their
subscriptions?
HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case of
Velasco v. Poizat, this Court held: "It is established doctrine that 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 its debt.... A corporation has no
power to release an original subscriber to its capital stock from the obligation
of paying for his shares, without a valuable consideration for such release;
and as against creditors a reduction of the capital stock can take place only in
the manner and under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary...." The Poizat doctrine found acceptance in later
cases. One of the latest cases, Lingayen Gulf Electric Power v. Baltazar,
Speaks to this effect: "In the case of Velasco v. Poizat, 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."
It would be unwarranted to ascribe to the late President Roxas the view that
the payment of the stock subscriptions, as thus required by law, could be
condoned in the event that the counterpart fund to be invested by the
Government would not be available. Even if such were the case, however,
and such a promise were in fact made, to further the laudable purpose to
which the proposed corporation would be devoted and the possibility that the
lumber producers would lose money in the process, still the plain and
specific wording of the applicable legal provision as interpreted
by this Court must be controlling. It is a well-settled principle that
with all the vast powers lodged in the Executive, he is still devoid
of the prerogative of suspending the operation of any statute or
any of its terms.
EDWARD A. KELLER & CO., LTD., petitioner-appellant,
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C.
ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C.
LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees.
(G.R. No. L-68097; January 16, 1986)
FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc.
as exclusive distributor of its household products in Panay and Negros. Under
its sales agreement, Keller sold on credit its products to COB Group
Marketing.
The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm
owed Keller about P179,000.
Keller sued COB Marketing and its stockholders.
ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders?
HELD: Yes. It is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his
unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757,
763; 18 CJs 1311-2).
GERARDO GARCIA, plaintiff-appellee,
vs.
ANGEL SUAREZ, defendant-appellant
(G.R. No. L-45493; April 21, 1939)
Plaintiff-appellee Garcia was appointed by the court as receiver of the
company, to collect the unpaid subscription, among others. On June 18,
1931, Garcia brought an action to recover from Suarez and other
shareholders the balance of their subscriptions, but the complaint was
dismissed for lack of prosecution.
On Oct. 10, 1935, a similar action was instituted which was granted by the
CFI holding defendant liable for the balance of his unpaid subscription and
interest. On appeal, the defendant raises the issue of prescription.
ISSUE: WON defendant Suarez is liable?
HELD: Yes. The premise of the argument is wrong because it confuses two
distinct obligations: the obligation to pay interest and that to pay the amount
of the subscription. The said section 37 of the Corporation Law provides
when the obligation to pay interest arises and when payment should be
made, but it is absolutely silent as to when the subscription to a stock should
be paid. Of course, the obligation to pay arises from the date of
the subscription, but the coming into being of an obligation
should not be confused with the time when it becomes
demandable. In a loan for example, the obligation to pay arises from the
time the loan is taken; but the maturity of that obligation, the date when the
debtor can be compelled to pay, is not the date itself of the loan, because
this would be absurd. The date when payment can be demanded is
necessarily distinct from and subsequent to that the obligation is contracted.
By the same token, the subscription to the capital stock of the
corporation, unless otherwise stipulation, is not payable at the
moment of the subscription but on a subsequent date which may be
fixed by the corporation. Hence, section 38 of the Corporation
Law, amended by Act No. 3518, provides that:
―The board of directors or trustees of any stock corporation
formed, organized, or existing under this Act may at any time declare
due and payable to the corporation unpaid subscriptions to the capital
stock . . . .‖
The board of directors of the Compañia Hispano-Filipino, Inc., not
having declared due and payable the stock subscribed by the
appellant, the prescriptive period of the action for the collection thereof only
commenced to run from June 18, 1931 when the plaintiff, in his capacity as
receiver and in the exercise of the power conferred upon him by the said
section 38 of the Corporation Law, demanded of the appellant to pay
the balance of his subscription. The present action having been filed on
October 10, 1935, the defense of prescription is entirely without basis.
DELINQUENT: Shares of stock become delinquent when no payment is
made on the balance of all or any portion of the subscription on the date or
dates fixed in the contract of subscription without need of call, or on the date
specified by the BOD pursuant to a call made by it in accordance with the
provisions of Sec. 67.
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses
the right to vote and be voted upon or represented in any stockholders
meeting as well as all the rights pertaining to a stockholder except the right
to receive dividends in accordance with the Code.
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for
be entitled to vote or to representation at any stockholder's meeting, nor
shall the holder thereof be entitled to any of the rights of a stockholder
except the right to dividends in accordance with the provisions of this
Code, until and unless he pays the amount due on his subscription with
accrued interest, and the costs and expenses of advertisement, if any.
RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that ―any
cash dividend due on delinquent stockholders shall first be applied to the
unpaid balance on his subscription plus cost and expenses, while stock
dividends shall be withheld until his unpaid subscription is paid in full‖
1. After the above procedures have been complied with, the new certificate
RIGHTS OF UNPAID SHARES: If the shares are not delinquent,
however, subscribers to the capital stock of a corporation though not fully
paid, are entitled to all the rights of a stockholder (Sec. 72) EXCEPT the
issuance of certificate of stocks (Sec. 64). They can vote and be voted upon
and entitled to receive all dividends due their shares.
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not
fully paid which are not delinquent shall have all the rights of a stockholder.
NON-STOCK CORPORATIONS: The rules on delinquent
shareholders applies to non-stock corporations, such as when members are
delinquent in paying membership dues.
RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK 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 (A) an affidavit in
triplicate setting forth, if possible, (1) the circumstances as to how the
certificate was lost, stolen or destroyed, (2) the number of shares
represented by such certificate, (3) the serial number of the
certificate and (4) the name of the corporation which issued the
same. He shall also submit such (B) other information and evidence
which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in
a newspaper of general circulation published in the place where the
corporation has its principal office, once a week for three (3) consecutive
weeks at the expense of the registered owner of the certificate of stock
which has been lost, stolen or destroyed. The notice shall state (1) the
name of said corporation, (2) the name of the registered owner
and (3) the serial number of said certificate, and (4) the number of
shares represented by such certificate, and that after the expiration of one
(1) year from the date of the last publication, if no contest has been
presented to said corporation regarding said certificate of stock, the right
to make such contest shall be barred and said corporation shall cancel in
its books the certificate of stock which has been lost, stolen or
destroyed and issue in lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu thereof as may be
required, effective for a period of one (1) year, for such amount and in such
form and with such sureties as may be satisfactory to the board of directors,
in which case a new certificate may be issued even before the expiration of
the one (1) year period provided herein: Provided, That if a contest has
been presented to said corporation or if an action is pending in court
regarding the ownership of said certificate of stock which has been lost,
stolen or destroyed, the issuance of the new certificate of stock in lieu
thereof shall be suspended until the final decision by the court regarding
the ownership of said certificate of stock which has been lost, stolen or
destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure above-described.
RATIONALE:
1. To avoid duplication of certificates of stock;
2. To avoid fictitious and fraudulent transfers; and
3. To protect the corporation against damage from whatever source arising
from the issuance of the duplicate certificate inluding liability to the
holder of the original certificate or to innocent holders of certificate
based on the duplicate.
Thus, the BOD has the authority to decide the amount and the kind of surety
bond that may be required for the issuance of a certificate of stock, in liey of
the lost or destroyed one, if the same is to be issued prior to the expiration of
the 1 year period provided by Sec. 73.
ISSUANCE OF NEW CERTIFICATES:
will be issued 1 year from the date of the last publication;
2. Nevertheless, the stockholder may file a bond or other security to have
the shares issued before the 1 year prescribed.
3. If a contest has been present to the corporation or an action is pending
in court, the issuance of the new certificate shall be suspended until
final decision.
H. RIGHTS AND LIABILITIES OF STOCKHOLDERS
RIGHTS OF A STOCKHOLDER:
1. Participation in the management of the corporate affairs
by exercising their right to vote and be voted upon either personally or
by proxy as provided for under Sec. 50 and 58 of the Code;
2. To enter into a voting trust agreement subject to the
procedure, requirements and limitations imposed under Sec. 50;
3. To receive dividends and to compel their declaration if warranted
under Sec. 43;
4. To transfer shares of stock subject only to reasonable restrictions
such as the options and preferences as may be allowed by law inclusive
of the right of the transferee to compel the registration of the transfer in
the books of the corporation as provided for in Sec. 63;
5. To be issued a certificate of stock for fully paid-up shares
in accordance with Sec. 64;
6. To exercise pre-emptive rights as provided for in Sec. 39;
7. To exercise their appraisal right in accordance with the provision of
Sec. 81 and in those instance allowed by law such as Sec. 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for delinquency
as may be allowed under Sec. 69;
10. To inspect the books of the corporation subject only to
the limitations imposed by Sec. 75;
11. To be furnished by the most recent financial statement of
the corporation as by Sec. 75;
12. To be issued a new stock certificate in lieu of the lost or
destroyed one subject to the procedure laid down in Sec. 73;
13. To have the corporation dissolved under Sec. 118 to 121, and Sec.
105 in a close corporation;
14. To participate in the distribution of assets of the corporation
upon dissolution under Sec. 122;
15. In the case of a close corporation, to petition the SEC to arbitrate
in the event of a deadlock as allowed under Sec. 104; and
16. Also in the case of a close corporation, to withdraw therefrom,
for any reason, and compel the corporation to purchase his
shares as provided for in Sec. 105.
OBLIGATIONS AND LIABILITIES:
1. To pay the corporation the balance of his unpaid
subscriptions subject to the provision of Sec. 67-70;
2. To pay interest on his unpaid subscription, if required by the by-
laws or by the contract of subscription in accordance with Sec. 66;
3. To answer to the creditor for the unpaid portion of
his subscription under the Trust Fund Doctrine;
4. To answer the ―water‖ in his stocks as provided for in Sec. 65;
5. To be liable, as general partners, for all debts, liabilities
and damages of determinable corporation as envisioned under
Sec. 21 (corporation by estoppel); and
6. To be personally liable for torts, in the event that a stockholder in
a close corporation actively participates in the management of
corporate affairs.
CHAPTER 11: CORPORATE BOOKS AND RECORDS
A. BOOKS AND RECORDS TO BE KEPT
Sec. 74. Books to be kept; stock transfer agent. - Every
corporation shall keep and carefully preserve at its principal office a record of
all business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set forth
in detail the time and place of holding the meeting, how authorized, the
notice given, whether the meeting was regular or special, if special its
object, those present and absent, and every act done or ordered done
at the meeting. Upon the
demand of any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting must be
noted in the minutes; and on a similar demand, the yeas and nays must be
taken on any motion or proposition, and a record thereof carefully made. The
protest of any director, trustee, stockholder or member on any action or
proposed action must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of
any meetings shall be open to inspection by any director, trustee, stockholder
or member of the corporation at reasonable hours on business days and he
may demand, writing, for a copy of excerpts from said records or minutes, at
his expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or trustees,
the liability under this section for such action shall be imposed upon the
directors or trustees who voted for such refusal: and Provided, further, That
it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose
in making his demand.
Stock corporations must also keep a book to be known as the "stock and
transfer book", in which must be kept a record of all stocks in the names of
the stockholders alphabetically arranged; the installments paid and unpaid
on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or
transfer of stock made, the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe. The stock and transfer
book shall be kept in the principal office of the corporation or in the
office of its stock transfer agent and shall be open for inspection by any
director or stockholder of the corporation at reasonable hours on business
days.
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from the
Securities and Exchange Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own
stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be
applicable.
THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY
THE CORPORATION:
1. Records of all business transactions which include, among others,
(1) journals, (2) ledger, (3) contracts, (4) vouchers and receipts, (5)
financial statements and other books of accounts, (6) income tax
returns, and (7) voting trust agreements - which must be kept and
carefully preserved at its principal office;
2. Minutes of all meetings of stockholders or members and of the
directors or trustees setting forth in detail (1) the date, time and place
of meeting, (2) how authorized, (3) the notice given, (4) whether the
same be regular or special, and if special, the purpose thereof shall be
specified, (5) those present and absent, and (6) every act done or
ordered done thereat - which must likewise be kept at the principal
office of the said corporation; and
3. Stock and Transfer Book showing the (1) names of the stockholders,
(2) the amount paid or unpaid on all stocks for which the subscription
has been made, (3) a statement of every alienation, sale or transfer of
stock made, if any (4) the date thereof, and (5) by whom and to whom
- which must also be kept at the principal office of the corporation or in
the office of its stock transfer agent.
STOCK AND TRANSFER AGENT: is the person who records
every
movement of the shares by the minute or by the hour.
NON-STOCK CORPORATIONS: can also have a stock and transfer agent
for purposes of the club share-membership.
INSPECTION & COPIES: These books are subject to inspection by any
of the directors, trustees, stockholders or members of the corporation
at reasonable hours on business days and a copy of excerpts of said
records may be demanded. In fact, in so far as Financial Statements are
concerned, the Code provides:
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.
BASIS OF RIGHT: is to protect his interest as a stockholder. Thus, it has
been said that: ―The right of the shareholders to ascertain how the affairs
of his company are being conducted by its directors and officers is founded
by his beneficial interest through ownership of shares and the necessity of
self-protection. Managers of some corporations deliberately keep the
shareholders in ignorance or under misapprehension as to the true condition
of its affairs. Business prudence demands that the investor keep a
watchful eye on the management and the condition of the business.
Those in charge of the company may be guilty of gross incompetence or
dishonesty for years and escape liability if the shareholders cannot
inspect the records and obtain information.‖
BOOKS OF SUBSIDIARY: The right of the stockholder to
examine corporate books extends to a wholly owned subsidiary which is
completely under the control and management of the parent company
where he is such a stockholder. But if the two entities are legally being
operated as separate and distinct entities, there is no such right of
inspection on the part of the stockholder of the parent company.
INSPECTION BY AGENT: while the right is founded on stock
ownership, thus personal in nature, it may be made by the
stockholder’s agent or representative since it may be unavailing in many
instances.
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder
or member, the right of a director or trustee to inspect and examine
corporate books and records is considered absolute and unqualified and
without regard to motive. This is because a director supervises, directs
and manages corporate business and it is necessary that he be
equipped with all the information and data with regard to the
affairs of the company in order that he may manage and direct its
operations intelligently and according to this best judgment in
the interest of all the stockholders he represents. Thus, while
stockholders and mmebers are entitled to inspect and examine the books
and records as provided in Sec. 74 and 75 they may not gain access to
highly sensitive and confidential information. In the case of directors,
―it is not denied‖ that they have such access. This would include, among
others, (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 for
mergers or tie-ups with other firms.
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED
THE RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC)
1. Mandamus. In such event, the corporate secretary shall be included
as a party respondent since he is customarily charged with the custody of
all documents or records of the corporation and against whom personal
order of the court would be made;
2. Damages either against the corporation or the responsible officer who
refused the inspection; or
3. Criminal complaint for violation of his right to inspect and copy
excerpts of all business transactions and minutes of meetings. The
officer or agent who refused the examination or copying thereof, shall
be guilty and liable of an offense punishable under Sec. 144 of the
Code. Sec. 144 imposes a penalty of a fine of not less than P1,000 but
not more than P10,000 or an imprisonment for not less than 30 days but
not more than 5 years, or both, at the discretion of the court. If the
refusal is pursuant to a resolution or order of the board, the liability shall
be imposed upon the directors/trustees who voted for such refusal.
DEFENSE OF CORPRATE OFFICERS: (INL)
1. That the person demanding has improperly used any information
secured through any prior examination of the records or minutes of such
corporation or any other corporation;
2. That he was not acting in good faith or for a legitimate purpose in
making his demand; or
3. The right is limited or restricted by special law or the law of its
creation.
W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N.
BERRY, respondents.
(G.R. No. L-15568; November 8, 1919)
FACTS: Petitioner seeks to obtain a writ of mandamus to compel the
respondents to permit him, in person or by some authorized agent or
attorney, to inspect and examine the records of the business by Philippine
Manufacturing Company, of which he is a stockholder.
Respondents interposed a demurrer.
ISSUE: WON the right the law concedes to a stockholder may be exercised
by a proper agent or attorney?
HELD: Yes. The right of inspection given to a stockholder can
be exercised either by himself or by any proper representative
or attorney in fact, and either with or without the attendance of
the stockholder. This is in conformity with the general rule that what a
man may do in person he may do through another; and we find nothing
in the statute that would justify us in qualifying the right in the manner
suggested by the respondents.
This conclusion is supported by the undoubted weight of authority in the
United States, where it is generally held that the provisions of law conceding
the right of inspection to stockholders of corporations are to be liberally
construed and that said right may be exercised through any other properly
authorized person. As was said in Foster vs. White (86 Ala., 467), "The right
may be regarded as personal, in the sense that only a
stockholder may enjoy it; but the inspection and examination may
be made by another. Otherwise it would be unavailing in many
instances." An observation to the same effect is contained in Martin vs.
Bienville Oil Works Co. (28 La., 204), where it is said: "The possession of
the right in question would be futile if the possessor of it, through lack of
knowledge necessary to exercise it, were debarred the right of procuring in
his behalf the services of one who could exercise it." In Deadreck vs.
Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have
the right to inspect the books of the corporation, taking minutes
from the same, at all reasonable times, and may be aided in this
by experts and counsel, so as to make the inspection valuable to
them, is a principle too well settled to need discussion." Authorities on
this point could be accumulated in great abundance, but as they may
be found cited in any legal encyclopedia or treaties devoted to the subject
of corporations, it is unnecessary here to refer to other cases announcing the
same rule.
The demurrer is overruled; and it is ordered that the writ of mandamus shall
issue as prayed, unless within 5 days from notification hereof the
respondents answer to the merits.
ANTONIO PARDO, petitioner,
vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER,
respondents
(G.R. No. L-22442; August 1, 1924)
FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to
compel respondent company to permit petitioner and his duly authorized
agent and representative to examine the records and business transactions of
said company.
Respondents raised the defense that under Art. 10 of the by-laws, it is
declared that ―every shareholder may examine the books of the company
and other documents pertaining to the same upon the days which the
board of directors’ shall annually fix‖. And thus was set from 15 th to 25th of
March by virtue of a board resolution.
ISSUE: WON the BOD may choose specific performance and particular dates
when the right of inspection may be exercised?
HELD: No. The general right given by the statute may not be
lawfully abridged to the extent attempted in this resolution. It
may be admitted that the officials in charge of a corporation may deny
inspection when sought at unusual hours or under other improper
conditions; but neither the executive officers nor the board of
directors have the power to deprive a stockholder of the right
altogether. A by-law unduly restricting the right of inspection is
undoubtedly invalid. Authorities to this effect are too numerous and direct
to require extended comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson
on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah, 248;
107 Am., St. Rep., 664. 681.)
The demurrer is, therefore, sustained; and the writ of mandamus will issue
as prayed, with the costs against the respondent.
EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar
Company, Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and
AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents.
(G.R. No. L-37064; October 4, 1932)
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ
of mandamus to be issued to each and all of the respondents to, among
others, place at his disposal at reasonable hours the minutes, documents and
books of Isabela Sugar Company, Inc. (which he is a director and
stockholder) for his inspection and to issue immediately, upon payment
of the fees, certified copies of any documentation in connection with
said minutes, documents and the books of the aforesaid corporation.
Director Veraguth telegraphed the secretary of the company, asking the
latter to forward in the shortest possible time a certified copy of the
resolution of the board of directors concerning the payment of attorney's
fees in the case against the Isabela Sugar Company and others. To this
the secretary made answer by letter stating that, since the minutes of the
meeting in question had not been signed by the directors present, a
certified copy could not be furnished and that as to other proceedings of
the stockholders a request should be made to the president of the
Isabela Sugar Company, Inc. It further appears that the board of directors
adopted a resolution providing for inspection of the books and the
taking of copies "by authority of the President of the corporation
previously obtained in each case."
ISSUE: WON the corporate secretary is justified in refusing to furnish copies
of the minutes of the meeting of the BOD?
HELD: Yes. The Corporation Law, section 51, provides that:
―All business corporations shall keep and carefully preserve a record of
all business transactions, and a minute of all meetings of directors,
members, or stockholders, in which shall be set forth in detail the time
and place of holding the meeting was regular or special, if special its
object, those
cognizance of it as a qualification. In other words, the specific provisions take
present and absent, and every act done or ordered done at the meeting. .
..
The record of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, member, or
stockholder of the corporation at reasonable hours.‖
The above puts in statutory form the general principles of Corporation Law.
Directors of a corporation have the unqualified right to inspect the books
and records of the corporation at all reasonable times. Pretexts may not
be put forward by officers of corporations to keep a director or
shareholder from inspecting the books and minutes of the corporation,
and the right of inspection is not to be denied on the ground that the
director or shareholder is on unfriendly terms with the officers of the
corporation whose records are sought to be inspected. A director or
stockholder cannot of course make copies, abstracts, and memoranda of
documents, books, and papers as an incident to the right of inspection, but
cannot, without an order of a court, be permitted to take books from the
office of the corporation. We do not conceive, however, that a
director or stockholder has any absolute right to secure certified
copies of the minutes of the corporation until these minutes
have been written up and approved by the directors. (See
Fisher's Philippine Law of Stock Corporations, sec. 153, and Fletcher
Cyclopedia Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything improper
occurred when the secretary declined to furnish certified copies of minutes
which had not been approved by the board of directors, and that while so
much of the last resolution of the board of directors as provides for prior
approval of the president of the corporation before the books of the
corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone. In addition, it should be said that this is
a family dispute, the petitioner and the individual respondents belonging to
the same family; that a test case between the petitioner and the respondents
has not been begun in the Court of First Instance of Occidental Negros
involving hundreds of thousands of pesos, and that the appellate court
should not intrude its views to give an advantage to either party. We rule
that the petitioner has not made out a case for relief by mandamus.
GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) – ISSUE: WON
petitioner may be properly denied examination of the books and records of
San Miguel International, Inc., a fully owned subsidiary of SMC?
HELD: No. Pursuant to the second paragraph of section 51 of the
Corporation Law, "(t)he record of all business transactions of the corporation
and minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It
is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial
ownership, or a ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right
is granted by statute to the stockholder, it is given to him as such and must
be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In
other words, the inspection has to be germane to the petitioner's
interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. In Grey
v. Insular Lumber, this Court held that "the right to examine the books
of the corporation must be exercised in good faith, for specific and
honest purpose, and not to gratify curiosity, or for specific and
honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to
inquire into and consider the stockholder's good faith and his purpose and
motives in seeking inspection. Thus, it was held that "the right given by
statute is not absolute and may be refused when the information is
not sought in good faith or is used to the detriment of the
corporation." But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to
take
from the stockholder the burden of showing propriety of purpose and place
upon the corporation the burden of showing impropriety of purpose or
motive. It appears to be the general rule that stockholders are entitled to full
information as to the management of the corporation and the manner of
expenditure of its funds, and to inspection to obtain such information,
especially where it appears that the company is being mismanaged or that it
is being managed for the personal benefit of officers or directors or certain of
the stockholders to the exclusion of others."
While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of law,
the right of such stockholder to examine the books and records
of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others
do not. Thus, it has been held that where a corporation owns approximately
no property except the shares of stock of subsidiary corporations which are
merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and
documents of all the corporations may be required to be produced for
examination, and that a writ of mandamus, may be granted, as the records
of the subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a party. Mandamus was
likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar
thereto.
On the other hand, mandamus at the suit of a stockholder was refused
where the subsidiary corporation is a separate and distinct corporation
domiciled and with its books and records in another jurisdiction, and is
not legally subject to the control of the parent company, although it
owned a vast majority of the stock of the subsidiary. Likewise, inspection
of the books of an allied corporation by stockholder of the parent
company which owns all the stock of the subsidiary has been refused
on the ground that the stockholder was not within the class of "persons
having an interest."
In the Nash case, The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation
included the right to inspect corporation's subsidiaries' books and records
which were in corporation's possession and control in its office in New York."
In the Bailey case, stockholders of a corporation were held entitled to inspect
the records of a controlled subsidiary corporation which used the same
offices and had identical officers and directors.
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would
be more in accord with equity, good faith and fair dealing to construe the
statutory right of petitioner as stockholder to inspect the books
and records of the corporation as extending to books and
records of such wholly-owned subsidiary which
are in respondent corporation's
possession and control.
The Court voted unanimously to grant the petition insofar as it prays that
petitioner be allowed to examine the books and records of San Miguel
International, Inc., as specified by him.
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
(G.R. No. L-33320; May 30, 1983)
FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a
special civil action for mandamus against the herein respondent PNB praying
that the latter be ordered to allow him to look into the books and records
of PNB to satisfy himself as to the truth of the published report that (1) the
respondent has guaranteed the obligation of South Negros Development
Corporation in the purchase of a US$ 23M sugar-mill to be financed by
Japanese suppliers and financiers; that the respondent; (2) the
respondent is financing the construction of the P21M Cebu-Mactan Bridge
to be constructed by VC Ponce,
Inc.; and (3) the construction of Passi Sugar Mill at Iloilo by the Homion
Philippines, Inc.; as well as (4) to inquire into the validity of said transactions.
The CFI dismissed the special civil action.
Assailing the conclusions of the lower court, the petitioner has assigned the
single error to the lower court of having ruled that his alleged improper
motive in asking for an examination of the books and records of the
respondent bank disqualifies him to exercise the right of a stockholder to
such inspection under Section 51 of Act No. 1459, as amended. Said
provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify
the qualification made by the lower court that the inspection of corporate
records may be denied on the ground that it is intended for an improper
motive or purpose, the law having granted such right to a stockholder in
clear and unconditional terms. He further argues that, assuming that a
proper motive or purpose for the desired examination is necessary for its
exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.
ISSUE: WON Petitioner is correct in saying that he has an unqualified right
to inspect the books as provided under Sec. 51 of the Corporation Law?
HELD: No. Petitioner may no longer insist on his interpretation of Section 51
of Act No. 1459, as amended, regarding the right of a stockholder to inspect
and examine the books and records of a corporation. The former
Corporation Law (Act No. 1459, as amended) has been replaced by Batas
Pambansa Blg. 68, otherwise known as the "Corporation Code of the
Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
―The records of all business transactions of the corporation and
the minutes of any meeting shall be open to inspection by any
director, trustee, stockholder or member of the corporation at reasonable
hours on business days and he may demand, in writing, for a copy of
excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in accordance with
the provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal; and Provided, further, That it shall be a defense to
any action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making his demand.‖
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following (1) the
records must be kept at the principal office of the corporation;
(2) the inspection must be made on business days; (3) the
stockholder may demand a copy of the excerpts of the records or
minutes; (4) and the refusal to allow such inspection shall subject
the erring officer or agent of the corporation to civil and criminal
liabilities.
However, while seemingly enlarging the right of inspection, the new Code
 has prescribed limitations to the same. It is now expressly required as
condition for such examination that (1) the one requesting it
must not have been guilty of using improperly any information
through a prior examination, and (2) that the person asking
for such examination must be "acting in good faith and for a
legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained
in Section 51, Act No. 1459, as amended, no longer holds true under
the provisions of the present law. The argument of the petitioner that the
right granted to him under Section 51 of the former Corporation Law should
not be dependent on the propriety of his motive or purpose in asking
for the inspection of the books of the respondent bank loses whatever
validity it might have had before the amendment of the law. If there is
any doubt in the correctness of the ruling of the trial court that the right
of inspection granted under Section 51 of the old Corporation Law must be
dependent on a showing of proper motive on the part of the stockholder
demanding the same, it is now dissipated by the clear language of the
pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.
ISSUE2: WON petitioner is in good faith in the exercise of his right to
inspect the books of PNB?
HELD: No. Although the petitioner has claimed that he has justifiable
motives in seeking the inspection of the books of the respondent bank, he
has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired
one share of stock in the respondent bank purposely to exercise the
right of inspection do not argue in favor of his good faith and proper
motivation. Admittedly he sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which
he can use against the respondent bank for acts done by the latter when
the petitioner was a total stranger to the same. He could have been impelled
by a laudable sense of civic consciousness, but it could not be said that
his purpose is germane to his interest as a stockholder.
ISSUE3: WON the right of a stockholder to inspect the books provided under
Sec. 74 of the Corporation Code is applicable to PNB?
HELD: No. We also find merit in the contention of the respondent bank that
the inspection sought to be exercised by the petitioner would be violative of
the provisions of its charter. (Republic Act No. 1300, as amended.) Sections
15, 16 and 30 of the said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of the
Central Bank. — The National Bank shall be subject to inspection
by the Department of Supervision and Examination of the
Central Bank'
Sec. 16. Confidential information. —The Superintendent of Banks and the
Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to
any person other than the President of the Philippines, the
Secretary of Finance, and the Board of Directors the
details of the inspection or investigation, nor shall they give
any information relative to the funds in its custody, its
current accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a Court of
competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.— Any
director, officer, employee, or agent of the Bank, who violates or
permits the violation of any of the provisions of this Act, or any
person aiding or abetting the violations of any of the provisions of
this Act, shall be punished by a fine not to exceed ten thousand pesos
or by imprisonment of not more than five years, or both such fine and
imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a
charter of its own, it is not governed, as a rule, by the Corporation
Code of the Philippines. Section 4 of the said Code provides:
Sec. 78. Articles of merger or consolidation. - After the approval by
a
SEC. 4. Corporations created by special laws or charters. — Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them.
supplemented by the provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the
corporation may not be reconciled with the abovequoted provisions
of the charter of the respondent bank. It is not correct to claim,
therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the
charter of the respondent bank.
CHAPTER 12: MERGER AND CONSOLIDATION
Sec. 36, par. 8 of the Corporation Code of the Philippines expressly
empowers a corporation to merge or consolidate with another corporation
subject to the requirements and procedure prescribed in TITLE IX.
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: (NTSO)
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.
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.
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.
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.
Sec. 80. Effects of merger or consolidation. - The merger
or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which,
in case of merger, shall be the surviving corporation designated in the plan
of merger; and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except
that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises of each
of the constituent corporations; and all property, real or personal, and all
receivables due on whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of, or belonging to, or
due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or
deed; and
5. The surviving or consolidated corporation shall be responsible and liable
for all the liabilities and obligations of each of the constituent corporations in
the same manner as if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent corporations
may be prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property of any of
such constituent corporations shall not be impaired by such merger or
consolidation.
REASON FOR REORGANIZATION: The reasons inducing a
reorganization are not in every case the same, but for the most part, they
are to be found in the weak financial or insolvent condition of the particular
corporations. The
and thereafter, the Commission shall proceed as provided in the Code.
aim of corporate reorganization or combination is generally to put the
company upon a sound financial basis and to enable it to take care of its
obligations thereby avoiding liquidation or bankruptcy. But in some cases,
a reorganization is effected notwithstanding the fact that the corporation
is solvent.
ILLEGAL COMBINATIONS: While a merger or consolidation is a
right, granted by law, to corporations registered under the Code, Act
3518 proscribes illegal combination. It provides, under Sec. 20 thereof
that ―no corporation engaged in commerce may acquire, directly or
indirectly, the whole or any part of the stock or other share capital of
another corporation or corporations engaged in commerce, where the effect
of such acquisitions may be to substantially lessen competition between
the corporation or corporations whose stock is so acquired and the
corporation making the acquisition, or between any of them, or to
restrain such commerce in any section community, or ten to create a
monopoly of any line of commerce.‖ Corollary to this is Art. 186 of the
Revised Penal Code which imposes a penalty of imprisonment and/or
fine on any person who enters into a contract or conspiracy to create
monopolies and combinations in restraint of trade.
MERGER: is a union effected by absorbing one or more existing corporations
by another which survives and continues the combined business. It is the
uniting of two or more corporations by the transfer of property to one of
them which continue in existence, the other or the others being dissolved
and merged therein.
Example: It was agreed that B Company will take over and acquire all the
business, assets, properties, rights and liabilities of C Corporation and by
virtue of which B will absorb C which is to be dissolved.
CONSOLIDATION: is the uniting or amalgamation of two or more
existing corporations to form a new corporation. It signifies a union as
necessarily results in the creation of a new corporation and the termination
of existence of old ones. The united concern resulting from such
union is called consolidated corporation.
Thus, in the example given, if B and C agreed to form a new corporation, A
Company, which will absorb both business, and all of B’s and C’s assets,
properties, rights and liabilities are transferred to A which will continue their
combined business while B and C will be dissolved, a consolidation takes
place.
In effect, in a consolidation, the constituent corporations are all dissolved,
while in a merger, the absorbing or surviving corporation is not, only the
absorbed.
REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER
OR CONSOLIDATION:
1. The BOD/T of each constituent corporations shall approve a plan or
merger or consolidation setting for the matters required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3 outstanding
capital stock or 2/3 of the member in non-stock corporations of each of
such corporations at separate corporate meetings called for the
purpose;
3. Prior notice of such meeting, with a copy or summary of the plan of
merger or consolidation shall be given to all stockholders or members at
least 2 weeks prior to the scheduled meeting, either personally or by
registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent
corporations to be signed by the president or vice-president and
certified by the corporate secretary or assistant secretary setting forth
the matters required in Sec. 78;
5. Submission of the articles of merger or consolidation in quadruplicate to
the SEC subject to the requirement of Sec. 79 that if it involve
corporations under direct supervision of any other government agency
or governed by special laws the favorable recommendation of the
government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at
which time the merger or consolidation shall be effective. If the plan,
however, is believed to be contrary to law, the SEC shall set a hearing
to give the corporations concerned an opportunity to be heard upon
notice
EFFECTS OF MERGER OR CONSOLIDATION:
1. There will only be a single corporation. In case of merger, the surviving
corporation or the consolidate corporation in case of consolidation;
2. The termination of corporate existence of the constituent corporations,
except that of the surviving corporation or the consolidated corporation;
3. The surviving corporation or the consolidated corporation will possess
all the rights, privileges, immunities and powers and shall be subject to
all the duties and liabilities of a corporation organized under the Code;
4. The surviving or consolidated corporation shall possess all the rights,
privileges, immunities and franchises of the constituent corporations,
and all property and all receivables due, including subscriptions to
shares and other choses in action, and every other interest of, or
belonging to or due to the constituent corporations shall be deemed
transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The rights of creditors or any lien on the property of the constituent
corporations shall not be impaired by the merger or consolidation.
LIQUIDATION: There would be no need to liquidate or wind-up the affairs
of the corporation because (1) there are no assets to distribute; (2) no debts
and liabilities to pay – since all these are transferred to the surviving or
consolidated corporation.
ASSOCIATED BANK, petitioner,
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.
(G.R. No. 123793; June 29, 1998)
FACTS: Associated Banking Corporation and Citizens Bank and
Trust Company merged to form Associated Citizens Bank which
subsequently changed its corporate name to Associate Bank.
The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor
of Associated Bank for P2.5M of which P2.25M remains unpaid.
Despite repeated demands, the defendant failed to pay the sum due.
Defendant denied all pertinent allegations in the complaint and alleged
as affirmative and/or special defense that Associated Bank is not the real
party in interest because the promissory note was executed in favor of
Citizens Bank and Trust Company.
Defendant was declared in default for not appearing in the Pre-Trial
Conference and the plaintiff was allowed to present evidence ex-parte, the
Motion to Life Order of Default and or Reconsideration of the Order being
dismissed. The trial court ruled in favor of Associated Bank. On appeal, the
CA reversed the trial court.
ISSUE: WON Associated Bank, the surviving corporation, may enforce
the promissory note made by Sarmiento in favor of CBTC, the absorbed
company after the effectivity of the merger?
HELD: Yes. Ordinarily, in the merger of two or more
existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. Although there is a
dissolution of the absorbed corporations, there is no winding
up of their affairs or liquidation of their assets, because the
surviving corporation automatically acquires all their rights,
privileges and powers, as well as their liabilities.
The merger, however, does not become effective upon the
mere agreement of the constituent corporations. The procedure
to be followed is prescribed under the Corporation Code. Section 79 of
said Code requires the approval by the Securities and Exchange
Commission (SEC) of the articles of merger which, in turn, must have
been duly approved by a majority of the respective stockholders of the
constituent corporations. The same provision further states that the
merger shall be effective only upon the issuance by the SEC
of a certificate of merger. The
vs.
BPI EMPLOYEES UNION-DAVAO CHAPTER-FEDERATION OF UNIONS
effectivity date of the merger is crucial for determining when
the merged or absorbed corporation ceases to exist; and
when its rights, privileges, properties as well as liabilities pass
on to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its
effectivity "shall, for all intents and purposes, be the date when the necessary
papers to carry out this [m]erger shall have been approved by the Securities
and Exchange Commission." As to the transfer of the properties of CBTC to
ABC, the agreement provides:
―10. Upon effective date of the Merger, all rights, privileges,
powers, immunities, franchises, assets and property of [CBTC],
whether real, personal or mixed, and including [CBTC's] goodwill and
tradename, and all debts due to [CBTC] on whatever act, and all
other things in action belonging to [CBTC] as of the effective date of
the [m]erger shall be vested in [ABC], the SURVIVING BANK, without
need of further act or deed‖
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of the
agreement itself, which was September 16, 1975. Private respondent
contends that, since he issued the promissory note to CBTC on September 7,
1977 — two years after the merger agreement had been executed — CBTC
could not have conveyed or transferred to petitioner its interest in the said
note, which was not yet in existence at the time of the merger. Therefore,
petitioner, the surviving bank, has no right to enforce the promissory note on
private respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its
execution, we still cannot agree that petitioner no longer has any interest in
the promissory note. A closer perusal of the merger agreement leads to a
different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any
deed, documents, or other papers of whatever kind or nature and
wherever found shall be deemed for all intents and purposes, references
to [ABC], the SURVIVING BANK, as if such references were direct
references to [ABC]. . . .
Thus, the fact that the promissory note was executed after
the effectivity date of the merger does not militate against
petitioner. The agreement itself clearly provides that all
contracts — irrespective of the date of execution — entered into
in the name of CBTC shall be understood as pertaining to the
surviving bank, herein petitioner. Since, in contrast to the earlier
aforequoted provision, the latter clause no longer specifically refers only to
contracts existing at the time of the merger, no distinction should be
made. The clause must have been deliberately included in the agreement
in order to protect the interests of the combining banks; specifically, to
avoid giving the merger agreement a farcical interpretation aimed at evading
fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions
of the merger agreement, as a reference to petitioner bank, "as if such
reference [was a] direct reference to" the latter "for all intents and
purposes."
No other construction can be given to the unequivocal stipulation. Being
clear, plain and free of ambiguity, the provision must be given its literal
meaning and applied without a convoluted interpretation. Verba lelegis non
est recedendum.
In light of the foregoing, the Court holds that petitioner has a valid cause of
action against private respondent. Clearly, the failure of private respondent
to honor his obligation under the promissory note constitutes a violation
of petitioner's right to collect the proceeds of the loan it extended to the
former.
BANK OF THE PHILIPPINE ISLANDS, Petitioner,
IN BPI UNIBANK, Respondent
(G.R. No. 164301; August 10, 2010)

FACTS: On March 23, 2000, the Bangko Sentral ng Pilipinas approved the
Articles of Merger executed on January 20, 2000 by and between BPI, herein
petitioner, and FEBTC. This Article and Plan of Merger was approved by the
Securities and Exchange Commission on April 7, 2000.
Pursuant to the Article and Plan of Merger, all the assets and liabilities of
FEBTC were transferred to and absorbed by BPI as the surviving corporation.
FEBTC employees, including those in its different branches across the
country, were hired by petitioner as its own employees, with their status and
tenure recognized and salaries and benefits maintained.
BPI has an existing Union Shop Clause agreement with the BPI Employees
Union-Davao Chapter-Federation of Unions in BPI Unibank (BPI Union)
whereby it is a pre-condition that new employees must join the union before
they can be regularized otherwise they will not have a continued
employment. By reason of the failure of the FEBTC employees to join the
union, BPI Union recommended to BPI their dismissal. BPI refused. The issue
went to voluntary arbitration where BPI won but the Court of Appeals
reversed the Voluntary Arbitrator. Hence, this petition.
ISSUE: WON employees of a dissolved corporation in a merger are
considered absorbed by the surviving corporation?
HELD: No. Absorbed FEBTC Employees are neither assets
nor liabilities. In legal parlance, however, human beings are never
embraced in the term "assets and liabilities." Moreover, BPI’s absorption of
former FEBTC employees was neither by operation of law nor by legal
consequence of contract. There was no government regulation or law
that compelled the merger of the two banks or the absorption of
the employees of the dissolved corporation by the surviving
corporation. Had there been such law or regulation, the
absorption of employees of the non-surviving entities of the
merger would have been mandatory on the surviving corporation. In
the present case, the merger was voluntarily entered into by both banks
presumably for some mutually acceptable consideration. In fact, the
Corporation Code does not also mandate the absorption of the
employees of the non-surviving corporation by the surviving
corporation in the case of a merger. Section 80 of the
Corporation Code provides.
This Court believes that it is contrary to public policy to declare the former
FEBTC employees as forming part of the assets or liabilities of FEBTC that
were transferred and absorbed by BPI in the Articles of Merger. Assets and
liabilities, in this instance, should be deemed to refer only to property rights
and obligations of FEBTC and do not include the employment contracts of its
personnel. A corporation cannot unilaterally transfer its employees to another
employer like chattel. Certainly, if BPI as an employer had the right to choose
who to retain among FEBTC’s employees, FEBTC employees had the
concomitant right to choose not to be absorbed by BPI. Even though FEBTC
employees had no choice or control over the merger of their employer with
BPI, they had a choice whether or not they would allow themselves to be
absorbed by BPI. Certainly nothing prevented the FEBTC’s employees from
resigning or retiring and seeking employment elsewhere instead of going
along with the proposed absorption.
Employment is a personal consensual contract and absorption by BPI of a
former FEBTC employee without the consent of the employee is in violation
of an individual’s freedom to contract. It would have been a different matter
if there was an express provision in the articles of merger that as a condition
for the merger, BPI was being required to assume all the employment
contracts of all existing FEBTC employees with the conformity of the
employees. In the absence of such a provision in the articles of merger, then
BPI clearly had the business management decision as to whether or not
employ FEBTC’s employees. FEBTC employees likewise retained the
prerogative to allow themselves to be absorbed or not; otherwise, that would
be tantamount to involuntary servitude.
There appears to be no dispute that with respect to FEBTC employees that
BPI chose not to employ or FEBTC employees who chose to retire or be
separated from employment instead of "being absorbed," BPI‘s assumed
liability to these employees pursuant to the merger is FEBTC’s liability to
them in terms of separation pay, retirement pay or other benefits that may
be due them depending on the circumstances.
Although not binding on this Court, American jurisprudence on the
consequences of voluntary mergers on the right to employment and seniority
rights is persuasive and illuminating. We quote the following pertinent
discussion from the American Law Reports:
Several cases have involved the situation where as a result of mergers,
consolidations, or shutdowns, one group of employees, who had accumulated
seniority at one plant or for one employer, finds that their jobs have been
discontinued except to the extent that they are offered employment at the
place or by the employer where the work is to be carried on in the future.
Such cases have involved the question whether such transferring employees
should be entitled to carry with them their accumulated seniority or whether
they are to be compelled to start over at the bottom of the seniority list in
the "new" job. It has been recognized in some cases that the
accumulated seniority does not survive and cannot be transferred to the
"new" job.
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d 597, the court saying that,
absent some specific contract provision otherwise, seniority rights were
ordinarily limited to the employment in which they were earned, and
concluding that the contract for which specific performance was sought
was not such a completed and binding agreement as would support
such equitable relief, since the railroad, whose concurrence in the
arrangements made was essential to their effectuation, was not a party to
the agreement.
Indeed, from the tenor of local and foreign authorities, in voluntary mergers,
absorption of the dissolved corporation‘s employees or the
recognition of the absorbed employees‘ service with their previous
employer may be demanded from the surviving corporation if
required by provision of law or contract. The dissent of Justice Arturo D.
Brion tries to make a distinction as to the terms and conditions of
employment of the absorbed employees in the case of a corporate merger or
consolidation which will, in effect, take away from corporate management
the prerogative to make purely business decisions on the hiring of
employees or will give it an excuse not to apply the CBA in force to the
prejudice of its own employees and their recognized collective bargaining
agent. In this regard, we disagree with Justice Brion.
Justice Brion takes the position that because the surviving corporation
continues the personality of the dissolved corporation and acquires all the
latter’s rights and obligations, it is duty-bound to absorb the dissolved
corporation’s employees, even in the absence of a stipulation in the plan of
merger. He proposes that this interpretation would provide the necessary
protection to labor as it spares workers from being "left in legal limbo."
However, there are instances where an employer can validly discontinue or
terminate the employment of an employee without violating his right to
security of tenure. Among others, in case of redundancy, for example,
superfluous employees may be terminated and such termination would be
authorized under Article 283 of the Labor Code.
The lack of a provision in the plan of merger regarding the transfer of
employment contracts to the surviving corporation could have very well been
deliberated on the part of the parties to the merger, in order to grant the
surviving corporation the freedom to choose who among the dissolved
corporation’s employees to retain, in accordance with the surviving
corporation’s business needs. If terminations, for instance due to redundancy
or labor-saving devices or to prevent losses, are done in good faith, they
would be valid. The surviving corporation too is duty-bound to protect
the rights of its own employees who may be affected by the merger in
terms of seniority and other conditions of their employment due to the
merger. Thus, we are not convinced that in the absence of a stipulation in
the merger plan the surviving corporation was compelled, or may be
judicially compelled, to absorb all employees under the same terms and
conditions obtaining in the dissolved corporation as the surviving
corporation should also take into
consideration the state of its business and its obligations to its own
employees, and to their certified collective bargaining agent or labor union.
Even assuming we accept Justice Brion’s theory that in a merger situation the
surviving corporation should be compelled to absorb the dissolved
corporation’s employees as a legal consequence of the merger and as a
social justice consideration, it bears to emphasize his dissent also
recognizes that the employee may choose to end his employment at any
time by voluntarily resigning. For the employee to be "absorbed" by
BPI, it requires the employees’ implied or express consent. It is because
of this human element in employment contracts and the personal,
consensual nature thereof that we cannot agree that, in a merger
situation, employment contracts are automatically transferable from one
entity to another in the same manner that a contract pertaining to purely
proprietary rights – such as a promissory note or a deed of sale of
property – is perfectly and automatically transferable to the surviving
corporation.
That BPI is the same entity as FEBTC after the merger is but a legal fiction
intended as a tool to adjudicate rights and obligations between and among
the merged corporations and the persons that deal with them. Although in a
merger it is as if there is no change in the personality of the employer, there
is in reality a change in the situation of the employee. Once an FEBTC
employee is absorbed, there are presumably changes in his condition of
employment even if his previous tenure and salary rate is recognized by BPI.
It is reasonable to assume that BPI would have different rules and
regulations and company practices than FEBTC and it is incumbent upon the
former FEBTC employees to obey these new rules and adapt to their new
environment. Not the least of the changes in employment condition that the
absorbed FEBTC employees must face is the fact that prior to the merger
they were employees of an unorganized establishment and after the merger
they became employees of a unionized company that had an existing
collective bargaining agreement with the certified union. This presupposes
that the union who is party to the collective bargaining agreement is the
certified union that has, in the appropriate certification election, been shown
to represent a majority of the members of the bargaining unit.
Likewise, with respect to FEBTC employees that BPI chose to employ and
who also chose to be absorbed, then due to BPI’s blanket assumption of
liabilities and obligations under the articles of merger, BPI was bound to
respect the years of service of these FEBTC employees and to pay the same,
or commensurate salaries and other benefits that these employees previously
enjoyed with FEBTC.
As the Union likewise pointed out in its pleadings, there were benefits
under the CBA that the former FEBTC employees did not enjoy
with their previous employer. As BPI employees, they will enjoy all
these CBA benefits upon their "absorption." Thus, although in a sense BPI is
continuing FEBTC’s employment of these absorbed employees, BPI’s
employment of these absorbed employees was not under exactly the
same terms and conditions as stated in the latter’s employment contracts
with FEBTC. This further strengthens the view that BPI and the former
FEBTC employees voluntarily contracted with each other for their
employment in the surviving corporation.
CHAPTER 13: APPRAISAL RIGHT
A. DEFINITION
Appraisal Right is the method of paying a shareholder for the taking of his
property. It is a statutory means whereby a stockholder can avoid the
conversion of this property into another property not of his own choosing and
is given to a shareholder as compensation for the abrogation of the common-
law rule that a single stockholder could block a certain corporate act such as
merger.
PURPOSE: is to protect the property rights of dissenting stockholders from
actions by the majority shareholders which alters the nature and character of
their investment. In effect, it is a right granted to dissenting stockholders on
certain corporate or business decisions to demand payment of the fair market
value of their shares.
1. The stockholder must have voted against the proposed corporate action
in any of the instances allowed by law for the exercise of the right of
B. WHEN EXERCISED
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:
3. 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;
4. 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.
ENUMERATION NOT EXCLUSIVE: it may also cover:
1. Investment of funds in another corporation or business or for any other
purpose other than its primary purpose as provided in Sec. 42;
2. Likewise, in a close corporation, a stockholder has the unbridled right to
compel the corporation ―for any reason‖ to purchase his shares at
their fair value which shall not be less than the par or issued value,
when the corporation has sufficient assets to cover its debts and
liabilities, exclusive of capital stock (Sec. 105).
NOT ALL AMENDMENTS: the right may only be exercised in cases
of amendment which ―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‖.
Accordingly, if the amendment is to increase or decrease the number of
directors, or change the corporate name, or change of principal office, the
appraisal right is not available.
STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise
the appraisal right, since the subscriber is entitled to all the rights
of a stockholder under Sec. 72 and although Sec. 82 provides for the
submission of certificate of stock, Sec. 86 provides that the notation to such
certificate of stock is OPTIONAL at the instance of the corporation.
C. REQUIREMENTS AND PROCEDURE
Sec. 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.
REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE
OF THIS RIGHT ARE:
appraisal;
2. The written demand for payment must be made by the dissenting
 stockholder within 30 days after the date on which the vote was taken.
Failure to make the demand within the said period shall be deemed a
waiver on the part of the stockholder concerned to exercise his appraisal
right;
3. Surrender of the certificate of stock by the dissenting stockholder for
notation in the corporate books and the payment of the corporation
of the fair market value of the said shares as of the day prior to the
date on which the vote was taken. If the stockholder and the
corporation cannot agree on the fair market value thereof, the
same shall be determined in accordance with the provisions of par.2 of
Sec. 82;
4. The fair value of the shares of the dissenting stockholder must be paid
by the corporation only if it has ―unrestricted retained earnings‖ in
its books to cover such payment. If the corporation has no
unrestricted retained earnings, the dissenting stockholder may not,
therefore, be able to effectively exercise his appraisal right, EXCEPT in
the case of a close corporation under Sec. 105;
5. Upon payment of the shares by the corporation, the dissenting
stockholder shall transfer his shares to the corporation.
D. EFFECT OF EXERCISE OF APPRAISAL RIGHT
Sec. 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.
SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the
steps provided in Sec. 82, the stockholder concerned is regarded as having
made an election to withdraw from the corporate enterprise and take the
value of his stock. Such a procedure suspends (for a maximum period of
30 days) certain ownership rights associated with stockholder status, such
as the right to receive dividends or distribution and the right to vote
which cannot be restored without compliance with the governing statutory
conditions.
DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue
to function as such, prior to payment, unless there is a contrary provision in
the by-laws.
E. WHEN RIGHT TO PAYMENT CEASES
Sec. 84. When right to payment ceases. - No demand for
payment under this Title may be withdrawn unless the corporation
consents thereto. If, however, such demand for payment is withdrawn with
the consent of the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved by the Securities
and Exchange Commission where such approval is necessary, or if the
Securities and Exchange Commission determines that such stockholder is
not entitled to the appraisal right, then the right of said stockholder to be
paid the fair value of his shares shall cease, his status as a stockholder shall
thereupon be restored, and all dividend distributions which would have
accrued on his shares shall be paid to him.
INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER
TO BE PAID THE FAIR VALUE OF HIS SHARES CEASES:
1. When he withdraws his demand for payment and the corporation
consents thereto;
2. When the proposed action is abandoned or rescinded by the
corporation;
3. When the proposed action is disapproved by the SEC where such
approval is necessary;
4. When the SEC determines that he is not entitled to exercise his
appraisal right;
5. When he fails to submit the stock certificate within ten (10) days from
CAPITAL STOCK: the old notion is that a non-stock corporation is
one which has no capital stock divided into shares – this may no longer hold
demand to the corporation for notation that such shares are dissenting
shares; and,
6. If the shares are transferred and the certificate subsequently cancelled.
F. COST OF APPRAISAL
If the corporation and the dissenting stockholder do not agree, an appraisal
to be made by three disinterested person may be made.
Sec. 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.
THE CORPORATION BEARS THE COST IF:
a. The price offered by the corporation is lower than the fair value of the
shares of the dissenting stockholder as determined by the appraisers;
b. Where an action is filed by the dissenting stockholder to recover such
fair value and the refusal of the stockholder to receive payment is found
by the court to be justified.
DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST
AND EXPENSES OF APPRAISAL WHEN:
a. When the price offered by the corporation is approximately the same as
the fair value ascertained by the appraisers;
b. Where the action filed by the dissenting stockholder and his refusal to
accept payment is found by the court to be unjustified.
G. NOTATION
Sec. 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.
PURPOSE: to give notice and guide to the corporation to determine the
respective rights of stockholder.
SALE: The law does not prohibit the dissenting stockholder to sell, transfer
or assign his shares. If such be the case, the right of the dissenting
stockholder to be paid the fair value of his shares shall cease and the
transferee will acquire all the rights of a regular stockholder inclusive of all
dividends which would have accrued on such shares.
CHAPTER 14: NON-STOCK CORPORATIONS (TITLE XI)
A. DEFINITION
Sec. 87. Definition. - For the purposes of this Code, a non-
stock corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers, subject to the provisions of
this Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject to the
provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by specific
provisions of this Title.
true under the definition provided by Sec. 87. Thus, even if it may have
capital stock divided into shares, proprietary or otherwise, a
corporation is considered ―non-stock‖ so long as it does not distribute
dividends to its members and officers. We have, for instance, Club
shares issued t the members, the totality of which may rightfully
represent ―capital‖ of the corporation but whose income (if there be any)
is not distributed by way of dividends during its corporate existence. The
corporation, in such a case, is legally ―non-stock‖.
PROFITS: A non-stock corporation is generally not allowed to engage in
any business undertaking or activity for profit as it would run counter to its
very nature as a non-profit entity. However, as may be allowed and
specified in its AOI or incidental to the objects and purposes indicated
therein, it may engage in certain money-making ventures or economic
activities provided that any profits derived therefrom shall be used for the
furtherance of the purposes for which the corporation was organized or to
defray the operating expenses of the entity. It has thus been said that the
fact that a non-profit corporation earns a profit, gain or income for the
corporation or members does not make it a profit-making corporation
where such profit or income is used for the purpose set forth in the AOI
and is not distributable to its incorporators, members or officers, since
mere intangible or pecuniary benefits to the members do not change the
nature of the corporation.
The determination of whether or not a non-stock corporation can engage
in profit-making business or activity depends largely on the purpose or
purposes indicated in the AOI. If the business activity is authorized in the
said articles, necessary, incidental or essential thereto, the same may be
undertaken by the corporation, otherwise, not, as it would be an ultra-vires
act under Sec. 45
B. PURPOSE
Sec. 88. Purposes. - Non-stock corporations may be formed or
organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes,
like trade, industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this Title governing
particular classes of non-stock corporations.
Non-stock corporations may be organized or formed for any purpose or
purposes allowed or indicated in the above provision. The enumeration,
however, is not exclusive as the law itself recognizes similar or allied purpose
or purposes for which non-stock corporations may be organized.
Recreational, sports club, athletic or allied activities of similar import, for
instance, may likewise be lawful purpose of a non-stock corporation.
C. MEMBERSHIP AND VOTING RIGHTS
Sec. 89. Right to vote. - The right of the members of any class or
classes to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member, regardless of class, shall be
entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a
member may vote by proxy in accordance with the provisions of this Code.
Voting by mail or other similar means by members of non-stock corporations
may be authorized by the by-laws of non-stock corporations with
the approval of, and under such conditions which may be prescribed by,
the Securities and Exchange Commission.
CUMULATIVE VOTING: GENERAL RULE: Cumulative voting is
not allowed, accordingly, even if the members may cast as many votes are
there are trustees to be elected, he may not cast more than one vote
for one candidate, UNLESS: allowed in the AOI or the by-laws.
CLASSIFICATION: The by-laws or the AOI may provide for classification as
to members with voting or non-voting rights, since it is provided that
―the right of the members of any class or classes to vote may be
limited, broadened or denied‖.
As to whether or not a member should be expelled or maintained is the
established right of the corporation to determine and the courts are
PROXY VOTING: Generally, allowed unless disallowed by the AOI or the
by-laws.
VOTING OTHER THAN IN PERSON: may also be allowed by the AOI
or by-laws. Contrary to a stock corporation, a stockholder has to vote in
the meeting called for the purpose except in case of a general amendment
where ―written assent‖ is allowed.
Sec. 90. Non-transferability of membership. - Membership in a
non-stock corporation and all rights arising therefrom are personal and
non-transferable, unless the articles of incorporation or the by-laws
otherwise provide.
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.
MEMBERSHIP: non-stock corporations have the right to adopt rules
prescribing the mode and manner in which membership thereat can be
obtained or maintained. This includes the right to limit membership. In other
words, membership in non-stock corporations may be acquired by complying
with the provisions of its rules prescribed in the by-laws. This is in
consonance with the express power granted by law under Sec. 36, par. 6 of
the Code, authorizing them to admit members thereof and that authority
carries with it the power to prescribe rules on membership.
It has thus been stated that in the absence of charter or statutory
restrictions, non-stock corporations may determine who shall be admitted to
membership and how they shall be admitted. It may exclude any person
whom it deems unfit for membership. Indeed, in the absence of restrictions,
it may act arbitrarily and exclude any persons it may see fit, and the courts
have no power to interfere. In other words, it is free to fix qualifications for
membership and to provide for termination of membership.
AUTHORITY TO ADMIT MEMBERS: the provisions in the by-laws, if
any, shall govern. Absent any provision to the contrary, it must
necessarily be lodged with the BOT since it is the body that exercises all
corporate powers as enunciated in Sec. 23 of the Code.
SPECIAL CASES: the law itself may provide certain limitations or
even perhaps proscription on transfer of membership. Thus, RA 4726,
otherwise known as the Condominium Act requires that membership
therein shall not be transferred separately from the condominium unit
of which it is appurtenant and that when a member ceases to own
a unit, he shall automatically cease to be a member.
TERMINATION OF MEMBERSHIP: Membership may be terminated in
the manner and for causes provided in the AOI or by-laws and when a
member is so terminated it shall extinguish all his rights in the
corporation or in its property unless otherwise provided in the said articles
or by-laws.
The power or authority to terminate members in non-stock corporations is
said to be inherent but strict compliance with the manner and procedure laid
down in the by-laws must be observed, otherwise it may render the expulsion
ineffective and invalid.
In the absence of any provision in the AOI or by-laws relative to the manner
and causes of termination or expulsion of member, the decided weight of
authority is to the effect that the power is inherent and may be exercised in
certain situations, namely:
1. When an offense is committed which, although it has no immediate
relation to a member’s duty as such, it is so infamous as to render him
unfit for society of honest men, and which is indictable at common law;
2. When the offense is a violation of his duty as member of the
corporation; and
3. When the offense is of a mixed nature, being both against his duty as a
member of the corporation, and also indictable at common law.
without authority to strip a member of his membership without cause.
CHINESE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINE ISLANDS, WILLIAM GOLANGCO, in his capacity as Director
and President of the said Association, and JUANITO K. TAN, in his capacity as
Recording Secretary of the said Association, petitioners,
vs.
VICTOR CHING and THE COURT OF APPEALS, respondents
(G.R. No. L-36929; June 18, 1976)
FACTS: Respondent Ching, a member of the BOD of petitioner Chinese
YMCA, filed an action in the CFI, alleging that on the Membership Campaign
of the Chinese YMCA held from Sept. 27, 1965, only 175 applicants were
submitted, canvassed and accepted on the last day of the membership
campaign, which was Nov. 26, 1965, NOT more than 240, as reported in the
Nov. 28, 1965 issue of the Chinese Commercial News.
The trial court rendered a decision in favor of herein respondent declaring
that only 174 applications constitute the present active membership of the
association.
ISSUE: WON the trial court is justified in stripping members of their
membership in a non-stock corporation?
HELD: No. The documentary evidence itself as cited by the trial court,
consisting of the applications and the receipts for payment of the
membership fees show that they were filed and paid not later than the
November 26, 1965 deadline, and this was further supported by the bank
statement of the petitioner YMCA deposit account with the China Banking
Corporation and the checks paid by certain members to the YMCA which
show that the application fees corresponding to the questioned 74
applications (that raised the total to 249 from 175) were already paid to
petitioner YMCA as the time of the said deadline. (Exhibits 4, 6, 6-A, 6-B and
6-C). No evidence could be cited by the trial court to rebut this well nigh
conclusive documentary evidence other than respondent's
unsupported suspicion which the trial court adopted in a negative
manner with its statement that it is "not improbable" that "some of those
applications filed after said deadline". If there were indeed any
applications filed after the deadline, they certainly should have been
positively pin-pointed and specifically annulled.
What is worse, 175 membership applications were undisputedly filed within
the deadline (including the 75 withdrawn by respondent) and yet the 100
remaining unquestioned memberships were nullified by the questioned
decision without the individuals concerned ever having been impleaded or
heard (except the individual petitioners president and secretary).
The appealed decision thus contravened the established principle that
the courts cannot strip a member of a non-stock non-profit
corporation of his membership therein without cause. Otherwise,
that would be an unwarranted and undue interference with the
well-established right of a corporation to determine its
membership, as announced by Fletcher, as follows:
Compliance with provisions of charter, constitution or by-laws. —In order
that membership may be acquired in a non-stock corporation and valid by-
laws must be complied with, except in so far as they may be and are
waived. *** But provisions in the by-laws as to formal steps to be taken to
acquire membership may be waived by the corporation, or it may be
estopped to assert that they have not been taken. [12A Fletcher
Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.]
Finally, the appealed decision did not give due importance to the undisputed
fact therein stated that "at the board meeting of the association held on
December 7, 1965, a list of 174 applications for membership, old and new,
was submitted to the board and approved by the latter, over the objection of
the petitioner [therein private respondent] who was present at said meeting."
Such action of the petitioner association's board of directors approving the
174 membership applications of old and new members constituting its
active membership as duly processed and screened by the authorized
committee
just be deemed a waiver on its part of any technicality or requirement of
form, since otherwise the association would be practically paralyzed and
deprived of the substantial revenues from the membership dues of
P17,400.00 (at P100.00 per application).
WHEREFORE the respondent court's decision is hereby set aside and in lieu
thereof judgment is rendered dismissing private respondent's petition in the
Court of First Instance of Manila and dissolving the preliminary
injunction, with costs against private respondent.
CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D.
ALMENDRAS, JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI,
O
RAMONTIT * E. GARCIA and JOSE B. SALA, petitioners,
vs.
RICARDO F. ELIZAGAQUE, respondent
(G.R. No. 160273 ; January 18, 2008)
FACTS: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation
operating as a non-profit and non-stock private membership club, having
its principal place of business in Banilad, Cebu City. Petitioners herein
are members of its Board of Directors.
Sometime in 1987, San Miguel Corporation, a special company proprietary
member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior
Vice President and Operations Manager for the Visayas and Mindanao, as a
special non-proprietary member. The designation was thereafter approved by
the CCCI’s Board of Directors.
In 1996, respondent filed with CCCI an application for proprietary
membership. The application was indorsed by CCCI’s two (2) proprietary
members, namely: Edmundo T. Misa and Silvano Ludo.
As the price of a proprietary share was around the P5 million range, Benito
Unchuan, then president of CCCI, offered to sell respondent a share for only
P3.5 million. Respondent, however, purchased the share of a certain Dr.
Butalid for only P3 million. Consequently, on September 6, 1996, CCCI
issued Proprietary Ownership Certificate No. 1446 to respondent.
During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI
Board of Directors, action on respondent’s application for proprietary
membership was deferred. In another Board meeting held on July 30, 1997,
respondent’s application was voted upon. Subsequently, or on August 1,
1997, respondent received a letter from Julius Z. Neri, CCCI’s corporate
secretary, informing him that the Board disapproved his application for
proprietary membership.
On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a
letter of reconsideration. As CCCI did not answer, respondent, on October 7,
1997, wrote another letter of reconsideration. Still, CCCI kept silent. On
November 5, 1997, respondent again sent CCCI a letter inquiring whether
any member of the Board objected to his application. Again, CCCI did not
reply.
Consequently, on December 23, 1998, respondent filed with the Regional
Trial Court (RTC), Branch 71, Pasig City a complaint for damages against
petitioners, docketed as Civil Case No. 67190.
After trial, the RTC rendered its Decision dated February 14, 2001 in favor of
respondent.
On appeal by petitioners, the Court of Appeals, in its Decision dated January
31, 2003, affirmed the trial court’s Decision and denied the Motion for
Reconsideration subsequently filed.
Hence, the present petition.
ISSUE: WON in disapproving respondent’s application for proprietary
membership with CCCI, petitioners are liable to respondent for damages?
HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred in
awarding exorbitant damages to respondent despite the lack of evidence that
they acted in bad faith in disapproving the latter’s application; and in
disregarding their defense of damnum absque injuria.
For his part, respondent maintains that the petition lacks merit, hence, should
be denied.
CCCI’s Articles of Incorporation provide in part:
SEVENTH: That this is a non-stock corporation and membership therein as
well as the right of participation in its assets shall be limited to qualified
persons who are duly accredited owners of Proprietary Ownership
Certificates issued by the corporation in accordance with its By-Laws.
Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the
admission of new members of the Club shall be as follows:
(a) Any proprietary member, seconded by another voting proprietary
member, shall submit to the Secretary a written proposal for the admission
of a candidate to the "Eligible-for-Membership List";
(b) Such proposal shall be posted by the Secretary for a period of thirty
(30) days on the Club bulletin board during which time any member may
interpose objections to the admission of the applicant by
communicating the same to the Board of Directors;
(c) After the expiration of the aforesaid thirty (30) days, if no objections
have been filed or if there are, the Board considers the objections
unmeritorious, the candidate shall be qualified for inclusion in the
"Eligible-for-Membership List";
(d) Once included in the "Eligible-for-Membership List" and after the
candidate shall have acquired in his name a valid POC duly recorded in the
books of the corporation as his own, he shall become a Proprietary
Member, upon a non-refundable admission fee of P1,000.00, provided
that admission fees will only be collected once from any person.
On March 1, 1978, Section 3(c) was amended to read as follows:
(c) After the expiration of the aforesaid thirty (30) days, the Board may,
by unanimous vote of all directors present at a regular or
special meeting, approve the inclusion of the candidate in the
"Eligible-for-Membership List".
As shown by the records, the Board adopted a secret balloting known as the
"black ball system" of voting wherein each member will drop a ball in the
ballot box. A white ball represents conformity to the admission of an
applicant, while a black ball means disapproval. Pursuant to Section 3(c), as
amended, cited above, a unanimous vote of the directors is required. When
respondent’s application for proprietary membership was voted upon during
the Board meeting on July 30, 1997, the ballot box contained one (1) black
ball. Thus, for lack of unanimity, his application was disapproved.
Obviously, the CCCI Board of Directors, under its Articles of
Incorporation, has the right to approve or disapprove an application
for proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on
Human Relations provide restrictions.
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it
with Article 21, thus:
―This article, known to contain what is commonly referred to as
the principle of abuse of rights, sets certain standards which must be
observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the following: to act
with justice; to give everyone his due; and to observe honesty and
good faith. The law, therefore, recognizes a primordial limitation on
all rights; that in their exercise, the norms of human conduct set
forth in Article 19 must be observed. A right, though by itself
legal because recognized or granted by law as such, may
nevertheless become the source of some illegality. When a right
is exercised in a manner which does not conform with the norms
enshrined in Article 19 and results in damage to another, a legal
wrong is thereby committed for which the wrongdoer must be
held responsible. But while Article 19 lays down a rule of conduct for
the government of human relations and for the maintenance of social
order, it does not provide a remedy for its violation.
WHEREFORE, we DENY the petition. The challenged Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED
with modification in the sense that (a) the award of moral damages
Generally, an action for damages under either Article 20 or Article 21
would be proper. (Emphasis in the original)‖
In rejecting respondent’s application for proprietary membership, we find
that petitioners violated the rules governing human relations, the basic
principles to be observed for the rightful relationship between human
beings and for the stability of social order. The trial court and the Court
of Appeals aptly held that petitioners committed fraud and evident bad
faith in disapproving respondent’s applications. This is contrary to morals,
good custom or public policy. Hence, petitioners are liable for damages
pursuant to Article 19 in relation to Article 21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-
Laws requiring the unanimous vote of the directors present at a special or
regular meeting was not printed on the application form respondent filled
and submitted to CCCI. What was printed thereon was the original
provision of Section 3(c) which was silent on the required number of
votes needed for admission of an applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the application
form due to economic reasons. We find this excuse flimsy and unconvincing.
Such amendment, aside from being extremely significant, was
introduced way back in 1978 or almost twenty (20) years before
respondent filed his application. We cannot fathom why such a
prestigious and exclusive golf country club, like the CCCI, whose
members are all affluent, did not have enough money to cause the printing
of an updated application form.
It is thus clear that respondent was left groping in the
dark wondering why his application was disapproved. He was not
even informed that a unanimous vote of the Board
members was required. When he sent a letter for reconsideration
and an inquiry whether there was an objection to his
application, petitioners apparently ignored him. Certainly,
respondent did not deserve this kind of treatment. Having been
designated by San Miguel Corporation as a special non-proprietary member
of CCCI, he should have been treated by petitioners with courtesy and
civility. At the very least, they should have informed him why his
application was disapproved.
The exercise of a right, though legal by itself, must nonetheless be in
accordance with the proper norm. When the right is exercised arbitrarily,
unjustly or excessively and results in damage to another, a legal wrong is
committed for which the wrongdoer must be held responsible. It bears
reiterating that the trial court and the Court of Appeals held that petitioners’
disapproval of respondent’s application is characterized by bad faith.
As to petitioners’ reliance on the principle of damnum absque injuria or
damage without injury, suffice it to state that the same is misplaced. In
Amonoy v. Gutierrez, we held that this principle does not apply when there
is an abuse of a person‘s right, as in this case.
As to the appellate court’s award to respondent of moral damages, we find
the same in order. Under Article 2219 of the New Civil Code, moral damages
may be recovered, among others, in acts and actions referred to in Article 21.
We believe respondent’s testimony that he suffered mental anguish, social
humiliation and wounded feelings as a result of the arbitrary denial of his
application.
ISSUE2: WON the liability is solidary considering that only one voted for
disapproval?
HELD: Yes. Section 31 of the Corporation Code provides:
SEC. 31. Liability of directors, trustees or officers. — Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors, or
trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members
and other persons. (Emphasis ours)
is reduced from P2,000,000.00 to P50,000.00; (b) the award of
exemplary damages is reduced from P1,000,000.00 to P25,000.00; and (c)
the award of attorney’s fees and litigation expenses is reduced from
P500,000.00 and P50,000.00 to P50,000.00 and P25,000.00, respectively.
D. TRUSTEES AND OFFICERS
The word ―trustees‖ as used in Sec. 92 makes reference to the
governing board or body in a non-stock corporation.
Sec. 92. Election and term of trustees. - Unless otherwise provided
in the articles of incorporation or the by-laws, the board of trustees of
non-stock corporations, which may be more than fifteen (15) in number as
may be fixed in their articles of incorporation or by-laws, shall, as
soon as organized, so classify themselves that the term of office of one-
third (1/3) of their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of trustees shall
be held annually and trustees so elected shall have a term of three (3)
years. Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired period.
No person shall be elected as trustee unless he is a member of the
corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation may be directly elected by the members.
QUALIFICATIONS OF TRUSTEES:
1. He is a member of the association;
2. Majority thereof must be residents of the Philippines; and
3. Other qualifications as may be provided for in the by-laws.
DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications,
and Sec. 29 and 30 as to removal also apply to Trustees.
NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or
by-laws, contrary to a stock corporation whose BOD must not exceed
15 members.
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office
and may vary depending on the needs of a specific corporation. By analogy
of the provisions of Sec. 7, however, a term in excess of 5 years is not
allowed as it would unduly deprive other members to take active part in
corporate management.
STAGGERED TERM: The term of office may also be staggered unless
the AOI or by-laws otherwise provide. If such be the case, the board shall
classify themselves in order that 1/3 of their number shall expire every
year and subsequent elections of trustees comprising 1/3 shall be held
annually. The trustees so elected to fill up any vacancy occurring before the
expiration of a particular term shall hold office only for the unexpired
portion of his predecessor.
GOVERNING BOARDS: While the Code speaks of the BOT as the
governing board or body in a non-stock corporation the same law allows a
non-stock corporation or any other special corporation to designate their
governing board by any other name other than BOD/T. The Rotary Club
for instance, designates it as Board of Governors while the Evangelica
Independence Metodista En Las Islas Filipinas calls it as the Consistory of
Elders.
ELECTION BY MEMBERS OF OFFICERS: One of the significant features
of a non-stock corporation is that it allows the AOI or by-laws to provide
that the officers thereof shall be directly elected by the members. Unlike in a
stock corporation where corporate officers are elected by the BOD.
Section 138. Designation of governing boards. - The provisions of specific
provisions of this Code to the contrary notwithstanding, non-stock or
special corporations may, through their articles of incorporation
or their by-laws, designate their governing boards by any name
other than as board of trustees.
At the meeting of the International Board of Directors held on June 27, 1982,
the election of petitioner James L. So to serve as District Governor of District
301-Al for the fiscal year 1982-83 was approved and said petitioner was duly
informed thereof by Richard G. Rice, Manager, District Operations
LIONS CLUBS INTERNATIONAL and JAMES L. SO,
petitioners, vs.
HON. AUGUSTO M. AMORES, Presiding Judge of the Court of First
Instance of Manila, Branch XXIV, COURT OF APPEALS and VICENTE JOSEFA,
respondents.
(G.R. No. L-61259; April 26, 1983)
FACTS: Vicente Josefa and James L. So entered into an agreement whereby
So would withdraw his candidacy for the post of Governor of District 301-A of
herein petitioner Lions Club International. Such withdrawal was accepted by
Governor Huang, however news items were published conveying the idea
that So had not withdrawn from the gubernatorial race.
Josefa filed a complaint before the CFI for quo warranto, injunction or at
least a temporary restraining order alleging irregularities in the election; that
although at the old site of the election, Josefa won, the Lions Club
Internation unlawfully recognized So as the winner.
The trial court issued the TRO which was later on lifted and on appeal, the
CA issued a new TRO.
ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue
cognizable by the courts?
HELD: No. We adopt the general rule that "... the courts will not
interfere with the internal affairs of an unincorporated
association so as to settle disputes between the members, or
questions of policy, discipline, or internal government, so
long as the government of the society is fairly and honestly
administered in conformity with its laws and the law of the land,
and no property or civil rights are invaded. Under such
circumstances, the decision of the governing body or established private
tribunal of the association is binding and conclusive and not subject to
review or collateral attack in the courts. " (7 C.J.S. pp. 38- 39).
The general rule of non-interference in the internal affairs of associations is,
however, subject to exceptions, but the power of review is extremely
limited. Accordingly, the courts have and will exercise power
to interfere in the internal affairs of an association where (1) law
and justice so require, and (2) the proceedings of the
association are subject to judicial review where there is fraud,
oppression, or bad faith, or (3) where the action complained of is
capricious, arbitrary, or unjustly discriminatory. Also, the courts
will usually entertain jurisdiction to grant relief (4) in case
property or civil rights are invaded, although it has also been held
that the involvement of property rights does not necessarily authorize
judicial intervention, in the absence of arbitrariness, fraud or collusion.
Moreover, the courts will intervene (5) where the proceedings in
question are violative of the laws of the society, or the law of
the land, as by depriving a person of due process of law.
Similarly, judicial intervention is warranted (6) where there is a lack
of jurisdiction on the part of the tribunal conducting the
proceedings, where the organization exceeds its powers, or
where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).
In accordance with the general rules as to judicial interference cited above,
the decision of an unincorporated association on the question of an
election to office is a matter peculiarly and exclusively to be determined
by the association, and, in the absence of fraud, is final and binding on the
courts. (7 C.J.S., p. 44).
The instant controversy between petitioner So and respondent Josefa falls
squarely within the ambit of the rule of judicial non-intervention or non-
interference. The elections in dispute, the manner by which it was conducted
and the results thereof, is strictly the internal affair that concerns only
the Lions association and/or its members, and We find from the records that
the same was resolved within the organization of Lions Clubs
International in accordance with the Constitution and By-Laws which
are not immoral, unreasonable, contrary to public policy, or in
contravention of the laws of the land
Department, Lions Clubs International in his letter dated July 8, 1982 and
marked Annex "K" to the petition, p. 79, Records. Petitioner attended and
completed the District Governors' Executive Seminar as District Governor of
301-Al (see Annex "L", P. 80, Records). On June 29, 1982, petitioner So was
proclaimed, sworn to and installed to office as District Governor of District
301-Al by the President of Lions International at the close of the 65th Lions
Clubs International Convention held in Atlanta, Georgia, U.S.A
The findings upon the evidence submitted and examined at the hearing of
the election protest before the Committee personally attended by both
petitioner So and respondent Josefa may not be disturbed by the courts. The
decision of the Association's tribunal, the International Board of Directors, is
controlling since respondent Josefa alleges no invasion of this property or
civil rights and neither is it claimed that the government of the Association
is not fairly and honestly administered in conformity with its laws and the law
of the land.
E. PLACE OF MEETINGS
Sec. 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.
PLACE OF MEETING: another distinctive feature of a non-stock
corporation is that membership meeting may be held anywhere in the
Philippines whereas in a stock corporation, the stockholders’ meeting is
mandated to be held or conducted within the city or municipality where the
principal office is located, and as far as practicable, within the
principal office of the corporation.
F. DISTRIBUTION OF ASSETS UPON DISSOLUTION
Corporations, stock and non-stock, may be dissolved in accordance and
pursuant to the provisions of Sections 118 to 121 of the Corporation
Code and the pertinent provisions of P.D. 902-A, as amended. If such be the
case, the assets of the corporation are to be distributed in accordance with
law and established jurisprudence.
Sec. 94. Rules of distribution. - In case dissolution of a non-
stock corporation in accordance with the provisions of this Code, its assets
shall be applied and distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution, shall
be returned, transferred or conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition requiring return, transfer
or conveyance by reason of the dissolution, shall be transferred or conveyed
to one or more corporations, societies or organizations engaged in activities
in the Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted pursuant to this
Chapter;
4. Assets other than those mentioned in the preceding paragraphs, if any,
shall be distributed in accordance with the provisions of the articles of
incorporation or the by-laws, to the extent that the articles of
incorporation or the by-laws, determine the distributive rights of members,
or any class or classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may
be specified in a plan of distribution adopted pursuant to this Chapter.
CLOSE CORPORAIONS: must contain the three provisions required to
be indicated in the AOI as provided by Sec. 96. Absent any of the
Sec. 95. Plan of distribution of assets. - A plan providing for
the distribution of assets, not inconsistent with the provisions of this Title,
may be adopted by a non-stock corporation in the process of dissolution
in the following manner:
The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission thereof to
a vote at a regular or special meeting of members having voting rights.
Written notice setting forth the proposed plan of distribution or a summary
thereof and the date, time and place of such meeting shall be given to each
member entitled to vote, within the time and in the manner provided in this
Code for the giving of notice of meetings to members. Such plan of
distribution shall be adopted upon approval of at least two-thirds (2/3) of
the members having voting rights present or represented by proxy at
such meeting.
Culled from the law is that non-stock corporations may provide in the AOI or
by-laws, for the distribution of its assets among its members subject to the
provisions of Sec. 94 and 95. That is, the exception relative to assets which it
holds upon some trust. In which event, the claims of the state, beneficiaries,
rightful owners or donors will have to be considered. Thus, assets not subject
to the provisions of number 2-4 of Sec. 94 may be distributed in accordance
with a plan of distribution thereof in accordance with the rule established in
Sec. 95 of the Code.
CHAPTER 15: CLOSE CORPORATION
A. DEFINITION
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.
The ultimate effect of the special provisions of the law on close corporations
is to furnish another form of business organization – a ―de facto
corporation with a corporate shell‖. It is referred to sometimes as a hybrid
of both the corporate and partnership forms, an ―incorporated
partnership‖ or ―corporation de jure but a de facto partnership‖.
This is because a close corporation may partake the nature of a partnership
in that the stockholders thereof take an active role in the management of the
corporate affairs either as directors, officers or even perhaps as partners in
management which is akin to the partnership form of business. This, in fact,
is the main distinction between a close corporation and the ordinary stock
corporation where, in the latter, the stockholders have hardly a voice in
management except perhaps to elect the directors.
Despite this, the stockholders who are active in management still enjoy
limited liability to the extent of their subscription in so far as corporate
obligations are concerned. It will be noted, however, that under no. 5 of Sec.
100 of the Code, they are made personally liable for corporate torts unless
they have obtained a reasonably adequate insurance liability.
provisions required by the said section, the corporation, will not, for all legal
intents and purposes, be considered as a close corporation and would
thus not be governed by TITLE XII of the Code, but by the general
provisions governing ordinary corporation. ―A corporation does not become
a close corporation just because man and his wife owns 99.86% if the
capital stock‖ (San Juan Structural Steel vs. CA). The qualifying conditions
requreid by law must be complied with.
2/3 OWNED BY ANOTHER CORPORATION: Even if another
corporation owns or controls 2/3 of the ―voting‖ stocks of a close
corporation, the latter may still be considered as such close corporation if
the corporation owning or controlling the shares is also a close corporation.
BUSINESS WITH PUBLIC INTEREST: may not be formed as
close corporation under the second paragraph of Sec. 95. Sec. 140 of the
Code lays down a similar policy authorizing NEDA to recommend to the
legislature the setting of maximum limits to family or group ownership
of stock in corporations vested with public interest, and the determination
of whether or not it should be vested with public interest within its domain.
B. PERMISSIVE PROVISIONS
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.
CLASSIFICATION OF SHARES: Under no. 1 above, the close
corporation may classify its shares into different classes to be held of
record only by specified persons. Example: Classes A, B and C. Class A is to
be held only by the incorporators; Class B by their relatives within the
third civil degree of consanguinity or affinity; Class C by their close business
associates.
CLASSIFICATION OF DIRECTORS: Under no. 2 above, a
close corporation may provide for a classification of directors into one or
more class, each of whom may be voted for and elected solely by a
particular class of stock. Example: 1,000 Class A shares; 500 Class B shares;
and 200 Class C shares. The AOI may provide that each class shall have a
representation in the BOD regardless of the number of shares within each
class. So, if the close corporation has 5 directors, then the AOI may allocate
3 directors for Class A shares, 1 for B and 1 for C. Within each class,
cumulative voting may also be exercised by the stockholders of such class to
elect their representative in the board. But to the extent that each class can
elect its own directors regardless of the number of shares in such class,
cumulative voting may, in effect be restricted. This is so because if there
is no provision for a classification of directors, then Class A stockholders,
by cumulating their votes (5x1000) will have 5,000 votes and can elect 3
directors with 1,666 votes each. Class B
number, and if the issuance or transfer of stock to any person would cause
shares, having 2,500 votes can vote 2 members and Class C shares having
only 1,000 votes cannot be guaranteed to any seat in the board.
QUORUM AND VOTING REQUIREMENT: a close corporation may
provide for a greater quorum or voting requirement under no. 3 above.
Although the AOI or by-laws of other stock corporations may provide for
greater quorum and voting requirements in directors’ meeting as provided
in Sec. 25 of the Code, those for stockholder’ meeting, unlike in a close
corporation, may not be altered or increased. This provisions in effect,
increases the veto power of the minority stockholders.
DIRECT MANAGEMENT BY STOCKHOLDERS: the AOI of the
close corporation may provide that the corporation shall be managed
by the stockholders rather than by the BOD. If such be the case, the
stockholders are deemed directors and are subject to all the rights and
liabilities of a director. However, their liability would be more extensive in
that they are personally lilable for torts unless, again, the corporation
has obtained reasonably adequate liability insurance. As distinguished
from the ordinary stock corporation, directors hereof are liable for
corporate torts only if they have been negligent or acted fraudulently in
the performance of their functions. As to what is ―reasonably adequate
liability insurance‖ would vary depending on the facts and circumstances of
the case.
In order that the provision allowing a close corporation to do away with
a BOD may be effective, the same must contain the continuing
provisions required in par. 2 of Sec. 97:
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.
ELECTION OF OFFICERS: Sec. 97 likewise allows the AOI of a
close corporation to provide that all officers or employees shall be
elected or appointed by the stockholders instead of the BOD.
C. EFFECT OF BREACH OF QUALIFYING CONDITIONS
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.
The restriction must be indicated not only in the AOI and the stock
certificates but also in the by-laws. The restrictions, however, shall not be
more onerous than granting existing stockholders or the corporation the
option to purchase the shares of the selling or transferring stockholder within
reasonable terms, conditions and period. If, after the expiration of the period,
the existing stockholders or the corporation fails to exercise the option, the
stockholder concerned may transfer his shares to any third person subject to
the provisions, however, of Sec. 99:
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
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.
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.
SALE OF SHARES: Apparently, a selling stockholder may not be able
to transfer his shares if to do so would violate the qualifying conditions
indicated in the AOI unless of course, all the stockholder consents to the
transfer or the AOI is amended (no. 5 above).
STOCKHOLDER: concerned is not, however, left without any recourse as
he may compel the close corporation to purchase his shares at their fair
value for any reason subject only to the condition laid down in Sec. 105.
TRANSFEREE: may rescind the transaction or to recover from the transferor
under any applicable warranty, express or implied.
D. STOCKHOLDERS‘ AGREEMENT
Sec. 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
Sec. 103. Amendment of articles of incorporation. - Any amendment to
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.
PRE-INCORPORATION AGREEMENTS: under par.1 do not
ordinarily survive the corporation in ordinary stock corporations unless it
has been ratified or adopted by the corporation after incorporation. Only in
such case may the corporation be bound by said agreement. In a close
corporation, these pre-incorporation agreements survive and continue to
be valid and binding, if such be the intent of the stockholders,
provided that the agreement is not inconsistent with the AOI
VOTING AGREEMENTS or rights or the manner of exercising voting
rights under par. 2 may be the subject of agreement of stockholders, such
as to vote for a specific person or group or to maintain a certain
stockholder as their president or chairman.
CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be
the subject of an agreement, in writing, and will be effective and binding
despite the fact that it may make them partners among themselves.
Agreements may also be entered into by and between the stockholders of a
close corporation which relates to the management of the corporate affairs
which would not otherwise be valid and binding in other corporations.
This is because stockholders’ agreement in the latter cannot limit or
restrict the discretion and powers of the BOD to manage the corporate
affairs.
E. WHEN BOARD MEETINGS NOT NECESSARY:
As a rule, directors in ordinary stock corporations must act as a body at a
duly constituted meeting to have a valid corporate transaction. In a
close corporation, directors may validly act even without a meeting subject
only to the conditions laid down in the Code under Sec. 101:
Sec. 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.
F. PRE-EMPTIVE RIGHTS
Sec. 102. Pre-emptive right in close corporations. - The pre-
emptive right of stockholders in close corporations shall extend to all
stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate debts,
unless the articles of incorporation provide otherwise.
G. AMENDMENTS TO ARTICLES OF INCORPORATION
the articles of incorporation which seeks to delete or remove any stockholder in ordinary stock corporation only upon the exercise of
provision required by this Title to be contained in the articles of his appraisal right in those instances allowed under Sec. 81 of the Code.
incorporation or to reduce a quorum or voting requirement stated in said
articles of incorporation shall not be valid or effective unless approved by Likewise a corporation may be dissolved on petitioner of only one
the affirmative vote of at least two-thirds (2/3) of the outstanding stockholder on the grounds indicated in Sec. 105 which include even mere
capital stock, whether with or without voting rights, or of such greater dishonesty. It provides:
proportion of shares as may be specifically provided in the articles of
incorporation for amending, deleting or removing any of the aforesaid Sec. 105. Withdrawal of stockholder or dissolution of corporation.
provisions, at a meeting duly called for the purpose. -In addition and without prejudice to other rights and remedies available to
a stockholder under this Title, any stockholder of a close corporation may,
H. DEADLOCKS 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
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the corporation has sufficient assets in its books to cover its debts and
the articles of incorporation or by-laws or agreement of stockholders of a liabilities exclusive of capital stock: Provided, That any stockholder
close corporation, if the directors or stockholders are so divided of a close corporation may, by written petition to the Securities
respecting the management of the corporation's business and affairs that and Exchange Commission, compel the dissolution of such corporation
the votes required for any corporate action cannot be obtained, with the whenever any of acts of the directors, officers or those in control of the
consequence that the business and affairs of the corporation can no corporation is illegal, or fraudulent, or dishonest, or oppressive or
longer be conducted to the advantage of the stockholders generally, unfairly prejudicial to the corporation or any stockholder, or whenever
the Securities and Exchange Commission, upon written petition by any corporate assets are being misapplied or wasted.
stockholder, shall have the power to arbitrate the dispute. In the exercise
of such power, the Commission shall have authority to make such order J. CLOSE CORPORATION VS. ORDINARY STOCK CORPORATION
as it deems appropriate, including an order: (1) canceling or altering
any provision contained in the articles of incorporation, by-laws, or
any stockholder's agreement; (2) canceling, altering or enjoining any
resolution or act of the corporation or its board of directors, stockholders,
or officers; (3) directing or prohibiting any act of the corporation or its
board of directors, stockholders, officers, or other persons party to the
action; (4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the availability of
unrestricted retained earnings in its books, or by the other stockholders;
(5) appointing a provisional director; (6) dissolving the corporation; or
(7) granting such other relief as the circumstances may warrant.

A provisional director shall be an impartial person who is neither

a stockholder nor a creditor of the corporation or of any subsidiary or
affiliate of the corporation, and whose further qualifications, if any,
may be determined by the Commission. A provisional director is not a
receiver of the corporation and does not have the title and powers of
a custodian or receiver. A provisional director shall have all the rights and
powers of a duly elected director of the corporation, including the right to
notice of and to vote at meetings of directors, until such time as he shall
be removed by order of the Commission or by all the stockholders.
His compensation shall be determined by agreement between him
and the corporation subject to approval of the Commission, which may
fix his compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation.

The provision above-quoted gives the SEC a very wide discretion in respect
to management of a close corporation in the event of a deadlock. It may:
1. Cancel or alter any provision in the AOI, by-laws or any
stockholders’ agreement;
2. Cancel, alter or enjoin any resolution or other act of the corporation
or its BOD, stockholders or officers;
3. Prohibit any act of the corporation or its BOD, stockholders or officers
or other persons party to the action;
4. Requiring the purchase of the par value of the shares of
any stockholders, either by the corporation regardless of
availability of unrestricted retained earnings, or by the other
shareholders;
5. Appointment of a provisional director; - the second paragraph of
Sec. 104 will govern. The provisional director may break the
deadlock by casting the deciding vote.
6. Dissolving the corporation; or
7. Other relief as the circumstances may warrant.

I. WITHDRAWAL OF STOCKHOLDERS/DISSOLUTION

If a stockholder wishes to withdraw therefrom, he may do so ―for

any reason‖ and compel the corporation to purchase his shares at their fair
value provided only that the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital stock. This can be
done by a
 CLOSE CORPORATION ORDINARY STOCK CORPORATION

The number of stockholders cannot exceed 20 No limitation as to number of shareholder

To the extent that all stockholders can be deemed directors, the Maximum number of directors is 15
number of directors can effectively be more than 15

Shares of stock are subject to specified restrictions Generally no restriction on transfer of shares

Shares of stock are prohibited from being listed in the stock exchange or No prohibition
offered for sale to the public

Stockholders may take an active part in corporate management by vesting Management is lodged in the Board of Directors
management to them rather than a Board of Director

Those active in management are personally liable for corporate torts Directors are liable for torts only if they have acted negligently or
unless the corporation has obtained an adequate liability insurance fraudulently

Directors can validly act even without a meeting Directors must, as a rule, act as a body at a duly constituted meeting

Agreements between stockholders regarding the operations of the Not valid and binding since stockholders’ agreement cannot limit
business can validly be made the discretion of the Board to manage corporate affairs

To the extent that directors may be classified into one or more classes Ordinarily, no such classification and no restrictions on cumulative voting
and to be voted solely by a particular class of stock, cumulative voting
may, in effect, be restricted

The articles of incorporation may provide that all officers shall be Officers are elected by the Board of Directors
elected or appointed by the stockholders

It may provide for greater quorum and voting requirements in meetings Although the articles of incorporation or by-laws may provide for greater
of stockholders and directors quorum and voting requirements in directors’ meeting under section 25,
those for stockholders’ meeting cannot generally be altered

Restriction on transfer of shares should be indicated in the articles of Valid and binding if indicated in the articles of incorporation and stock
incorporation, by-laws and stock certificates certificates

Pre-emptive rights of stockholders is broader as it include all issues Pre-emptive rights may be denied as provided for in section 39

without exception
A stockholder may withdraw Unless he sells his shares, FACTS: Manuel Dulay, president of petitioner Manuel Dulay Enterprises,
and compel the corporation to a stockholder cannot get back Inc., through Board Resolution No. 18 sold the subject property,
purchase his shares for any reason his investment nor compel known as the Dulay Apartment, to private respondent Maria
with the limitation only that the the corporation to Theresa Veloso where a Memorandum to the Deed of Absolute Sale
corporation has sufficient assets buy his shares except in the was executed giving Manuel Dulay within 2 years to repurchase the
to cover its liabilities exclusive of exercise of his appraisal right property.
The proper forum may interfere Courts cannot interfere I
in the management of a the business judgment Respondent Veloso mortgaged said property to secure a loan from
close corporation in case of the directors/stockholders private respondent Manuel Torres. For non-payment of the said
of deadlocks under Section 104, ―BUSINESS JUDGMENT loan, Torres foreclosed the mortgage and was declared the highest
even of the directors/stockholders RULE‖ bidder in the public auction.
are acting in good faith
Any stockholder may petition Dissolution may be had only on For Dulay’s and Veloso’s failure to redeem said property, Torres applied
the SEC for corporate dissolution the grounds provided by the for consolidation of title, to which petitioner Virgilio Dulay, vice
on grounds among others, provides provisions of the Code on president of the corporation intervened alleging that Manuel Dulay was
for in section 105. dissolution and P.D. 902-A, as never authorized by the corporation to sell the property. Instead of
impleading Virgilio Dulay, Torres withdrew his petition and moved for its
MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY dismissal which was granted.
AND NEPOMUCENO REDOVAN, petitioners,
vs. Later on, Torres and Edgardo Pabalan, real estate administrator of
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, Torres, filed an action against petitioners (Redovan as tenant of Dulay
MANUEL A. TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE Apartment) for the recovery of possession, sum of money and damages
C. VELOSO, respondents. with preliminary injunction.
(G.R. No. 91889; August 27, 1993)
Private respondents and Torres later on filed an action against
spouses Florentino Manalastas, a tenant of Dulay Apartment with
petitioner corporation for ejectment.
The MTC decided in favor of respondents which was affirmed by the RTC
and later by the CA.
ISSUE: WON 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?
HELD: No. Section 101 of the Corporation Code of the Philippines provides:
Sec. 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 acquiese 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 directors' meeting is held without 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.
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, 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 his case, petitioner Virgilio
Dulay failed to do.
Petitioners' claim that the sale of the subject property by its
president, Manuel Dulay, to private respondents spouses Veloso is null and
void as the alleged Board Resolution No. 18 was passed without the
knowledge and consent of the other members of the board of directors
cannot be sustained. As correctly pointed out by the respondent Court of
Appeals:
Appellant Virgilio E. Dulay's protestations of complete innocence to
the effect that he never participated nor was even aware of any
meeting or resolution authorizing the mortgage or sale of the subject
premises (see par. 8, affidavit of Virgilio E. Dulay, dated May 31, 1984,
p. 14, Exh. "21") is difficult to believe. On the contrary, he is very
much privy to the transactions involved. To begin with, he is a
incorporator and one of the board of directors designated at the time of
the organization of Manuel R. Dulay Enterprise, 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.
Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being
close relatives namely, three (3) children and their father whose
name identifies their corporation (Articles of Incorporation of Manuel
R. Dulay Enterprises, Inc. Exh. "31-A").
Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed
an affidavit that he was a signatory witness to the execution of the post-
dated Deed of Absolute Sale of the subject property in favor of private
respondent Torres indicates that he was aware of the transaction executed
between his father and private respondents and had, therefore,
adequate knowledge about the sale of the subject property to private
respondents.
Consequently, 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. As stated by the trial court:
. . . 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 and the only non-relative in
the board of directors was Atty. Plaridel C. Jose who appeared on
paper as the secretary. There is no denying the fact, however, that
Maria Socorro R. Dulay at times acted as secretary. . . ., the Court can
not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is
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.
SERGIO F. NAGUIAT, doing business under the name and style SERGIO
F. NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC.,
petitioners, vs.
NATIONAL LABOR RELATIONS COMMISSION (THIRD
DIVISION),
NATIONAL ORGANIZATION OF WORKINGMEN and its members, LEONARDO
T. GALANG, et al., respondents.
(G.R. No. 116123; March 13, 1997)
FACTS: Private respondents were employed as taxi drivers of Clark Field
Taxi, Inc. which held a concessionaire’s contract with Army Air Force
Exchange Services (AAFES) for the operation of taxi services within the Clark
Air Base.
Due to the phase-out of the US Military Bases in the Philippines, which Clark
Air Base was not spared, the AAFES was dissolved and the services of
individual respondents were officially terminated.
The AAFES Taxi Drivers’ Association (drivers union) and CFTI agreed on a
separation pay of P500 per year of service to which private respondents did
not agree.
Private respondents filed a complaint against Sergio Naguiat, president of
CFTI, doing business under the name and style of Sergio F. Naguiat
Enterprises, Inc., AAFES and the drivers’ union for separation pay which was
granted by the Labor Arbiter at P1,200 per year of service for humanitarian
considerations.
On appeal, the NLRC granted separation pay to private respondents.
ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily
liable with CFTI?
HELD: No. From the evidence proffered by both parties, there is no
substantial basis to hold that Naguiat Enterprises is an indirect employer of
individual respondents much less a labor only contractor. On the contrary,
petitioners submitted documents such as the drivers' applications for
employment with CFTI, and social security remittances and payroll of Naguiat
Enterprises showing that none of the individual respondents were its
employees. Moreover, in the contract between CFTI and AAFES, the former,
as concessionaire, agreed to purchase from AAFES for a certain amount
within a specified period a fleet of vehicles to be "ke(pt) on the road" by
CFTI, pursuant to their concessionaire's contract. This indicates that CFTI
became the owner of the taxicabs which became the principal investment
and asset of the company.
Private respondents failed to substantiate their claim that Naguiat
Enterprises managed, supervised and controlled their employment. It
appears that they were confused on the personalities of Sergio F. Naguiat
as an individual who was the president of CFTI, and Sergio F. Naguiat
Enterprises, Inc., as a separate corporate entity with a separate
business. They presumed that Sergio F. Naguiat, who was at the same
time a stockholder and director of Sergio F. Naguiat Enterprises, Inc., was
managing and controlling the taxi business on behalf of the latter. A closer
scrutiny and analysis of the records, however, evince the truth of the
matter: that Sergio F. Naguiat, in supervising the taxi drivers and
determining their employment terms, was rather carrying out his
responsibilities as president of CFTI. Hence, Naguiat Enterprises as a
separate corporation does not appear to be involved at all in the taxi
business.
And, although the witness insisted that Naguiat Enterprises was his employer,
he could not deny that he received his salary from the office of CFTI inside
the base.
Another driver-claimant admitted, upon the prodding of counsel for the
corporations, that Naguiat Enterprises was in the trading business while CFTI
was in taxi services.
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association
which, admittedly, was the union of individual respondents while still
working at Clark Air Base, states that members thereof are the employees
of CFTI and "(f)or collective bargaining purposes, the definite employer is
the Clark Field Taxi Inc."
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of
CFTI may be solidarily liable with CFTI?
PRIVATE SCHOOLS OR COLLEGES include any private institutions
HELD: Only Sergio F. Naguiat. Sergio F. Naguiat, in his capacity as president
of CFTI, cannot be exonerated from joint and several liability in the payment
of separation pay to individual respondents.
Sergio F. Naguiat, admittedly, was the president of CFTI who actively
managed the business. Thus, applying the ruling in A.C. Ransom, he
falls within the meaning of an "employer" as contemplated by the Labor
Code, who may be held jointly and severally liable for the obligations
of the corporation to its dismissed employees.
Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises
were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
states:
(5) To the extent that the stockholders are actively engage(d) 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. (emphasis supplied)
Nothing in the records show whether CFTI obtained "reasonably adequate
liability insurance;" thus, what remains is to determine whether there was
corporate tort.
Our jurisprudence is wanting as to the definite scope of "corporate tort."
Essentially, "tort" consists in the violation of a right given or the omission of
a duty imposed by law. Simply stated, tort is a breach of a legal duty.
Article 283 of the Labor Code mandates the employer to grant separation
pay to employees in case of closure or cessation of operations of
establishment or undertaking not due to serious business losses or financial
reverses, which is the condition obtaining at bar. CFTI failed to comply
with this law-imposed duty or obligation. Consequently, its stockholder who
was actively engaged in the management or operation of the business
should be held personally liable.
As pointed out earlier, the fifth paragraph of Section 100 of the
Corporation Code specifically imposes personal liability upon the
stockholder actively managing or operating the business and affairs of the
close corporation.
The Court here finds no application to the rule that a corporate officer cannot
be held solidarily liable with a corporation in the absence of evidence that he
had acted in bad faith or with malice. In the present case, Sergio Naguiat is
held solidarily liable for corporate tort because he had actively engaged in
the management and operation of CFTI, a close corporation.
Antolin T. Naguiat was the vice president of the CFTI. Although he carried
the title of "general manager" as well, it had not been shown that he had
acted in such capacity. Furthermore, no evidence on the extent of his
participation in the management or operation of the business was
proferred. In this light, he cannot be held solidarily liable for the obligations
of CFTI and Sergio Naguiat to the private respondents.
CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
A. CHAPTER I – EDUCATIONAL INSTITUTIONS
Sec. 106. Incorporation. - Educational corporations shall be governed
by special laws and by the general provisions of this Code.
EDUCATIONAL INSTITUTIONS are those that provide facilities
for teaching or instruction. It includes both public and private schools or
colleges and universities and are subject to the provisions of special laws
and by the general provisions of the Code.
PUBLIC SCHOOLS or those created by the government are, however,
subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Insofar as
they may be applicable however, the provisions of any special law or the
Corporation Code supplement the law of their creation.
for teaching, managed by private individuals or corporations which offer
courses of kindergarten, primary, intermediary or secondary instructions or
superior courses in vocational, technical, professional or special schools
by which diploma or certificates are to be granted or titles and degrees
conferred (Sec. 2, Act No. 2076, as amended by CA 180).
These instructions of learning once recognized by the government as such
are mandated by law to be incorporated within 90 days under the provisions
of the Corporation Code and must, perforce, comply with the requirements
and procedure laid down thereunder. (Sec. 5, supra)
Their failure to do so will not immune the educational institution from suit
as a corporation (Chang Kai Shek School vs. CA; April 18, 1989, supra)
The SEC, however, shall not act on the incorporation of any educational
corporation, unless the provision of Sec. 107 is complied with:
Sec. 107. Pre-requisites to incorporation. - Except upon
favorable recommendation of the Ministry of Education and Culture, the
Securities and Exchange Commission shall not accept or approve
the articles of incorporation and by-laws of any educational institution
BOARD OF DIRECTORS/TRUSTEES: or the governing board by any
name of an educational institution is similar in number as to any other
corporation except that in case it is non-stock, the number must be in
multiples of five (5). As compared to stock corporation, their number
may be within the vicinity of five (5) to fifteen (15).
TERM OF OFFICE: Members of the Board may hold office for five years
but they shall be staggered so that 1/5 of their number shall expire every
year. Sec. 108 provides:
Sec. 108. Board of trustees. - Trustees of educational
institutions organized as non-stock corporations shall not be less than five
(5) nor more than fifteen (15): Provided, however, That the number of
trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or 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.
CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2,
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and
Sports)
Educational institutions, other than those established by religious groups
and mission boards, shall be owned solely by citizens of the
Philippines or corporations or associations at least sixty per centum of the
capital of which is owned by such citizens. The Congress may, however,
require increased Filipino equity participation in all educational
institutions. The control and administration of educational institutions
shall be vested in citizens of the Philippines.
No educational institution shall be established exclusively for aliens and no
group of aliens shall comprise more than one-third of the enrollment in any
From and after the filing with the Securities and Exchange Commission of the
said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of
the religious denomination, sect or church theretofore administered or
managed by him as such chief archbishop, bishop, priest, minister, rabbi or
member of the governing board thereof. Neither may they act as an officer
with the power of control and administration of the institution. In effect
their ownership of any capital would be limited to ―non-controlling‖ interest.
B. CHAPTER II - RELIGIOUS CORPORATIONS
REGLIGIOUS CORPORATIONS are those composed entirely of
spiritual persons, which are created for the furtherance of religion or
perpetuating the rights of the church or for the administration of church or
religious work or property.
CLASSES OF RELIGIOUS CORPORATIONS:
Sec. 109. Classes of religious corporations. - Religious corporations
may be incorporated by one or more persons. Such corporations may be
classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general
provisions on non-stock corporations insofar as they may be applicable.
C. CORPORATION SOLE
CORPORATION SOLE: consists of one person only and his successor
in some particular station, who are incorporated by law in order to give
them some legal capacities and advantages, particularly that of perpetuity,
which in their natural persons they could not have had.
PURPOSE OF INCORPORATION AND PERSONS WHO MAY
INCORPORATE:
Sec. 110. Corporation sole. - For the purpose of administering
and managing, as trustee, the affairs, property and temporalities of any
religious denomination, sect or church, a corporation sole may be formed by
the chief archbishop, bishop, priest, minister, rabbi or other presiding
elder of such religious denomination, sect or church.
CONTENTS OF THE ARTICLES OF INCORPORATION:
Sec. 111. Articles of incorporation. - In order to become a
corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file with
the Securities and Exchange Commission articles of incorporation setting
forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination,
sect or church are not inconsistent with his becoming a corporation sole and
do not forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
filled, according to the rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation.
PROCEDURE FOR THE ORGANIZATION:
presiding elder shall be held in trust by him as a corporation sole, for the
use, purpose, behalf and sole benefit of his religious denomination,
sect or church, including hospitals, schools, colleges, orphan asylums,
parsonages and cemeteries thereof.
TERM OF EXISTENCE: As can be gleaned from the law, the AOI of a
corporation sole does not require a provision for its term of existence. For
obvious reasons, since a corporation sole is supposed to exist in perpetuity. It
may, however, be dissolved in accordance with Sec. 115 of the Code.
BEGINNING OF CORPORATE EXISTENCE: is upon filing of the
verified AOI with the SEC and the documents required under Sec. 112. This
serves as an exception to the rule that a corporation acquires juridical
personality only upon the issuance of a certificate of incorporation by the
said government agency.
POWER TO ALIENATE PROPERTIES, LIMITATION: The extent of the
its power to mortgage or sell real properties is, however, subject to
certain restriction, that is, a proper court order must first be secured
for that purpose, which is not otherwise imposed in any other
corporation. Intervention of the court may dispensed with only if the
rules, regulations and discipline of the religious denomination, sect or
church concerned provide or regulate the manner or method of holding or
alienating properties. Sec. 113 provides:
Sec. 113. Acquisition and alienation of property. - Any corporation
sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may receive
bequests or gifts for such purposes. Such corporation may sell or mortgage
real property held by it by obtaining an order for that purpose from the
Court of First Instance of the province where the property is situated upon
proof made to the satisfaction of the court that notice of the application for
leave to sell or mortgage has been given by publication or otherwise in such
manner and for such time as said court may have directed, and that it is to
the interest of the corporation that leave to sell or mortgage should be
granted. The application for leave to sell or mortgage must be made by
petition, duly verified, by the chief archbishop, bishop, priest, minister,
rabbi or presiding elder acting as corporation sole, and may be opposed
by any member of the religious denomination, sect or church represented
by the corporation sole: Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or
church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations and
discipline shall control, and the intervention of the courts shall not be
necessary.
OWNERSHIP OF PROPERTY: does not vest unto the head
upon registration of real property in the name of the corporation sole,
such devolving upon the church or congregation acquiring it.
CONSITUTIONAL LIMITATION, RE: 60% FILIPINO OWNED: does
not apply to corporation sole with regards ownership of real property in its
own name. It has thus been held that the Roman Catholic Church of
the Philippines, a corporation sole, has no nationality and that the framers of
the Constitution did not have in mind the religious corporation sole when
they provided that 60% of the capital of the corporation acquiring it
must be owned by Filipino citizens.
CHARACTER OF THE LAND: at the time of institution of
registration proceedings must first be determined before a corporation
sole, or any private corporation for that matter, can acquire the land
must first be determined. If it does not form part of public domain,
the constitutional prohibition against its acquisition by private corporation
will not apply. Thus, it has likewise been earlier held that under the
Public Land Act, alienable
We must therefore, declare that although a branch of the Universal Roman
public land may be subject to registration by a possessor if he, personally or
through his predecessors-in-interest, had openly continuously and exclusively
possessed the same for 30 years as the same is converted into private
property by mere lapse or completion of the said period.
THE ROMAN CATHOLIC APOSTOLIC ADMINISTRATOR OF DAVAO,
INC., petitioner,
s.
THE LAND REGISTRATION COMMISSION and THE REGISTER OF
DEEDS OF DAVAO CITY, respondents
(G.R. No. L-8451; December 20, 1957)
FACTS: Mateo Rodis executed a Deed of Sale in favor of the Roman Catholic
Apostolic Administrator of Davao, Inc., with Mgr. Clovit Thibault, a
Canadian citizen, as actual incumbent. When the deed of sale was
presented to the Register of Deeds of Davao for registration, the
latter required the corporation to submit an affidavit declaring that 60% of
the members thereof were Filipino citizens.
Entertaining some doubts as to the registrability of the deed of sale, the
Register of Deeds referred the matter to the Land Registration Commission
which held that by virtue of the provisions of Sec. 1 and 5 of Art. XIII of the
Philippine Constitution, the vendee was not qualified to acquire private lands
in the Philippines in the absence of proof that at least 60% of the capital,
property, or assets of the Roman Catholic Apostolic Administrator of Davao,
Inc. was actually owned or controlled by Filipino citizens.
ISSUE: WON the corporation sole may register the property transferred?
HELD: Yes. In solving the problem thus submitted to our consideration, We
can say the following: A corporation sole is a special form
of corporation usually associated with the clergy. Conceived
and introduced into the common law by sheer necessity, this legal creation
which was referred to as "that unhappy freak of English law" was
designed to facilitate the exercise of the functions of ownership carried on
by the clerics for and on behalf of the church which was regarded as the
property owner (See I Couvier's Law Dictionary, p. 682-683).
A corporation sole consists of one person only, and his
successors (who will always be one at a time), in some particular
station, who are incorporated by law in order to give them some
legal capacities and advantages, particularly that of perpetuity,
which in their natural persons they could not have had. In this
sense, the king is a sole corporation; so is a bishop, or dens, distinct from
their several chapters (Reid vs. Barry, 93 Fla. 849, 112 So. 846).
That leaves no room for doubt that the bishops or archbishops,
as the case may be, as corporation's sole are merely
administrators of the church properties that come to their
possession, in which they hold in trust for the church. It can also
be said that while it is true that church properties could be administered
by a natural persons, problems regarding succession to said properties
can not be avoided to rise upon his death. Through this legal fiction,
however, church properties acquired by the incumbent of a corporation sole
pass, by operation of law, upon his death not his personal heirs but to his
successor in office. It could be seen, therefore, that a corporation sole is
created not only to administer the temporalities of the church or religious
society where he belongs but also to hold and transmit the same to his
successor in said office. If the ownership or title to the properties do not
pass to the administrators, who are the owners of church properties?.
Bouscaren and Elis, S.J., authorities on cannon law, on their treatise
comment:
In matters regarding property belonging to the Universal Church and to
the Apostolic See, the Supreme Pontiff exercises his office of supreme
administrator through the Roman Curia; in matters regarding other church
property, through the administrators of the individual moral persons in
the Church according to that norms, laid down in the Code of Cannon
Law. This does not mean, however, that the Roman Pontiff is the owner
of all the church property; but merely that he is the supreme
guardian (Bouscaren and Ellis, Cannon Law, A Text and Commentary, p.
764).
Catholic Apostolic Church, every Roman Catholic Church in different
countries, if it exercises its mission and is lawfully incorporated in accordance
with the laws of the country where it is located, is considered an entity or
person with all the rights and privileges granted to such artificial being under
the laws of that country, separate and distinct from the personality of the
Roman Pontiff or the Holy See, without prejudice to its religious relations with
the latter which are governed by the Canon Law or their rules and
regulations.
The Corporation Law also contains the following provisions:
SECTION 159. Any corporation sole may purchase and hold real estate and
personal; property for its church, charitable, benevolent, or educational
purposes, and may receive bequests or gifts of such purposes. Such
corporation may mortgage or sell real property held by it upon
obtaining an order for that purpose from the Court of First Instance of
the province in which the property is situated; but before making the
order proof must be made to the satisfaction of the Court that notice of
the application for leave to mortgage or sell has been given by
publication or otherwise in such manner and for such time as said
Court or the Judge thereof may have directed, and that it is to the
interest of the corporation that leave to mortgage or sell must be made
by petition, duly verified by the bishop, chief priest, or presiding elder
acting as corporation sole, and may be opposed by any member of the
religious denomination, society or church represented by the corporation
sole: Provided, however, That in cases where the rules, regulations,
and discipline of the religious denomination, society or church concerned
represented by such corporation sole regulate the methods of acquiring,
holding, selling and mortgaging real estate and personal property, such
rules, regulations, and discipline shall control and the intervention of the
Courts shall not be necessary.
It can, therefore, be noticed that the power of a corporation sole to purchase
real property, like the power exercised in the case at bar, it is not restricted
although the power to sell or mortgage sometimes is, depending upon the
rules, regulations, and discipline of the church concerned represented by said
corporation sole. If corporations sole can purchase and sell real estate for its
church, charitable, benevolent, or educational purposes, can they register
said real properties? As provided by law, lands held in trust for specific
purposes me be subject of registration (section 69, Act 496), and the
capacity of a corporation sole, like petitioner herein, to register lands
belonging to it is acknowledged, and title thereto may be issued in its name
(Bishop of Nueva Segovia vs. Insular Government, 26 Phil. 300-1913).
Indeed it is absurd that while the corporations sole that might be in
need of acquiring lands for the erection of temples where the faithful can
pray, or schools and cemeteries which they are expressly authorized by law
to acquire in connection with the propagation of the Roman Catholic
Apostolic faith or in furtherance of their freedom of religion they could not
register said properties in their name. As professor Javier J. Nepomuceno
very well says "Man in his search for the immortal and imponderable, has,
even before the dawn of recorded history, erected temples to the Unknown
God, and there is no doubt that he will continue to do so for all time to
come, as long as he continues 'imploring the aid of Divine Providence'"
(Nepomuceno's Corporation Sole, VI Ateneo Law Journal, No. 1, p.
41, September, 1956). Under the circumstances of this case, We
might safely state that even before the establishment of the Philippine
Commonwealth and of the Republic of the Philippines every corporation
sole then organized and registered had by express provision of law the
necessary power and qualification to purchase in its name private lands
located in the territory in which it exercised its functions or ministry
and for which it was created, independently of the nationality of its
incumbent unique and single member and head, the bishop of the dioceses.
It can be also maintained without fear of being gainsaid that the Roman
Catholic Apostolic Church in the Philippines has no nationality
and that the framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
corporations sole when they provided that 60 per centum of the
capital thereof be owned by Filipino citizens.
THE DIRECTOR OF LANDS vs. CA (supra, POWER TO
ACQUIRE PROPERTY)
This being the case, the prohibition under the 1973 Constitution would have
FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
registration of a parcel of land which it claimed to have acquired by virtue of
a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and its predecessors-in-interest have been in actual, continuous, public,
peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
Director of Lands. The CFI and the CA ruled in favor of INC.
ISSUE: WON the registration of the land should be upheld?
HELD: As observed at the outset, had this case been resolved immediately
after it was submitted for decision, the result may have been quite adverse to
private respondent. For the rule then prevailing under the case of
Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
subsequent cases involving private respondent adverted to above', is that
a juridical person, private respondent in particular, is disqualified under
the 1973 Constitution from applying for registration in its name alienable
public land, as such land ceases to be public land "only upon the issuance of
title to any Filipino citizen claiming it under section 48[b]" of Commonwealth
Act No. 141, as amended. These are precisely the cases cited by petitioner
in support of its theory of disqualification.
Since then, however, this Court had occasion to re-examine the rulings in
these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437,
among others. Thus, in the recent case of Director of Lands v.
Intermediate Appellate Court, 146 SCRA 509, We categorically stated that
the majority ruling in Meralco is "no longer deemed to be binding
precedent", and that "[T]he correct rule, ... is that alienable public land
held by a possessor, personally or
through his predecessors-in-interest, openly,
continuously and exclusively for the prescribed statutory period [30
years under the Public Land Act, as amended] is converted to
private property by mere lapse or completion of said period, ipso
jure." We further reiterated therein the timehonored principle of non-
impairment of vested rights.
The crucial factor to be determined therefore is the length of time private
respondent and its predecessors-in-interest had been in possession of the
land in question prior to the institution of the instant registration
proceedings. The land under consideration was acquired by private
respondent from Aquelina de la Cruz in 1947, who, in turn, acquired by
same by purchase from the Ramos brothers and sisters, namely: Eusebia,
Eulalia, Mercedes, Santos and Agapito, in 1936. Under section 48[b] of
Commonwealth Act No. 141, as amended, "those who by themselves or
through their predecessors-in-interest have been in open, continuous,
exclusive and notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition or ownership,
for at least thirty years immediately preceding the filing of the
application for confirmation of title except when prevented by war or force
majeure" may apply to the Court of First Instance of the province where the
land is located for confirmation of their claims, and the issuance of a
certificate of title therefor, under the Land Registration Act. Said paragraph
[b] further provides that "these shall be conclusively presumed to
have performed all the conditions essential to a Government grant and
shall be entitled to a certificate of title under the provisions of this chapter."
Taking the year 1936 as the reckoning point, there being no showing
as to when the Ramoses first took possession and occupation of the land in
question, the 30-year period of open, continuous, exclusive and
notorious possession and occupation required by law was completed in 1966.
The completion by private respondent of this statutory 30-year period
has dual significance in the light of Section 48[b] of Commonwealth Act No.
141, as amended and prevailing jurisprudence: [1] at this point, the
land in question ceased by operation of law to be part of the public domain;
and [2] private respondent could have its title thereto confirmed
through the appropriate proceedings as under the Constitution then in
force, private corporations or associations were not prohibited from
acquiring public lands, but merely prohibited from acquiring, holding or
leasing such type of land in excess of 1,024 hectares.
If in 1966, the land in question was converted ipso jure into private land, it
remained so in 1974 when the registration proceedings were commenced.
no application. Otherwise construed, if in 1966, private respondent
could have its title to the land confirmed, then it had acquired a
vested right thereto, which the 1973 Constitution can neither impair nor
defeat.
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ROMAN CATHOLIC BISHOP OF
LUCENA, represented by Msgr. Jose T. Sanchez, and
REGIONAL TRIAL COURT, BRANCH LIII, LUCENA CITY, respondents
(G.R. No. 75042; November 29, 1988)
FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr.
Jose T. Sanchez, filed an application for confirmation of title to 4 parcels
of land which were said to have been obtained either by purchase or
donation dating as far back as 1928, which was granted by the CFI.
Against this decision, the Solicitor General filed a Motion for reconsideration
on the following grounds:
1. Article XIV, Section 11 of the New Constitution(1973) disqualifies a private
corporation from acquiring alienable lands for the public domain;
2. In the case at bar the application was filed after the effectivity on the New
Constitution on January 17, 1973;
which was denied by the lower court for lack of merit.
Still insisting of the alleged unconstitutionality of the registration (a
point which, incidentally, the appellant never raised in the lower court prior
to its Motion for Reconsideration), the Republic elevated this appeal, and
the IAC affirmed the lower court’s decision.
ISSUE: WON private respondent, corporation sole, is entitled to confirmation
of its title to the 4 parcels of land?
HELD: The parties herein do not dispute that since the acquisition of the
four (4) lots by the applicant, it has been in continuous possession and
enjoyment thereof, and such possession, together with its
predecessors-in-interest, covering a period of more than 52 years (at least
from the date of survey in 1928) with respect to lots 1 and 2, about 62
years with respect to lot 3, all of plan PSU-65686; and more than 39 years
with respect to the fourth parcel described in plan PSU-11 2592 (at least
from the date of the survey in 1940) have been open, public, continuous,
peaceful, adverse against the whole world, and in the concept of owner.
Petitioner argues that considering such constitutional prohibition,
private respondent is disqualified to own and register its title to the lots in
question. Further, it argues that since the application for registration was
filed only on February 2, 1979, long after the 1973 Constitution took effect
on January 17, 1973, the application for registration and confirmation of
title is ineffectual because at the time it was filed, private corporation
had been declared ineligible to acquire alienable lands of the public domain
pursuant to Art. XIV, Sec. 11 of the said constitution. (Rollo, p. 41)
The questioned posed before this Court has been settled in the case of
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA
509 [1986]) which reversed the ruling first enunciated in the 1982 case of
Manila Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982])
imposing the constitutional ban on public land acquisition by private
corporations which ruling was declared emphatically as res judicata on
January 7, 1986 in Director of Lands vs. Hermanos y Hermanas de Sta.
Cruz de Mayo, Inc., (141 SCRA 21 [1986]). In said case, (Director of Lands
v. IAC, supra), this Court stated that a determination of the character
of the lands at the time of institution of the registration
proceedings must be made. If they were then still part of the public
domain, it must be answered in the negative.
If, on the other hand, they were already private lands, the
constitutional prohibition against their acquisition by private corporation
or association obviously does not apply. In affirming the Decision of
the Intermediate Appellate Court in said case, this Court adopted the
vigorous dissent of the
then Justice, later Chief Justice Claudio Teehankee, tracing the line of cases
beginning with CARINO, in 1909, thru SUSI, in 1925, down to HERICO, in
1980, which developed, affirmed and reaffirmed the doctrine that open,
exclusive and undisputed possession of alienable public land for the period
prescribed by law creates the legal fiction whereby the land, upon completion
of the requisite period ipso jure and without the need of judicial or other
sanction, ceases to be public land and becomes' private property. (DIRECTOR
OF LANDS vs. IAC, supra, p. 518).
It must be emphasized that the Court is not here saying that a corporation
sole should be treated like an ordinary private corporation.
In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land
Registration Commission, et al. (L-8451, December 20,1957,102 Phil.
596). We articulated:
In solving the problem thus submitted to our consideration, We can say
the following: A corporation sole is a special form of corporation usually
associated with the clergy. Conceived and introduced into the common law
by sheer necessity, this legal creation which was referred to as "that
unhappy freak of English Law" was designed to facilitate the exercise of
the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See 1 Bouvier's
Law Dictionary, p. 682-683).
A corporation sole consists of one person only, and his successors (who
will always be one at a time), in some particular station, who are
incorporated by law in order to give them some legal capacities and
advantages, particulary that of perpetuity, which in their natural persons
they could not have had.
There is no doubt that a corporation sole by the nature of its Incorporation is
vested with the right to purchase and hold real estate and personal property.
It need not therefore be treated as an ordinary private corporation because
whether or not it be so treated as such, the Constitutional provision involved
will, nevertheless, be not applicable.
In the light of the facts obtaining in this case and the ruling of this Court in
Director of Lands vs. IAC, (supra, 513), the lands subject of this petition
were already private property at the time the application for confirmation
of title was filed in 1979. There is therefore no cogent reason to disturb the
findings of the appellate court.
VACANCY: in the office of the ―head‖ of the corporation, the
person authorized by the rules, regulations or discipline of the
denomination shall exercise all the powers and authority of the
corporation sole during such vacancy and until such vacancy has been
filled-up. The manner in which the vacancy is to be filled in clearly spelled
out in Sec. 114 of the Code:
Sec. 114. Filling of vacancies. - The successors in office of any
chief archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession to
office and shall be permitted to transact business as such on the filing with
the Securities and Exchange Commission of a copy of their commission,
certificate of election, or letters of appointment, duly certified by any notary
public.
During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized and
empowered by the rules, regulations or discipline of the religious
denomination, sect or church represented by the corporation sole to
administer the temporalities and manage the affairs, estate and properties of
the corporation sole during the vacancy shall exercise all the powers and
authority of the corporation sole during such vacancy.
Under the above-provision, it is required that the successor, in order to be
permitted to transact business as a corporation sole, must file with the SEC a
copy of his commission, certificate of election, or letter of appointment, duly
certified by a notary public.
DISSOLUTION:
Sec. 115. Dissolution. - A corporation sole may be dissolved and its
affairs settled voluntarily by submitting to the Securities and Exchange
Commission a verified declaration of dissolution.
The declaration of dissolution shall set forth: (NRAN)
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the
winding up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs.
DISSOLUTION BY JUDICIAL DECREE: is generally not allowed
because of the doctrine of separation of the Church and the State. However,
the State may exercise its police power if the corporation is being carried
out and is being used for illegal purposes.
D. RELIGIOUS SOCIETIES
Under common law, a religious society is a body of persons associated
together for the purpose of maintaining religious worship. The
religious society and the church are distinct bodies, independent of each
other, though they may exist with each other.
Under Philippine Law, a religious society, order, diocese, synod or district
organization of any religious denomination, sect or church may
incorporate for the administration of its temporalities or for the management
of its affairs, properties and estate in accordance with the Code:
Sec. 116. Religious societies. - Any religious society or religious order,
or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution, rules,
regulations, or discipline of the religious denomination, sect or church of
which it is a part, or by competent authority, may, upon written consent
and/or by an affirmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties and
estate by filing with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect
or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of
the body;
3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules, regulations or
discipline of the religious denomination, sect, or church of which it forms a
part;
4. That the religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be established
and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the
FACTS: Philippine Blooming Mills, Inc. (PBM), a corporation with corporate
existence of 25 years, entered into a lease contract with private respondents,
diocese, synod, or district organization, the board of trustees to be not less
than five (5) nor more than fifteen (15).
Apparent from the foregoing, is that a religious society is not mandated by
law to register as a corporation but may do so to acquire juridical personality
and for the purpose of administration of its temporalities and properties and
even to acquire properties of its own. Thus, it has been held that an
unincorporated religious association cannot acquire private agricultural
lands in the Philippines (Register of Deeds vs. Ung Sui Temple)
TERM OF EXITENCE: Like the corporation sole, the AOI of a
religious society need not contain a term of its existence as it is supposed
to exist in perpetuity.
BEGINNING OF CORPORATE EXISTENCE: is upon issuance of
the certificate of registration by the SEC. Absent any specific provision of the
law, it must be deemed to fall within the general rule under Sec. 19.
CHAPTER XVII: DISSOLUTION (TITLE XIV)
A. DISSOLUTION is the extinguishment of the corporate franchise
and the termination of corporate existence.
When a corporation is dissolved, it ceases to be a juridical entity and can no
longer pursue the business for which it was incorporated. It will nevertheless
continue as a body corporate for another period of three years from the time
it is dissolved but only for the purpose of winding up its affairs and the
liquidation of its assets.
B. METHODS OF DISSOLUTION
THREE WAYS OF
DISSOLUTION: 1. Expiration of
its corporate term;
2. Voluntary surrender of its primary franchise (voluntary dissolution); and
3. The revocation of its corporate franchise (involuntary dissolution)
Sec. 117, however, mentions only two methods:
Sec. 117. Methods of dissolution. - A corporation formed or
organized under the provisions of this Code may be dissolved
voluntarily or involuntarily.
This is rightfully so, because the expiration of corporate term can be
considered voluntary dissolution t being the intention of the stockholders that
it shall exist only for such period.
C. EXPIRATION OF CORPORATE TERM
A corporation registered under the Corporation Code, with the exception of
religious ones, is required to indicate its term of existence in the AOI. It
ceases to exist and is deemed automatically dissolved upon the expiration of
the term indicated thereat without the need of any formal proceedings.
EXTENSION: It is to be observed, however, that the original term of
existence indicated in the AOI is subject to extension in accordance with the
provisions of Sec. 11 and 37 of the Code. If such be the case, the corporation
continues to be possessed with juridical personality and may carry out its
business for the period of time granted by virtue of such extension.
The extension should nonetheless be made before the expiration of the
original term, but not earlier than 5 years prior to such expiration, otherwise
the corporation is dissolved, ipso facto.
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH
XXI, PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG
PEK @ BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG
TY @ VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF
RIZAL, PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS,
respondents (G.R. No. 63201; May 27, 1992)
whereby the latter shall lease the parcels of land owned by them to PBM for
a period of 20 years, extendible to another 20 years, provided that PBM
extend its corporate existence in accordance with law.
PBM introduced improvements on the land which were annotated with the
Register of Deeds.
Later on, PBM executed a deed of assignment in favor of PNB over its
leasehold rights and later on a real estate mortgage covering all the
improvements to secure a loan.
PBM filed a petition for registration of improvements in the titles of real
property of private respondents which was opposed by private
respondents on the ground that PBM failed to renew the contract of lease
and apply for extension of its corporate existence.
The CFI issued an order directing the cancellation of the inscriptions on
respondents’ certificates of title.
ISSUE: WON the cancellation of entries on respondents’ title is valid and
proper?
HELD: Yes. The contract of lease expressly provides that the term of the
lease shall be twenty years from the execution of the contract but can be
extended for another period of twenty years at the option of the lessee
should the corporate term be extended in accordance with law. Clearly, the
option of the lessee to extend the lease for another period of twenty years
can be exercised only if the lessee as corporation renews or extends its
corporate term of existence in accordance with the Corporation Code which
is the applicable law. Contracts are to be interpreted according to their
literal meaning and should not be interpreted beyond their obvious
intendment. Thus, in the instant case, the initial term of the contract of
lease which commenced on March 1, 1954 ended on March 1, 1974.
PBM as lessee continued to occupy the leased premises beyond that
date with the acquiescence and consent of the respondents as lessor.
Records show however, that PBM as a corporation had a corporate life of
only twenty-five (25) years which ended an January 19, 1977. It should
be noted however that PBM allowed its corporate term to expire without
complying with the requirements provided by law for the extension of
its corporate term of existence.
Section 11 of Corporation Code provides that a corporation shall exist for
a period not exceeding fifty (50) years from the date of incorporation
unless sooner dissolved or unless said period is extended. Upon the
expiration of the period fixed in the articles of incorporation in the absence
of compliance with the legal requisites for the extension of the period, the
corporation ceases to exist and is dissolved ipso facto (16 Fletcher 671
cited by Aguedo F. Agbayani, Commercial Laws of the Philippines, Vol. 3,
1988 Edition p. 617). When the period of corporate life expires, the
corporation ceases to be a body corporate for the purpose of continuing
the business for which it was organized. But it shall nevertheless be
continued as a body corporate for three 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 gradually to settle and close
its affairs, to dispose of and convey its property and to divide its assets
(Sec. 122, Corporation Code). There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the
dissolution of a corporation because the period of corporate
existence is provided in the articles of incorporation. When such
period expires and without any extension having been made
pursuant to law, the corporation is dissolved automatically
insofar as the continuation of its business is concerned. The
quo warranto proceeding under Rule 66 of the Rules of Court, as amended,
may be instituted by the Solicitor General only for the involuntary
dissolution of a corporation on the following grounds: a) when the
corporation has offended against a provision of an Act for its creation or
renewal; b) when it has forfeited its privileges and franchises by non-user;
c) when it has committed or omitted an act which amounts to a
surrender of its corporate rights, privileges or franchises; d) when it has
mis-used a right, privilege or franchise conferred upon it by law, or when
it has exercised a right, privilege or franchise in contravention of law.
Hence, there is no need for the SEC to
5. A copy of the resolution authorizing the dissolution must be certified by
make an involuntary dissolution of a corporation whose corporate term
had ended because its articles of incorporation had in effect expired by its
own limitation.
Considering the foregoing in relation to the contract of lease between the
parties herein, when PBM's corporate life ended on January 19, 1977 and
its 3-year period for winding up and liquidation expired on January 19, 1980,
the option of extending the lease was likewise terminated on January 19,
1977 because PBM failed to renew or extend its corporate life in
accordance with law. From then on, the respondents can exercise their right
to terminate the lease pursuant to the stipulations in the contract.
The rights of the lessor and the lessee over the improvements which the
latter constructed on the leased premises is governed by Article 1678 of the
Civil Code.
The provision gives the lessee the right to remove the improvements if the
lessor chooses not to pay one-half of the value thereof. However, in the case
at bar, the law will not apply because the parties herein have stipulated in
the contract their own terms and conditions concerning the improvements, to
wit, that the lessee, namely PBM, bound itself to remove the improvements
before the termination of the lease. Petitioner PNB, as assignee of PBM
succeeded to the obligation of the latter under the contract of lease. It could
not possess rights more than what PBM had as lessee under the contract.
Hence, petitioner was duty bound to remove the improvements before the
expiration of the period of lease as what we have already discussed in the
preceding paragraphs. Its failure to do so when the lease was terminated
was tantamount to a waiver of its rights and interests over the improvements
on the leased premises.
D. SURRENDER OF FRANCHISE (VOLUNTARY DISSOLUTION)
MODES OF VOLUNTARY DISSOUTION:
1. Voluntary Dissolution where no creditors are affected (Sec. 118);
2. Voluntary Dissolution where creditors are affected (Sec. 119);
3. Shortening of corporate term (Sec. 120).
1. VOLLUNTARY DISSOUTION WHERE NO CREDITORS ARE
AFFECTED:
Sec. 118. Voluntary dissolution where no creditors are affected. -
If dissolution of a corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution duly
adopted by the affirmative vote of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3)
of the members of a meeting to be held upon call of the directors or
trustees after publication of the notice of time, place and object of the
meeting for three (3) consecutive weeks in a newspaper published in the
place where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general
circulation in the Philippines, after sending such notice to each stockholder
or member either by registered mail or by personal delivery at least thirty
(30) days prior to said meeting. A copy of the resolution authorizing the
dissolution shall be certified by a majority of the board of directors or
trustees and countersigned by the secretary of the corporation. The
Securities and Exchange Commission shall thereupon issue the certificate of
dissolution.
FORMAL AND PROCEDURAL REQUIREMENTS:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member either by registered
mail or personal delivery at least thirty (30) days prior to the meeting
(scheduled by the board for the purpose of submitting the board action
to dissolve the corporation for approval of the stockholder or
members.);
3. Publication of the notice of time, place and subject of the meeting for
three (3) consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located or in a
newspaper of general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the stockholders owning
at least 2/3 of the outstanding capital stock or 2/3 of the members at
the meeting duly called for the purpose;
a majority of the board of directors or trustees and countersigned by the
 corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
FAILURE TO COMPLY: with the above requirements will have no effect
on the legal existence of the corporation. Elsewise stated, a corporation
benig a creation of the law by the grant of its existence by the State, may
only be dissolved in the manner prescribed by the law of its creation. Since
it is the State that grants its right to exist, it is only through the State which
can allow th termination of existence. Unless dissolved pursuant thereto, a
corporation does not cease to have a juridical personality.
A mere resolution by the stockholders or the BOD of a corporation to dissolve
the same does not affect the dissolution but that some other steps,
administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce)
2. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED
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 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.
FORMAL AND PROCEDURAL REQUIREMENTS:
1. Affirmative vote of the stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the members at a meeting
duly called for that purpose;
2. Petition for dissolution shall be filed with the SEC (the proper forum)
signed by a majority of its board of directors or trustees or other officers
having the management of its affairs, verified by the president or
secretary or one of its directors or trustees, setting forth all claims and
demands against it.
3. Issuance of an order by the SEC reciting the purpose of the
petition and fixing the date on or before which objections thereto may
be filed by any person, which date shall not be less than thirty days
nor more than sixty days after entry of the order.
4. Before such date, a copy of the order must be published once a week
for three (3) consecutive weeks in a newspaper of general circulation
published in the city or municipality where the principal office is situated
or in a newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks in three (3)
public places in such city or municipality.
6. Upon five (5) days’ notice, given after the date on which the right to
file objections has expired, the SEC shall hear the petition and try any
issue made by the objections filed.
7. Judgment dissolving the corporation and directing of its assets as justice
requires and the appointment of a receiver (if necessary in its discretion)
to collect such assets and pay the debts of the corporation
APPOINTMENT OF A RECEIVER: While the foregoing are
mandatory requirements, the appointment of a receiver is only permissive.
As can be gleaned from the second paragraph of Sec. 119, it uses the
phrase ―and may appoint a receiver‖, showing the clear intent of the aw
that the same is merely discretionary on the part of the proper forum. Such
language, held by the High Court, ―tends to recognize that in cases of
voluntary dissolution, there is no occasion for the appointment of a
receiver except under special circumstances and upon proper showing‖
(China Bank vs. Michellin)
3. DISSOLUTION BY SHORTENING CORPORATE TERM
Sec. 120 was inserted to incorporate the long standing practice of dissolving
a corporation by amendment of the AOI by shortening the
corporate existence.
A corporation may exist for 50 years, but there is no law which prevents the
shareholders thereof to shorten that period and effect a dissolution of the
corporation.
PERPETUAL SUCCESSION: In fact, a corporation may be given
the capacity of ―perpetual succession‖ like the corporation sole and the
religious society. It does not mean, however, that it shall continue to exist
forever. It merely means that it has the capacity of continuous
existence during a particular period or until dissolved in accordance with
law.
It may thus amend its AOI and provide a term of existence or shorten it
which may have the effect of a dissolution. Thus, while Sec. 115 of the Code
provides for the process and procedure for the dissolution of a corporation
sole, there is nothing in the law itself which would prohibit it from amending
its AOI. It is believed, however, that authorization for the dissolution by the
particular religious denomination, sect or church, as required in sub-
paragraph 3 of Sec. 115 would still be necessary in the case of amending the
AOI to affect dissolution.
Sec. 120. Dissolution by shortening corporate term. - A
voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions of
this Code. A copy of the amended articles of incorporation shall be submitted
to the Securities and Exchange Commission in accordance with this Code.
Upon approval of the amended articles of incorporation of the expiration of
the shortened term, as the case may be, the corporation shall be
deemed dissolved without any further proceedings, subject to the provisions
of this Code on liquidation.
SPECIAL AMENDMENT: Shortening of the corporate term with the effect
of dissolution is a special type of amendment covered and governed by
the special provisions of Sec. 37 of the Code. Thus, while the general
provision on amendment under Sec. 16 allows ―written assent‖ in
determining the voting requirement for ordinary amendments, sec. 37
mandates that the vote must be cast at a duly constituted meeting.
Likewise, sec. 16 provides that amendment of the AOI is deemed approved if
not acted upon by the SEC within 6 months from the date of filing for a
cause not attributable to the corporation. This is not applicable in
case of shortening the corporate term which will have the effect of
dissolution in Sec. 120, which requires the approval of the SEC.
E. INVOLUNTARY DISSOLUTION
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.
Culled from the above provision is that this is a dissolution is by judicial
decree.
JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by
the SC, actions, for quo warranto against corporations or against persons obligations, in conformity with existing laws
who usurps an office in a corporation fall under the jurisdiction of the SEC
(Unilongo, et. al. vs. CA; GR No. 123910; April 5, 1999).

This, however, is no longer exclusive and absolute in view of the

amendments introduced by the Securities Regulations Code (SRC) of 2000, or
RA 8799, which transferred the jurisdiction of the SEC under Sec. 5 of PD
902-A to the regional trial courts as designated by the SC (Sec. 5.2, RA
8799). The jurisdiction of the courts and the SEC over revocation proceedings
seems to be concurrent under the present set up since Sec. 5 of RA 8799,
particularly par. (m) thereof, provides that the SEC has the power to
―suspend, or revoke, after proper notice and hearing the franchise
and certificate of registration of corporations, partnership or associations,
upon any ground provided by law‖. This, despite the transfer of its
jurisdiction under the SRC.

GROUNDS FOR INVOLUNTARY DISSOLUTION: as provided under

Sec. 6 of PD 902-A: (FSRCFF)

1. Fraud in procuring its certificate of registration;

2. Serious misrepresentation as to what the corporation can do or
is doing to the great prejudice of or damage to the general public;
3. Refusal to comply or defiance of any lawful order of
the Commission restraining commission of acts which would amount
to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5) years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as determined by
the Commission within the prescribed period.

OTHER GROUNDS PROVIDED FOR IN THE CORPORATION

CODE: 1. Violation of any provision of the Code under section 144;
2. In case of deadlock in a close corporation as provided for in section
105; 3. In a close corporation, any acts of directors, officers or those in
control of the corporation which 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 under
section 105.

INVOLUNTARY DISSOLUTION: is a harsh remedy akin to a

capital punishment. Thus, it has been laid to rest in the case of
Government vs. Philippine Sugar Estate that courts proceed with extreme
caution which have for their object the forfeiture of corporate franchise, and
forfeiture will not be allowed, except under express limitation, or for plain
abuse of power by which the corporation fails to fulfil the design and
purpose of its organization. But when the abuse or violation constitutes or
threatens a substantial injury to the public or such as to amount to a
violation of the fundamental conditions of its charter, or its conduct is
characterized by ―obduracy or pertinacity in contempt of law‖, dissolution
will be granted.

Likewise, it has been held that the relief of dissolution will be awarded only
where no other adequate remedy is available and it will not be allowed
where the rights of the stockholders can be, or are, protected in some other
way.

THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellant,

vs.
THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO. (LTD.)
defendant-appellant
(G.R. No. L-11789; April 2, 1918)

FACTS: Defendant corporation by its charter is authorized among others:

j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y

Almacenes de Depositos, and, in this manner or otherwise, to engage
in any mercantile or industrial enterprise.

(k) With no other restrictions than those provided by law, place funds of
the corporation in hypothecary or pignorative loans, in public securities of
the United States, in stocks or shares issued by firms, corporations, or
companies that are legally organized and operated, and in rural and
urban property. It may also contract and guarantee all kinds of

These powers are necessarily limited by Sec. 75 of of the Act of Congress of
July 1, 1902, and by the section 13 Act of 1459, the latter being a
reproduction of the former, which is as follows:
That no corporation shall be authorized to conduct the business of buying
and selling real estate or be permitted to hold or own real estate except
such as may be reasonably necessary to enable it to carry out the
purposes for which it is created, . . . . Corporations, however, may loan
funds upon real estate, security, and purchase real estate when necessary
for the collection of loans, but they shall dispose of real estate so obtained
within five years after receiving the title . . .
The defendant corporation entered into a contract with The Tayabas Land
Company (TLC) where PSEC invested P400,000 in the TLC and that ―All
lands bought or which may be bought with the credit, which The Philippine
Sugar brings to The Tayabas Land Company and which lie within and
without the railway line from Pagbilao to Lopez, shall be held as security for
such credit, at their respective cost price, until their alienation, except the
part thereof which pertains to D. Mariano Lim in The Tayabas Land
Company‖ and that if TLC is to sell the land and its improvements at a
price lower than P0.50 per square meter TLC is to obtain the consent of
PSEC first.
An action for quo warranto was brought by the Attorney General for and in
behalf of the Government of the Philippine Islands for the purpose of having
the charter of the defendant corporation PSEC declared forfeited for engaging
in the ―buying and selling of real estate‖ along the right of way of
Manila Railroad Company with the view of reselling the same to Manila
Railroad for a profit; that it had continuously offended against the laws of
the Philippine Islands and had misused its corporate authority, franchise and
privileges and had assumed privileges and franchises not granted.
ISSUE: WON defendant corporation should be dissolved?
HELD: No. Section 212 of Act No. 190 provides a judgment which may be
defeat the purpose of the grant; and ordinarily the wrong or evil must be
one remediable in no other form of judicial proceeding.
Courts always proceed with great caution in declaring a forfeiture of
franchises, and require the prosecutor seeking the forfeiture to bring the
case clearly within the rules of law entitling him to exact so severe a
penalty. (People vs. North River Sugar Refining Co., 9 L.R.A., 33, 39;
State vs. Portland Natural Gas Co., 153, Ind., 483.)
While it is true that the courts are given a wide discretion in ordering the
dissolution of corporations for violations of its franchises, etc., yet
nevertheless, when such abuses and violations constitute or
threaten a substantial injury to the public or such as to amount to
a violation of the fundamental conditions of the contract (charter)
by which the franchises were granted and thus defeat the
purpose of the grant, then the power of the courts should be
exercised for the protection of the people.
Under the law the people of the Philippine Islands have guaranteed the
payment of the interest upon cost of the construction of the railroad which
occupied or occupies at least some of the lands purchased by the defendant.
Every additional dollar of increase in the price of the land purchased by the
railroad company added that much to the costs of construction and thereby
increased the burden imposed upon the people. The very and sole purpose of
the intervention of the defendants in the purchase of the land from the
original owners was for the purpose of selling the same to the Railroad
Company at profit — at an increased price, thereby directly increasing the
burden of the people by way of additional taxation. The purpose of the
intervention of the defendant in the transactions in question, was to enrich
itself at the expense of the taxpayers of the Philippine Islands, who had, by a
franchise granted, permitted the defendant to exist and do business as a
corporation. The defendant was not willing to allow the Railroad Company
to purchase the land of the original owners. Its intervention with The
Tayabas Land Company was to obtain an increase in the price of the land
in a resale of the same to the railroad company. The conduct of the
defendant in the premises merits the severest condemnation of the law.
rendered in said case:
When in any such action, it is found and adjudged that the corporation
has, by any act done or omitted surrendered, or forfeited its corporate
rights, privileges, and franchise, or has not used the same during the term
of five years, judgment shall be entered that it be ousted and excluded
therefrom and that it be dissolved; but when it is found and
adjudged that a corporation has offended in any matter or
manner which does not by law work as a surrender or forfeiture,
or has misused a franchise or exercised a power not conferred
by law, but not of such a character as to work a surrender
or forfeiture of its franchise, judgment shall be rendered that
it be ousted from the continuance of such offense or the exercise
of such power.
It will be seen that said section (212) gives the court a wide discretion in its
judgment in depriving corporations of their franchise. High, in his work on
Extraordinary Legal Remedies, says at page 606:
It is to be observed in the outset that the courts proceed with extreme
caution in the proceeding which have for their object the
forfeiture of corporate franchises, and a forfeiture will not be
allowed, except under express limitation, or for a plain abuse of
power by which the corporation fails to fulfill the design and
purpose of its organization.
In the case of State of Minnesota vs. Minnesota Thresher Manufacturing
Co. (3 L.R.A. 510) the court said (p. 518):
The scope of the remedy furnished by its (quo warranto) is to forfeit the
franchises of a corporation for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's charter to
show a misuser of its franchises justifying such a forfeiture. And as already
remarked the object being to protect the public, and not to redress private
grievances, the misuser must be such as to work or threaten a substantial
injury to the public, or such as to amount to a violation of the fundamental
condition of the contract by which the franchise was granted and thus
The judgment of the lower court should be modified. It is hereby ordered and
decreed that the franchise heretofore granted to the defendant by which it
was permitted to exist and do business as a corporation in the Philippine
Islands, be withdrawn and annulled and that it be disallowed to do and to
continue doing business in the Philippine Islands, unless it shall within a
period of six months after final decision, liquidate, dissolve and
separate absolutely in every respect and in all of its relations,
complained of in the petition, with The Tayabas Land Company,
without any findings to costs.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the
Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant
(G.R. No. L-26649; July 13, 1927)
FACTS: The Attorney General of the Government of the Philippine Islands
instituted the present quo warranto for the purpose of depriving
defendant corporation of its franchise upon 17 distinct causes of action,
the first of which is:
Plaintiff ―alleged illegal holding by the respondent of the title to real
property for a period in excess of five years after the property had been
bought in by the respondent at one of its own foreclosure sales. The
provision of law relevant to the matter is found in section 75 of Act of
Congress of July 1, 1902 (repeated in subsection 5 of section 13 of the
Corporation Law.) In both of these provisions it is in substance declared
that while corporations may loan funds upon real estate security and
purchase real estate when necessary for the collection of loans, they shall
dispose of real estate so obtained within five years after receiving the title‖
ISSUE: WON the corporation should be dissolved on the first cause of
action?
HELD: No. It is evident that the strict letter of the law was violated by the
respondent; but it is equally obvious that its conduct has not been
characterized by obduracy or pertinacity in contempt of the law. Moreover,
several facts connected with the incident tend to mitigate the offense.
It has been held by this court that a purchaser of land registered under the
Torrens system cannot acquire the status of an innocent purchaser for value
unless his vendor is able to place in his hands an owner's duplicate showing
the title of such land to be in the vendor (Director of Lands vs. Addison, 49,
Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results that prior to
May 7, 1921, El Hogar Filipino was not really in a position to pass an
indefeasible title to any purchaser. In this connection it will be noted that
section 75 of the Act of Congress of July 1, 1902, and the similar provision in
section 13 of the Corporation Law, allow the corporation "five years after
receiving the title," within which to dispose of the property. A
fair interpretation of these provisions would seem to indicate that the
date of the receiving of the title in this case was the date
when the respondent received the owner's certificate, or May 7,
1921, for it was only after that date that the respondent had an
unequivocal and unquestionable power to pass a complete title.
The failure of the respondent to receive the certificate sooner was
not due in any wise to its fault, but to unexplained delay on the
part of the register of deeds. For this delay the respondent cannot
be held accountable.
The question then arises whether the failure of the respondent to get rid of
the San Clemente property within five years after it first acquired the deed
thereto, even supposing the five-year period to be properly counted from
that date, is such a violation of law as should work a forfeiture of its
franchise and require a judgment to be entered for its dissolution in this
action of quo warranto.
Upon this point we do not hesitate to say that in our opinion the
corporation has not been shown to have offended against the law in a
manner that should entail a forfeiture of its charter. Certainly no court with
any discretion to use in the matter would visit upon the respondent and
its thousands of shareholders the extreme penalty of the law as a
perpetrated in the past, especially if its conduct had exhibited a willful
obduracy and contempt of law.
Third cause of action. — Under the third cause of action
the respondent is charged with engaging in activities foreign to
the purposes for which the corporation was created and not
reasonable necessary to its legitimate ends. The specifications
under this cause of action relate to three different sorts of
activities. The first consist of 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.
The second specification under the third cause of action has reference to the
administration and management of properties belonging to
delinquent shareholders of the association
The third specification under this cause of action relates to certain activities
which are described in the following paragraphs contained in the agreed
statements of facts:
El Hogar Filipino has undertaken 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
For the services so rendered in the management of such properties El
Hogar Filipino receives compensation in the form of commissions upon
the gross receipts from such properties at rates varying from two and
one-half per centum to five per centum of the sums so collected,
according to the location of the property and the effort involved in its
management.
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.
ISSUE2: WON the defendant should be dissolved on the above-ground?
consequence of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the
Code of Civil Procedure, as applied by this court in Government of the
Philippine Islands vs. Philippine Sugar Estates Development Co. (38 Phil.,
15). This section (212), in prescribing the judgment to be rendered
against a corporation in an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation has offended in any
matter or manner which does not by law work as a surrender or forfeiture,
or has misused a franchise or exercised a power not conferred by law, but
not of such a character as to work a surrender or forfeiture of its franchise,
judgment shall be rendered that it be outset from the continuance of such
offense or the exercise of such power.
This provision clearly shows that the court has a discretion with
respect to the infliction of capital punishment upon corporation and
that there are certain misdemeanors and misuses of franchises
which should not be recognized as requiring their dissolution.
Government of the Philippine Islands vs. Philippine Sugar Estates
Development Co.: (38 Phil., 15): In the PSEC, case, it was found that the
offending corporation had been largely (though indirectly) engaged in the
buying and holding or real property for speculative purposes in contravention
of its charter and contrary to the express provisions of law. Moreover, in that
case the offending corporation was found to be still interested in the
properties so purchased for speculative at the time the action was brought.
Nevertheless, instead of making an absolute and
unconditional order for the dissolution of the corporation, the
judgment of ouster was made conditional upon the failure of
the corporation to discontinue its unlawful conduct within six
months after final decision. In the case before us the respondent
appears to have rid itself of the San Clemente property many months
prior to the institution of this action. It is evident from this that the
dissolution of the respondent would not be an appropriate remedy in this
case. We do not of course undertake to say that a corporation might not
be dissolved for offenses of this nature
HELD: No. 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.
Fourth cause of action. — It appears that among the by-laws of
the association there is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of
an absolute majority of its members, is empowered to cancel
shares and to return to the owner thereof the balance resulting
from the liquidation thereof whenever, by reason of their
conduct, or for any other motive, the continuation as members
of the owners of such shares is not desirable.
ISSUE3: WON if the above by-law is invalid, the corporation may
be dissolved?
HELD: No. This by-law is of course a patent nullity, since it is in direct
conflict with the latter part of section 187 of the Corporation Law, which
expressly declares that the board of directors shall not have the power to
force the surrender and withdrawal of unmatured stock except in case of
liquidation of the corporation or of forfeiture of the stock for delinquency. It
is agreed that this provision of the by-laws has never been enforced, and in
fact no attempt has ever been made by the board of directors to make use of
the power therein conferred.
It is supposed, in the fourth cause of action, that the existence of this
article among the by-laws of the association is a misdemeanor on
the part of the respondent which justifies its dissolution. In this view
we are unable to concur. The obnoxious by-law, as it stands, is a mere
nullity, and could not be enforced even if the directors were to attempt to do
so. There is no provision of law making it a misdemeanor to incorporate an
invalid provision in the by-laws of a corporation; and if there were such, the
hazards incident to corporate effort would certainly be largely increased.
There is no merit in this cause of action.
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T.
RESUELLO, PABLO TANJUTCO, ARTURO SORIANO, RUBEN BELTRAN,
BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D.
BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR., respondents.
(G.R. No. L-20583; January 23, 1967)
FACTS: The AOI of defendant corporation were registered with the SEC on
March 27, 1961. Based on the opinion of legal counsel of the Central Bank of
the Philippines, that the defendant corporation is a banking institution, the
Monetary Board promulgated Resolution No. 1095, declaring that the
corporation is performing banking operations without having first complied
with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution,
the company still continued with its operations and was able to establish 74
branches all over the Philippines and induced the public to open 59,643
savings deposit accounts.
The Solicitor General initiated this quo warranto proceeding to dissolve said
company.
ISSUE: WON the company should be dissolved?
HELD: Yes. Although, admittedly, defendant corporation has not secured
the requisite authority to engage in banking, defendants deny that
its transactions partake of the nature of banking operations. It is
conceded, however, that, in consequence of a propaganda campaign
therefor, a total of 59,463 savings account deposits have been made by
2. On May 25, 1948, respondent corporation through its Board of
Directors, adopted a resolution authorizing it to acquire 1,024 hectares
of public land in Zamboanga and 10,000 hectares of timber concession
in Mindanao in violation of Section 6, Act No. 143);
3. In May, 1949, respondent office constituting themselves as Board of
Directors of respondent corporation, passed a resolution authorizing
the corporation to lease a pasture land of 2,000 hectares of cattle
ranch on a public land in Bayawan, Negros Occidental;
4. From August 1946 to the end of 1952, respondent corporation operated
a general merchandise store, a business which is neither for, nor
incidental to, the accomplishment of its principal business for which it
was organized, i.e., the operation of land and water transportation;
5. Respondent corporation snowed Mariano Cuenco and Manuel Cuenco
to act as president in 1945 to 1948 and 1953 to 1954, respectively,
when at that time, neither of them owned a single stock;
6. In violation of its charter and articles of incorporation, as well
as applicable statutes concerning its operation, it engaged in mining
by organizing the Jose P. Velez Coal Mines, and allowing said
corporation to use the facilities and assets of respondent corporation;
7. It imported and sold at black market prices to third persons truck spare
Parts, the of which were appropriated by respondent directors;
8. It paid its laborers and employees wages below the minimum wage law
to the great prejudice of its labor force, and in violation of the laws of
the state, manipulating its books and records so as to make it appear
that its laborers and employees were and have been paid their salaries
and wages in accordance with the minimum wage law;
9. It deliberately failed to maintain accurate and faithful stock and transfer
books since 1945 up to the filing of the petition, enabling it to defraud
the state, mislead the general public, its creditors, investors and its
stockholders by not accurately and faithfully making
a. an adequate, accurate and complete record of dividend distribution, and
b. an adequate, accurate and complete record of transfers of its stocks
Later on, the Solicitor General filed a motion for the dismissal of the
complaint which was granted by the lower court.
ISSUE: WON the lower court is correct in not dissolving the corporation?
the public with the corporation and its 74 branches, with an aggregate
deposit of P1,689,136.74, which has been lent out to such persons as the
corporation deemed suitable therefor. It is clear that these transactions
partake of the nature of banking, as the term is used in Section 2 of the
General Banking Act.
Accordingly, defendant corporation has violated the law by engaging in
banking without securing the administrative authority required in
Republic Act No. 337.
That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing
misuser of the corporate funds and franchise affects the
essence of its business, that it is willful and has been repeated
59,463 times, and that its continuance inflicts injury upon the
public, owing to the number of persons affected thereby.
Wherefore, the writ prayed for should be, as it is hereby granted and
defendant corporation is, accordingly, ordered dissolved.
REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
vs.
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO,
MANUEL CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and
FEDERICO A. REYES (Original Respondents); and ANTONIO V.
CUENCO, CARMEN CUENCO, DIOSCORO B. LAZARO and MANUEL V.
CUENCO, JR. (New Directors of respondent corporation), respondent-
appellees.
MIGUEL CUENCO, respondent-crossclaimant-appellant.
(G.R. No. L-31490; January 6, 1978)
FACTS: The Solicitor General initiated this quo warranto proceedings against
respondent corporation on the following nine causes of action:
1. To conceal its illegal transaction, respondent corporation falsely
reconstituted its articles of incorporation in July 1948 by adding new
cattle ranch, agriculture, and general merchandise;
HELD: Yes. After a very careful and deliberate consideration of the evidence
adduced by petitioner, the lower court came to the conclusion that the same
did not really warrant a quo warranto by the State that could truly justify to
decapitate corporate life, and that the corporate acts or missions complained
of had not resulted in substantial injury to the public, nor were they wilful
and clearly obdurate. The court found that the several acts of misuse and
misapplication of the funds and/or assets of the Bisaya Land Transportation
Co., Inc. were committed new particularly by the respondent Dr. Manuel
Cuenco with the cooperation of Jose P. Velez, for the commission of which
they may be personally held liable. There appears to be no reason for us to
disregard the findings of the trial court, which, applying well settled
doctrines, ought to be given due weight and credit (De la Rama vs. Ma-ao
Sugar Central, L-17504 & L-17506, Feb. 28, 1969). Besides, the court a quo
found that the controversy between the parties was more personal
than anything else and did not at all affect public interest.
The Solicitor General himself asserts that the only purpose of his ration for
the of this quo warranto is to take the State out of an unnecessary court
litigation, so that the dismissal of the case would result in the disposition
solely of the quo warranto by and between petitioner Republic of the
Philippines and the respondents named therein. Other interested parties who
might feel aggrieved, therefore, would not be without their remedies since
they can still maintain whatever claims they may have against each other. It
has been held that relief by dissolution will be awarded only where
no other adequate remedy is available, and is not available where
the rights of the stockholders can be, or are, protected in some
other way (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813,
citing "Thwing vs. McDonald", 134 Minn. 148,156 N.W. 780,158 N.W.
820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell vs. Bank of St. Paul, 7
Minn. 252, cited in De la Rama vs. Ma-ao Sugar Central, supra).
ACCORDINGLY, without prejudice to the rights of the private parties herein
to take proper steps to enforce whatever causes of action they may
have
against each other, the order of the lower court embodied in its "Resolution"
dated April 3, 1968, granting the Solicitor General's motion to dismiss the
quo warranto proceedings is hereby upheld.
FINANCING CORPORATION OF THE PHILIPPINES and J. AMADO
ARANETA, petitioners,
vs.
HON. JOSE TEODORO, Judge of the Court of First Instance of
Negros Occidental, Branch II, and ENCARNACION LIZARES
VDA. DE PANLILIO, respondents
(G.R. No. L-4900; August 31, 1953)
FACTS: In civil case No. 1924 of the Court of First Instance of Negros
Occidental, Asuncion Lopez Vda. de Lizares, Encarnacion Lizares Vda. de
Panlilio and Efigenia Vda. de Paredes, in their own behalf and in behalf of the
other minority stockholders of the Financing Corporation of the
Philippines, filed a complaint against the said corporation and J. Amado
Araneta, its president and general manager, claiming among other things
alleged gross mismanagement and fraudulent conduct of the corporate
affairs of the defendant corporation by J. Amado Araneta, and asking that
the corporation be dissolved; that J. Amado Araneta be declared personally
accountable for the amounts of the unauthorized and fraudulent
disbursements and disposition of assets made by him, and that he be
required to account for said assets, and that pending trial and disposition of
the case on its merits a receiver be appointed to take possession of the
books, records and assets of the defendant corporation preparatory to its
dissolution and liquidation and distribution of the assets. Over the strong
objection of the defendants, the trial court granted the petition for the
appointment of a receiver and designated Mr. Alfredo Yulo as such
receiver with a bond of P50,000.
ISSUE: The main contention of the petitioners in opposing the
appointment of a receiver in this case is that said appointment is
merely an auxiliary remedy; that the principal remedy sought by the
respondents in the action in Negros Occidental was the dissolution of the
Financing Corporation of the Philippines; that according to the law a
suit for the dissolution of a corporation can be brought and
the appointment of a receiver upon application of the minority stockholders is
a power to be exercised with great caution, nevertheless, it should be
exercised necessary in order not to entirely ignore and disregard the rights of
said minority stockholders, especially when said minority stockholders are
unable to obtain redress and protection of their rights within the corporation
itself.
PRESENT STATE OF LAW: any stockholder or member of a corporation
can institute a dissolution proceeding against his own corporation before
the proper forum. This is clear from the provisions of PD 902-A, as
amended, when it provides that the SEC, now the Special Commercial Courts,
shall hear and decide cases involving ―intra-corporate dispute or
partnership relations between and among stockholders, members or
associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates,
respectively; and between such corporations, partnerships or association
and the State insofar as it concerns their individual franchise or right to exist
as such entity‖ (Sec. 5(b) as further amended by Sec. 5.2 of RA 8799). Of
note, however, is that under Sec. 5(m) of RA 8799, the SEC appears to
have concurrent jurisdiction to ―suspend or revoke, after proper notice
and hearing, the franchise or certificate of registration of corporations,
partnerships or associations upon any of the grounds provided by law.
It has thus been held as early as 1950 that ―even the existence of a de
jure corporation may be determined in a private suit for its dissolution
between stockholders, without the intervention of the state‖ (Hall vs. Piccio).
Likewise, in a close corporation, a petition for the dissolution of the
corporation may be instituted by any one individual shareholder on the
ground, even by mere dishonesty.
F. EFFECTS OF DISSOLUTION
Dissolution terminates its power to enter into contracts or to continue the
business as a going concern.
The SC held that a corporation, whose corporate life expired, cannot lawfully
pursue the business for which it was organized. It cannot apply for a new
maintained only by the State through its legal counsel, and that
respondents, much less the minority stockholders of said corporation, have
no right or personality to maintain the action for dissolution, and that
inasmuch as said action cannot be maintained legally by the respondents,
then the auxiliary remedy for the appointment of a receiver has no basis.
HELD: True it is that the general rule is that the minority stockholders of a
corporation cannot sue and demand its dissolution. However, there are cases
that hold that even minority stockholders may ask for dissolution, this, under
the theory that such minority members, if unable to obtain redress and
protection of their rights within the corporation, must not and should not
be left without redress and remedy. This was what probably prompted this
Court to state in the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-2598
(47 Off. Gaz. No. 12 Supp., p. 200) that even the existence of a de jure
corporation may be terminated in a private suit for its dissolution by the
stockholders without the intervention of the State.
We repeat that although as a rule, minority stockholders of
a corporation may not ask for its dissolution in a private suit, and
that such action should be brought by the Government through its
legal officer in a quo warranto case, at their instance and request,
there might be exceptional cases wherein the intervention of the
State, for one reason or another, cannot be obtained, as when the
State is not interested because the complaint is strictly a matter
between the stockholders and does not involve, in the opinion of
the legal officer of the Government, any of the acts or omissions
warranting quo warranto proceedings, in which minority stockholders
are entitled to have such dissolution. When such action or private suit is
brought by them, the trial court had jurisdiction and may or may not
grant the prayer, depending upon the facts and circumstances attending
it. The trial court's decision is of course subject to review by the appellate
tribunal. Having such jurisdiction, the appointment of a receiver pendente
lite is left to the sound discretion of the trial court. As was said in the case
of Angeles vs. Santos (64 Phil., 697), the action having been properly
brought and the trial court having entertained the same, it was within the
power of said court upon proper showing to appoint a receiver pendente
lite for the corporation; that although
certificate or a secondary franchise for it is incapable of receiving a grant
(Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a
contract executed prior to its dissolution for the purpose of continuing
the business of its organization (Cebu Ports vs. State Marine).
Debts due to or by a corporation are not extinguished. It has thus been held
that the termination of the life of a juridical entity does not, by itself, imply
the diminution or extinction of rights demandable against such juridical
entity (Gonzales vs. Sugar Regulatory Adm.)
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.
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its
terms, terminate where the corporation cease to exist. But unless the
lease so provides, the rights and obligations thereunder are not
extinguished by the corporation’s dissolution since leases affect property
rights and survives the death of the parties. The stockholders succeed to
the rights and liabilities of the dissolved corporation in an unexpired
leasehold state which may be enforced by or against the receiver or
liquidating trustee.
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not
hold true in cases of contracts for personal services which are deemed
terminated by the dissolution of the corporation. In such cases, there
is found an ―implied condition‖ that the contract shall terminate in such
event.
PERIOD OF LIQUIDATION: Despite its dissolution, a
corporation nonetheless, continues to be a body corporate for a period of
3 years for purposes of liquidation and winding up its affairs (Sec. 122).
Upon expiration of the 3 year period to wind up its affairs, the juridical
personality of the
corporation ceases for all intent and purposes, and as a general rule, it can
no longer sue and be sued (see Gelano vs. CA).
JAIME T. BUENAFLOR, petitioner,
vs.
CAMARINES SUR INDUSTRY CORPORATION, respondent
(G.R. Nos. L-14991-94; May 30, 1960)
FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the
Public Service Commission for the construction of a 5-ton ice plant and
to establish a cold storage and refrigeration service of about 6,000 cubic
feet capacity in Sabang, respectively. After being served a copy of the
application of petitioner, respondent corporation also filed the same
applications on Oct. 1957.
Counsel for Buenaflor presented a motion to dismiss on the ground that the
corporate life of respondent already expired in Nov. 1953. Respondent
Corporation then registered on Oct. 1957, a new AOI and transferred all
assets of the old corporation together with existing certificate of public
convenience to the new corporation.
The PSC provisionally approved the transfer of the assets, as well as the
certificate of public convenience to the new corporation.
On Nov. 1957, the new corporation answered the motion to dismiss by
alleging its recent incorporation.
ISSUE: WON Buenaflor’s application should be approved?
HELD: Yes. It is admitted — and the Commission found – that the needs of
Sabang Barrio will be conveniently served with the establishment of a 5-ton
ice plant. But it elected to deny Buenaflor's application, even as it awarded
the privilege to the new Camarines Corporation on the ground that it (the old
corporation) had been serving ice in Sabang up to the time of Buenaflor's
application, and was, consequently, the pioneer operator there.
Wherefore, revoking the appealed decision in so far as it awarded the
certificate to said Corporation, we hereby approve Buenaflor's application
for five tons, instead of one ton, subject to the usual conditions imposed by
the Public Service Commission on ice plant establishments.
CEBU PORT LABOR UNION, represented by this President
ALEJO CABABAJAY, petitioner,
vs.
STATES MARINE CORPORATION, NICASIO PANSACALA,
ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS,
respondents
(G.R. No. L-9350; May 20, 1957)
FACTS: On Sept. 12, 1953, petitioner filed a petition for ―recognition
of stevedoring services and injunction‖ against respondents claiming that it
was awarded a contract for the exclusive right of loading and unloading
of the cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO.,
though at the time of the filing of the petition it was owned and
operated by the States Marine Corporaiton.
Respondent corporation filed a motion to dismiss on the ground that it has
no legal capacity to sue or be sued, it having been dissolved on Oct. 17,
1952 and therefore has no personality to enter or refuse to enter into any
contract, much less of threatening the petitioner as alleged in the petition.
Petitioner relied on Sec. 77 to include said corporation as party respondent
despite the fact that counsel for the other respondents called already the
attention of the Court that the State Marine Corporation was non-existing
and suggested that proper substitution or amendment of the petition be
made.
ISSUE: WON State Marine Corp can be made a party respondent?
HELD: Section 77 of the Corporation Law reads as follows:
SEC. 77. 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
The fact, however, is that since 1953, the old Corporation had been illegally
plying its business of selling ice in Sabang because, under the Corporation
Law, Sec. 77, after November 1953, it could not lawfully continue the
business for which it had been established (operate ice plant, sell ice, etc).
After November 1953, it could only continue to exist for three years for the
purpose of prosecuting and defending suits by or against it, and of enabling
it gradually to settle and close its affairs, to dispose and convey its
property and to divide its capital stock. It could not, without violating the law,
continue to sell ice. And yet, the Commission awarded the certificate on
the basis of such serve and distribution of ice — applying the "prior
operator" rule. In other words, the new Camarines Corporation is
rewarded, precisely because the old corporation, its predecessor, had
violated the law during that period (1953-1957). We cannot, and should
not countenance such anomalous result.
On the other hand, when the old Camarines Corporation docketed its
application October 1, 1957, it had no juridical personality, it had
ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even
a corporation de facto. And then, there is no application subscribed by the
new Camarines Corporation. Far from being mere technicality, these point
support a conclusion which appears to be just and equitable, not only for the
reasons already indicated, but also to compensate Buenaflor's diligence and
courage in exposing the irregular practice of a "ghost" corporation foisting its
services upon the unsuspecting public of Sabang and neighboring territory —
enjoying a franchise without paying, perhaps, the corporate income tax and
other burdens attached to corporate existence.
Remembering the Camarines Corporation's automatic cessation in November
1956 (three years after November 1953) we must decline to regard the new
Camarines Corporation (formed October 30, 1957) as a continuation of the
old. At most, it is the transferee of the properties of the old corporation (or
more properly, the assets of the stockholders) plus the certificate of public
convenience to operate the ice plant in Naga and Magarao. And yet, as
stated, the new corporation has not filed any application for certificate of
public convenience in Sabang, and has not published such application
continued as a body corporate for three years after the time when it
would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and
close its affairs, to dispose of and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for which
it was established.
Even a cursory reading of the above-quoted provision would convey the idea
clearly manifested in the limitation "but not for the purpose of continuing the
business for which it was established", that the 3-year period allowed by the
law is only for the purpose of winding up its affairs. Petitioner-appellee
prayed that it be declared to have the right to stevedoring work in question
"thereby respecting the contract entered into by petitioner and the Elizalde &
Co. and subsequently enforced and continued by the respondent States
Marine Corporation". It appearing that the said States Marine
Corporation was already dissolved at the time said petition was
filed, and the vessel subject of the agreement having changed
hands, it cannot be compelled now to respect such
agreement specially considering the fact that it cannot even be
made a party to this suit (See. 1, Rule 3, of the Rules of Court.
SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES,
petitioners, vs.
SUGAR REGULATORY ADMINISTRATION, respondent
(G.R. No. 84606; June 28, 1989)
FACTS: Petitioner spouses file a complaint seeking cancellation of a
mortgage and recovery of a sum of money for the overpayment they made,
on a loan secured from RP Bank, by virtue of an alleged deduction made by
Philippine Sugar Commission (Philsucom) of the proceeds of sugar exports.
Petitioners filed an amended complaint which assailed the constitutionality of
EO No. 18 abolishing Philsucom which in effect destroyed petitioners’ right to
recover from PSC. They assert that the transfer from Philsucom to SRA are
unconstitutional and ineffective.
On Aug. 2, 1988, the trial court granted the motion to dismiss insofar as SRA
is concerned while denying that same motion insofar as RP Bank and
Philsucom were concerned.
ISSUE: WON SRA could be made a party-respondent liable to the claim of
the petitioners?
HELD: Yes. The termination of the life of a juridical entity does not by itself
imply the diminution or extinction of rights demandable against such juridical
entity.
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. Section 13 of Executive Order No. 18 reads in part:
Assets and records that, as determined by the Sugar Regulatory
Administration, are required in its operation are hereby transferred to the
Sugar Regulatory Administration.
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.
We believe, 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
contracts of subscription.
After dissolution, a body corporate continues to exist for 3 years for the
purpose of liquidation and winding up of its affairs:
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.
LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS:
1. By the corporation itself through the BOD
a. This is the usual method or procedure of liquidating a corporation
(China Banking Corp vs. Michelin) and although there is no law
authorizing it, neither is there anything that prohibits the BOD from
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. 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.
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.
G. LIQUIDATION AND WINDING UP
During the course of liquidation and winding up, the assets will be collected
and realized, the rights and claims of creditors will be settled or provided for
and a distribution of the remaining assets to the shareholders who are
entitled thereto.
Therefore, liquidation or winding up of corporate affairs therefore means
the collection of all corporate assets, the payments of all its debts and
settlement of its obligations and the ultimate distribution of corporate assets,
if any of it remains, to all stockholders in accordance with their
proportionate stockholdings in the corporation or in accordance with
their respective
d. Thus, it has been held that when a corporation is dissolved and the
liquidation of assets is placed in the hands of a receiver or assignee, the
3 year period is not applicable and the assignee may institute all actions
leading to the liquidation of the corporation even after the expiration of
3 years.
e. Note however, that a receiver may be appointed by the court even while
the corporation is a going concern and does not always imply dissolution
of a corporation.
NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-
appellant,
vs.
APOLONIA PORE, defendant-appellee
(G.R. No. L-16779; August 16, 1961)
FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal
Court of Tacloban, Leyte, against defendant for the recovery of advances the
latter failed to account for, amounting to P1,213.34. The court rendered a
decision holding that defendant is liable for P272.49.
Said court denying reconsideration, plaintiff appealed before the CFI to which
a motion to dismiss was filed by defendant on the ground that EO No. 372
abolished plaintiff and thus it no longer had capacity to sue.
Plaintiff objected there to on the ground that the said EO granted plaintiff to
continue in existence for 3 years from Nov. 30, 1950, the effectivity date of
the EO, for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators to gradually settle the its affairs
and that the case was filed on Nov. 14, 1953, or before the expiration of
the 3 year period.
ISSUE: WON the action commenced within the 3 year period may be
continued after the expiration of the said period?
undertaking the same
b. If this method is resorted to, the board will only have a period of 3 years
to finish its task of liquidation
c. Claims for or against the corporate entity not filed within the period will
become unenforceable as there exist no corporate entity against which
they can be enforced.
d. Actions pending for or against the corporation when the 3 year period
expires are abated, since after the period, the corporation ceases for all
intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore)
2. By a trustee appointed by the corporation
a. The corporation may opt to convey all corporate assets to a trustees
who will take charge of liquidation
b. If this method is used, the three year period limitation imposed by
section 122 will not apply provided the designation of the trustee is
made within that period.
c. Thus, during the period of liquidation, but before the completion
thereof, a dissolved corporation is still liable for all its debts and
liabilities in an action filed against it through its trustee even if the case
is filed beyond the 3 year period of liquidation.
3. By appointment of a receiver
a. A receiver may be appointed by the proper forum on petition or motu
proprio upon the dissolution of the corporation (Sec. 119)
b. The appointment of a receiver is, however, permissive rather than
mandatory and the law tends to recognize that in cases of voluntary
dissolution there is no occasion for the appointment of a receiver except
under special circumstances and upon proper showing (China Banking
vs. Michelin)
c. If a receiver is appointed, the 3 year period fixed by law within which to
complete the task of liquidation will not likewise apply because the
dissolved corporation is substituted by the receiver who may sue or be
sued even after that period (Sumera vs. Valencia).
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued
as a corporation is limited to three years from the time the period of
dissolution commences; but that there is no time limit within the
trustees must complete a liquidation placed in their hands. It is
provided only (Corp. Law, Sec. 78) that the conveyance to the
trustees must be made within the three-year period. It may be
found impossible to complete the work of liquidation within the three-year
period or to reduce disputed claims to judgment. The authorities are to the
effect that suits by or against a corporation abate when it ceased to be an
entity capable of suing or being sued (7 R.C.L. Corps., Par. 750); but
trustees to whom the corporate assets have been conveyed pursuant to
the authority of section 78 may sue and be sued as such in all matters
connected with the liquidation. By the terms of the statute the effect of
the conveyance is to make the trustees the legal owners of
the property conveyed, subject to the beneficial interest
therein of creditors and stockholders. (pp. 389-390; see also
Sumera v. Valencia [67 Phil. 721, 726-727).
Obviously, the complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement of its affairs is
what impelled the President to create a Board of Liquidators, to continue the
management of such matters as may then be pending. The first question
must, therefore, be answered in the negative.
Wherefore, actions commenced within the 3 year period of liquidation may be
continued by the trustee despite the expiration of the said period.
TIBURCIO SUMERA, as receiver of the corporation "Devota
de Nuestra Señora de la Correa", plaintiff-appellant,
vs.
EUGENIO VALENCIA, defendant-appellee
(G.R. No. 45485; May 3, 1939)
HELD: No. The rule appears to be well settled that, in the absence of
statutory provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by law
for the liquidation of its affairs.
It is generally held, that where a statute continues the existence of a
corporation for a certain period after its dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes defunct
upon the expiration of such period, at least in the absence of a provision
to the contrary, so that no action can afterwards be brought by or against
it, and must be dismissed. Actions pending by or against the
corporation when the period allowed by the statute expires, ordinarily
abate.
. . . This time limit does not apply unless the circumstances are
such as to bring the corporation within the provision of the
statute. However, the wording of the statutes, in some jurisdictions
authorize suits after the expiration of the time limit, where the statute
provides that for the purpose of any suit brought by or against the
corporation shall continue beyond such period for a further named period
after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp.
892-893.).
Our Corporation Law contains no provision authorizing a corporation,
after three (3) years from the expiration of its lifetime, to continue in its
corporate name actions instituted by it within said period of three (3)
years. In fact, section 77 of said law provides that the corporation shall "be
continued as a body corporate for three (3) years after the time when it
would have been . . . dissolved, for the purpose of prosecuting and
defending suits by or against it . . .", so that, thereafter, it shall no longer
enjoy corporate existence for such purpose. For this reason, section 78 of
the same law authorizes the corporation, "at any time during said three
years . . . to convey all of its property to trustees for the benefit of
members, stockholders, creditors and other interested", evidently for the
purpose, among others, of enabling said trustees to prosecute and defend
suits by or against the corporation begun before the expiration of said
period. Hence, commenting on said sections, Judge Fisher, in his work
entitled Philippines Law on Stock Corporations (1929 ed.), has the
following to say:
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary
dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928
appointing Damaso Nicolas as assignee to take charge of liquidation. Nicolas
was substituted by herein appellant Sumera who filed a motion with the court
asking defendant Valencia to deliver to him the P400.00 funds of the
corporation which was denied, reserving, however to said assignee the right
to bring the proper action. Accordingly, on June 5, 1936, Sumera filed the
present complaint for recovery of money.
The defendant interposed the defense that the right against him had already
prescribed which was found by the lower court to be tenable, the case not
being filed within the 3 year period prescribed under Sec. 77 of Act No. 1459.
ISSUE: WON the 3 year period prescribed by the Corporation Law is
applicable if the liquidation is placed on the hands of a receiver or assignee?
HELD: No. Passing now to discuss the question raised by plaintiff and
appellant in his sole assignment of alleged error, section 77 of Act No. 1459
provides that "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 years after the time when it would
have been so dissolved, for the purpose of prosecuting and defending suits
by or against it and of enabling it gradually to settle and close its affairs to
dispose of and convey its property and to divide its capital stock, but not for
the purpose of continuing the business for which it was established." And
section 77 of the same Act provides, "At any time during said three years
said corporation is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders, creditors,
and others interested. From and after any such conveyance by the
corporation of its property in trust for the benefit of its members,
stockholders, 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 members, stockholders, creditors,
or other persons in interest.
Fletcher, in volume 8, page 9226, of his Encyclopedia of Private
Corporations, says:
By Section 2 of the executive order, while the boards of directors of the
various corporations were abolished, their powers and functions and duties
6537. Effect of expiration of statutory extension of life. — In general. —
The qualified existence after dissolution, as provided for by statute,
terminates at the expiration of the time fixed, or, no time is fixed, at the
expiration of a reasonable time. Where the extreme limit to which the
statute has extended the life of a corporation after its dissolution has
expired, it has no offices which can bind it by agreement, but only has
statutory trustees. After the expiration of such time, it is generally held not
only that the corporation cannot sue or be sued but that actions pending
at such time are abated. But a statute authorizing the continuance of
a corporation for three years to wind up its affairs, does not preclude
an action to wind up brought after the three years.
In the light of the legal provisions and authorities cited, interpretative of said
laws, if the corporation carries out the liquidation of its
assets through its own officers and continues and defends the
actions brought by or against it, its existence shall terminate at
the end of three years from the time of dissolution; but if a
receiver or assignee is appointed, as has been done in the present
case, with or without a transfer of its properties within three
years, the legal interest passes to the assignee, the beneficial
interest remaining in the members, stockholders, creditors and
other interested persons; and said assignee may bring an action,
prosecute that which has already been commenced for the
benefit of the corporation, or defend the latter against any
other action already instituted or which may be instituted even
outside of the period of three years fixed for the offices of the
corporation.
For the foregoing considerations, we are of the opinion and so hold that
when a corporation is dissolved and the liquidation of its assets is
placed in the hands of a receiver or assignee, the period of three
years prescribed by section 77 of Act No. 1459 known as the
Corporation Law is not applicable, and the assignee may institute all
actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.
Wherefore, the order appealed from is reversed and it is ordered that the
case be remanded to the court of origin to the end that it may decide the
same on the merits, with costs against the appellee.
THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE
DECEASED CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
(G.R. No. L-18805; August 14, 1967)
FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum
of money from National Coconut Corporation’s (NACOCO) general
manager and board chairman Maximo Kalaw and other defendants as
directors.
The defendants pose that since the three year period has elapsed since its
abolition by virtue of EO 372, the Board of Liquidators may not now
continue with, and prosecute, the present case to its conclusion.
ISSUE: WON the Board of Liquidators has personality to proceed as party-
plaintiff in this case?
HELD: Yes. The executive order abolishing NACOCO and creating the Board
of Liquidators should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of NACOCO was
continued for a period of three years from the effectivity of the order for "the
purpose of prosecuting and defending suits by or against it and of enabling
the Board of Liquidators gradually to settle and close its affairs, to dispose of
and convey its property in the manner hereinafter provided", is to be read
not as an isolated provision but in conjunction with the whole. So reading, it
will be readily observed that no time limit has been tacked to the
existence of the Board of Liquidators and its function of closing the
affairs of the various government owned corporations, including
NACOCO.
under existing laws were to be assumed and exercised by the Board of
Liquidators. The President thought it best to do away with the boards of
directors of the defunct corporations; at the same time, however, the
President had chosen to see to it that the Board of Liquidators step into the
vacuum. And nowhere in the executive order was there any mention of the
lifespan of the Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusions.
Not that our views on the power of the Board of Liquidators to proceed to
the final determination of the present case is without jurisprudential support.
The first judicial test before this Court is National Abaca and Other
Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that
case, the corporation, already dissolved, commenced suit within the
three-year extended period for liquidation. That suit was for recovery
of money advanced to defendant for the purchase of hemp in behalf of the
corporation. She failed to account for that money. We there said that "the
rule appears to be well settled that, in the absence of statutory
provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by
law for the liquidation of its affairs." We there said that "[o]ur
Corporation Law contains no provision authorizing a corporation, after
three (3) years from the expiration of its lifetime, to continue in its
corporate name actions instituted by it within said period of three (3)
years." However, these precepts notwithstanding, we, in effect,
held in that case that the Board of Liquidators escapes from the
operation thereof for the reason that "[o]bviously, the complete
loss of plaintiff's corporate existence after the expiration of the
period of three (3) years for the settlement of its affairs is what
impelled the President to create a Board of Liquidators, to
continue the management of such matters as may then be pending.
CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO,
petitioners,
vs.
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL,
INC., respondents
(G.R. No. L-39050; February 24, 1981)
FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal
property of petitioner-wife Guillermina Mendoza de Gelano. It was while
private respondent was leasing the property that its officers and directors had
come to know petitioner-husband Carlos Gelano who received from the
corporation cash advances on account of rent to be paid by the corporation
to the land.
Despite repeated demands by the private respondent refused to pay the cash
advances. Petitioner-wife refused to pay on the ground that the cash
advances was for the personal account of her husband asked for by, and
given to him, without the knowledge and consent and did not benefit the
family.
On May 29, 1959, the corporation, through its lawyer, filed a complaint for
collection against petitioners.
Meanwhile, the corporation amended its AOI to shorten its term of existence
up to Dec. 31, 1960 only which was approved by the SEC but the trial court
was not notified of such amendment.
On Nov. 20, 1964, almost 4 years after the dissolution, the trial court
rendered a decision in favor of private respondent.
ISSUE: WON a corporation whose corporate life had ceased by the
expiration of its term of existence, could still continue prosecuting and
defending suits after its dissolution and beyond the period of 3 years to wind
up its affairs, without having undertaken any step to transfer its assets to a
trustee or assignee?
that the corporation shall "be continued as a body corporate for three (3)
years after the time when it would have been ... dissolved, for the purpose of
prosecuting and defending suits By or against it ...," so that, thereafter, it
shall no longer enjoy corporate existence for such purpose. For this reason,
Section 78 of the same law authorizes the corporation, "at any time during
said three years ... to convey all of its property to trustees for the benefit of
members, Stockholders, creditors and other interested," evidently for
the purpose, among others, of enabling said trustees to prosecute and
defend suits by or against the corporation begun before the expiration of said
period
When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
Section 77 of the Corporation Law, it still has the right until December 31,
1963 to prosecute in its name the present case. After the expiration of said
period, the corporation ceased to exist for all purposes and it can no longer
sue or be sued.
However, a corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is authorized
under Section 78 to convey all its property to trustees to enable it to
prosecute and defend suits by or against the corporation beyond the Three-
year period. Although private respondent did not appoint any
trustee, yet the counsel who prosecuted and defended the
interest of the corporation in the instant case and who in fact
appeared in behalf of the corporation may be considered a trustee
of the corporation at least with respect to the matter in litigation
only. Said counsel had been handling the case when the same was
pending before the trial court until it was appealed before the
Court of Appeals and finally to this Court. We therefore hold
that there was a substantial compliance with Section 78 of
the Corporation Law and as such, private respondent Insular
Sawmill, Inc. could still continue prosecuting the present case
even beyond the period of three (3) years from the time of its
dissolution.
The word "trustee" as sued in the corporation statute must be
understood in its general concept which could include the counsel
to whom was entrusted in the instant case, the prosecution of the
suit filed by the corporation. The purpose in the transfer of the assets of
the corporation to a trustee upon its dissolution is more for the protection of
its creditor and stockholders. Debtors like the petitioners herein may not take
advantage of the failure of the corporation to transfer its assets to a trustee,
assuming it has any to transfer which petitioner has failed to show, in the
first place. To sustain petitioners' contention would be to allow them to
enrich themselves at the expense of another, which all enlightened legal
systems condemn.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in
his capacity as Liquidator of the Marsman Development
Company, defendants-appellants.
(G.R. No. L-18956; April 27, 1972)
FACTS: Sometime before Oct. 15, 1953, an investigation was conducted on
the business operation and activities of defendant corporation leading to
the discovery of deficiency taxes on logs produced from its concession.
The Collector of Internal Revenue demanded payment for forest charges and
25% surcharge. After further investigation, another assessment was sent to
the defendant by the BIR demanding a total sum of P45, 541.66 representing
deficiency taxes, forest charges, surcharges and penalties. Later on, another
assessment was sent to defendant corporation for discharging lumber
without permit.

HELD: Yes. In American corporate law, upon
patterned, it is well settled that, unless the
pending suits and actions by and against
a dissolution of the corporation. Section
provides
which our Corporation Law was
statutes otherwise provide, all
a corporation are abated by
77 of the Corporation Law
Defendant contend that the present action was barred by Sec. 77 of the
Corporation Law which allows corporate existence to continue after
dissolution only for a period of 3 years. That the company was extra-
judicially dissolved on April 23, 1954, the orginal complaint was filed only
on Sept. 8, 1958 and the amended complaint on Aug. 26, 1956.

The trial court ruled in favor of the government holding that the amended
complaint was precisely to include FH Burgess, liquidator of the company, as
party defendant.

ISSUE: WON the case should prosper?
HELD: Yes. It is to be recalled that the assessments against appellant
corporation for deficiency taxes due for its operations since 1947 were made
by the Bureau of Internal Revenue on October 15, 1953, September 13, 1954
and November 8, 1954, such that the first was before its dissolution and the
last two not later than six months after such dissolution. Thus, in whatever
way the matter may be viewed, the Government became the creditor of the
corporation before the completion of its dissolution by the liquidation of its
assets. Appellant F.H. Burgess, whom it chose as liquidator,
became in law the trustee of all its assets for the benefit of all
persons enumerated in Section 78, including its creditors, among
whom is the Government, for the taxes herein involved.
To assume otherwise would render the extra-judicial
dissolution illegal and void, since, according to Section 62 of the
Corporation Law, such kind of dissolution is permitted only when
it "does not affect the rights of any creditor having a claim
against the corporation." It is immaterial that the present action was
filed after the expiration of three years after April 23, 1954, for at the
very least, and assuming that judicial enforcement of taxes may not be
initiated after said three years despite the fact that the actual liquidation has
not been terminated and the one in charge thereof is still holding the assets
of the corporation, obviously for the benefit of all the creditors thereof, the
assessment aforementioned, made within the three years, definitely
established the Government as a creditor of the corporation for whom
the liquidator is supposed to hold assets of the corporation. And since
the suit at bar is only for the collection of taxes finally assessed against
the corporation within the three years invoked by appellants, their
assignment of error cannot be sustained.
Judgment of the trial court is affirmed.
STOCKHOLDERS UPON DISSOLUTION: Upon dissolution of
a corporation, it is considered in equity, even in the absence of a statute
that its assets are held for the benefit of its stockholders after payment
of its debts and will be so distributed to the said stockholders in
accordance with their proportionate interest in the corporation or
their contracts of subscription.
PREFERRED SHAREHOLDERS: It must herein be remembered that
holders of preferred shares may be granted certain rights or
privileges upon dissolution of the corporation. The preference may be in the
form of receiving a certain part or portion of corporate assets upon
dissolution. And, depending on their contracts of subscription, they may or
may not be entitled to share any of the assets remaining, after they may
have received their respective preference in accordance therewith.
INCORPORATION OF A NEW CORPORATION: During the 3 year
period granted to a corporation to liquidate or wind up its affairs, the
BOD is not normally permitted to undertake any activity outside of the
usual liquidation of the corporation. There is, however, nothing to prevent
the stockholders from conveying their respective shareholdings toward the
creation of a new corporation to continue the business of the old. This is
because winding up is the sole activity of a dissolved corporation that does
not intend to incorporate a new. If it does, however, it is not unlawful for
the old BOD to incorporate and transfer the assets of a dissolved
corporation to the new corporation intended to be created as long as the
stockholders have given their consent (Chung Ka Bio vs. IAC)
LAPSE OF THE THREE YEAR PERIOD: If the 3 year period of
liquidation has elapsed and no effort to finally settle or close the corporate
affairs was undertaken, those having pecuniary interest in the corporate
assets, including not only the stockholders but likewise the creditors, acting
for and in behalf, may make proper representations with the SEC for
working out a final settlement of the corporate concern (Clemente vs. CA).
RECEPIENT UNKNOWN OR CANNOT BE FOUND: Any asset
distributable to any creditor or stockholders or member who is unknown
or cannot be found shall be escheated to the city or municipality where
such assets are located (Sec. 122).
LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAÑO, HEIRS OF
CHUNG KA BIO, WELLINGTON CHUNG, CHUNG SIONG PEK, VICTORIANO
CHUNG, and MANUEL CHUNG TONG OH, petitioners,
vs.
INTERMEDIATE APPELLATE COURT (2nd Special Cases Division),
SECURITIES and EXCHANGE COMMISSION EN BANC, HON. ANTONIO R.
MANABAT, HON. JAMES K. ABUGAN, HON. ANTERO F.L. VILLAFLOR, JR.,
HON. SIXTO T.J. DE GUZMAN, JR., ALFREDO CHING, CHING TAN, CHIONG
TIONG TAY, CHUNG KIAT HUA, CHENG LU KUN, EMILIO TAÑEDO, ROBERTO
G. CENON and PHILIPPINE BLOOMING MILLS COMPANY, INC., respondents
(G.R. No. 71837; July 26, 1988)
FACTS: Chung Ka Bio and other petitioners are stockholders of the old
Philippine Blooming Mills Company, Inc. (PBM) which has been
reincorporated on July 14, 1977 after the old was dissolved on Jan. 19 1977.
The assets and liabilities of the old PBM was transferred by the BOD to the
new PBM.
Ching Ka Bio and other petitioners filed with the SEC a petition for
liquidation of both the old and new PBM (for non-usage of its charter
and failure to operate within 2 years).
ISSUE: WON the BOD was justified to convey all the assets of the old PBM
to the new corporation without the express consent of its stockholders?
HELD: Yes. As the contention is based on the negative averment that no
stockholders' meeting was held and the 2/3 consent vote was not obtained,
there is no need for affirmative proof. Even so, there is the presumption of
regularity which must operate in favor of the private respondents, who insist
that the proper authorization as required by the Corporation Law was duly
obtained at a meeting called for the purpose. (That authorization was
embodied in a unanimous resolution dated March 19, 1977, which was
reproduced verbatim in the deed of assignment.) Otherwise, the new PBM
would not have been issued a certificate of incorporation, which should also
be presumed to have been done regularly. It must also be noted that under
Section 28-1/2, "any stockholder who did not vote to authorize the action of
the board of directors may, within forty days after the date upon which such
action was authorized, object thereto in writing and demand payment for his
shares." The record does not show, nor have the petitioners alleged or
proven, that they filed a written objection and demanded payment of their
shares during the reglementary forty-day period. This circumstance should
bolster the private respondents' claim that the authorization was unanimous.
While we agree that the board of directors is not normally
permitted to undertake any activity outside of the usual
liquidation of the business of the dissolved corporation, there is
nothing to prevent the stockholders from conveying their
respective shareholdings toward the creation of a new
corporation to continue the business of the old. Winding up is the
sole activity of a dissolved corporation that does not intend to
incorporate anew. If it does, however, it is not unlawful for the
old board of directors to negotiate and transfer the assets of the
dissolved corporation to the new corporation intended to be
created as long as the stockholders have given their consent. This
was not prohibited by the Corporation Act. In fact, it was expressly
allowed by Section 28-1/2.
What the Court finds especially intriguing in this case is the fact that although
the deed of assignment was executed in 1977, it was only in 1981 that it
occurred to the petitioners to question its validity. All of four years had
elapsed before the petitioners filed their action for liquidation of both the old
and the new corporations, and during this period, the new PBM was in full
operation, openly and quite visibly conducting the same business
undertaken earlier by the old dissolved PBM. The petitioners and the private
respondents are not strangers but relatives and close business associates.
The PBM office is in the heart of Metro Manila. The new corporation, like the
old, employs as many as 2,000 persons, the same personnel who worked
for the old PBM. Additionally, one of the petitioners, Chung Siong Pek was
one of the directors who executed the deed of assignment in favor of the
old PBM and it was he also who received the deeded assets on behalf and
as treasurer of the new PBM. Surely, these circumstances must operate to
bar the petitioners now from questioning the deed of assignment after this
long period of inaction in the protection of the rights they are now
belatedly asserting. Laches has operated against them.
ARCADIO C. OCHOA, represented by FE O. OCHOA-BAYBAY, CONCEPCION,
MARIANO, ARTEMIO, VICENTE, ANGELITA, ROBERTO, HERNANDO AND
LOURDES, all surnamed ELEPAÑO, petitioners,
vs.
THE HON. COURT OF APPEALS, ELVIRA PANDINCO-CASTRO AND VICTOR
CASTRO, respondents.
(G.R. No. 82407; March 27, 1995)
FACTS: Petitioners herein initiated an action to be declared owners of the
property in question and to received rentals and other fruits as consequence
of such ownership.
The trial court rendered a decision in favor of respondents holding, among
others, that since there is no liquidation, it is the corporation, not the
stockholders, which can assert, if at all, any title to the corporate assets.
ISSUE: WON petitioners can be held, given their submissions, to have
succeeded in establishing for themselves a firm title to the property in
question?
HELD: No. Like the courts below, we find petitioners' evidence to be direly
wanting; all that appear to be certain are that the "Sociedad Popular
Calambeña," believed to be a "sociedad anonima" and for a while engaged in
the operation and management of a cockpit, has existed sometime in the
past; that it has acquired the parcel of land here involved; and that the
plaintiffs' predecessors, Mariano Elepaño and Pablo Clemente, had been
original stockholders of the sociedad. Except in showing that they are the
successors-in-interest of Elepaño and Clemente, petitioners have been unable
to come up with any evidence to substantiate their claim of ownership of the
corporate asset.
If, indeed, the sociedad has long become defunct, it should behoove
petitioners, or anyone else who may have any interest in the corporation, to
take appropriate measures before a proper forum for a peremptory
settlement of its affairs. We might invite attention to the various modes
provided by the Corporation Code (see Sees. 117-122) for
dissolving, liquidating or winding up, and terminating the life of the
corporation. Among the causes for such dissolution are when the corporate
term has expired or when, upon a verified complaint and after notice and
hearing, the Securities and Exchange Commission orders the dissolution of a
corporation.
The corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it
and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The
termination of the life of a juridical entity does not by itself cause
the extinction or diminution of the rights and liabilities of such
entity (see Gonzales vs. Sugar Regulatory Administration, 174 SCRA
377) nor those of its owners and creditors. If the three-year extended
life has expired without a trustee or receiver having been expressly
designated by the corporation within that period, the board of directors
(or trustees) itself, following the rationale of the Supreme Court's decision
in Gelano vs. Court of Appeals (103 SCRA 90) may be permitted to so
continue as "trustees" by legal implication to complete the corporate
liquidation. Still in the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including
not only the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make proper
representations with the Securities and Exchange
commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns.
WHEREFORE, the decision appealed from is AFFIRMED.
ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec.
122, such that, in the absence of a known stockholder, member of the
BOD or creditor, the properties should have been escheated in favor of
the local government. Following the rule laid down in Clemente will open
the door to fraud in a way that any person claiming interest as heir of the
corporation
license to transact business in the Philippines shall submit to the Securities
may still go to the SEC to make proper representations with the SEC for
working out a final settlement. Moreover, the corporation being non-
existent for all intents and purposes, after the expiration of the three
year period provided by law, could not have legally transferred such
property to any person. The Gonzales case is misapplied, because SRA
was a successor of Philsucom, while in the Gelano case, there was a lawyer
who prosecuted the case who was deemed as trustee. In the Clemente
case, there was no such successor nor a lawyer who can be deemed a
trustee.
CHAPTER 18: FOREIGN CORPORATIONS
A. DEFINITION: As to the Philippines, any corporation, which owe
its existence to the laws of another state, government or country
is a ―foreign corporation‖. Elsewise stated, a foreign corporation
is one created or organized under the laws of any state or
government other than those of the forum.
Sec. 123. Definition and rights of foreign corporations. - For
the purposes of this Code, a foreign corporation is one formed,
organized or existing under any laws other than those of the Philippines
and whose laws allow Filipino citizens and corporations to do business in
its own country or state. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact business
in this country in accordance with this Code and a certificate of authority
from the appropriate government agency.
―AND WHOSE LAWS ALLOW FILIPINO CITIZENS AND
CORPORATIONS TO DO BUSINESS IN ITS OWN COUNTRY
OR STATE‖: is not an accurate inclusion in the definition as any
corporation registered or organized under the laws of another state is
necessarily a foreign corporation WON the state of its corporation allow
Filipino citizens or corporations to do business in that forum.
The said phrase was inserted by framers of the law only as a condition
precedent to the grant of a license to do business in the Philippines.
INCORPORATION TEST: is applied in determining whether a corporation
is domestic or foreign. If it is incorporated in another state, it is a
foreign corporation, while if it is registered under Philippine laws, it is
deemed a Filipino or domestic corporation irrespective of the
nationality of its stockholders.
Thus, a corporation registered under the Foreign Investments Act of 1991
(RA No. 7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with
100% foreign equity is considered a Filipino or domestic corporation and
not foreign.
CONTROL TEST: In times of war and for purposes of security of the state,
however, the ―control test‖ would apply in determining the
corporate nationality, i.e., the citizenship of the controlling stockholders
determines the nationality of the corporation.
CORPORATE PERSONALITY BEYOND BORDERS:
B. APPLICATION FOR LICENSE
Under Sec. 123, a foreign corporation cannot transact business in the
Philippines unless it has obtained a license or permit to do so in accordance
with the laws of the country and a certificate of authority from the
appropriate government agency such as the Banko Sentral ng Pilipinas for
banking institutions or the Office of the Insurance Commission for
insurance companies, etc.
A certificate of authority from the Board of Investments is no longer
required under RA 7042. Said certificate of authority is only necessary for
the purpose of availing the incentives granted and allowed under
the Omnibus Investments Code.
The manner in which a foreign corporation may obtain a license to do
business in the Philippines is laid down in Sec. 125:
Sec. 125. Application for a license. - A foreign corporation applying for
a
and Exchange Commission a copy of its articles of incorporation and by-
laws, certified in accordance with law, and their translation to an official
language of the Philippines, if necessary. The application shall be under
oath and, unless already stated in its articles of incorporation, shall
specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the principal office of the
corporation in the country or state of incorporation;
3. The name and address of its resident agent authorized to accept summons
and process in all legal proceedings and, pending the establishment of a local
office, all notices affecting the corporation;
4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to pursue
in the transaction of its business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in the certificate of
authority issued by the appropriate government agency;
6. The names and addresses of the present directors and officers of the
corporation;
7. A statement of its authorized capital stock and the aggregate number of
shares which the corporation has authority to issue, itemized by classes, par
value of shares, shares without par value, and series, if any;
8. A statement of its outstanding capital stock and the aggregate number of
shares which the corporation has issued, itemized by classes, par value of
shares, shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary or appropriate in order
to enable the Securities and Exchange Commission to determine whether
such corporation is entitled to a license to transact business in the
Philippines, and to determine and assess the fees payable.
Attached to the application for license shall be a duly executed certificate
under oath by the authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of the country or state of
the applicant allow Filipino citizens and corporations to do business therein,
and that the applicant is an existing corporation in good standing. If
such certificate is in a foreign language, a translation thereof in English
under oath of the translator shall be attached thereto.
The application for a license to transact business in the Philippines shall
likewise be accompanied by a statement under oath of the president or any
other person authorized by the corporation, showing to the satisfaction of the
Securities and Exchange Commission and other governmental agency in the
proper cases that the applicant is solvent and in sound financial condition,
and setting forth the assets and liabilities of the corporation as of the date
not exceeding one (1) year immediately prior to the filing of the application.
Foreign banking, financial and insurance corporations shall, in addition to the
above requirements, comply with the provisions of existing laws applicable to
them. In the case of all other foreign corporations, no application for license
to transact business in the Philippines shall be accepted by the Securities and
Exchange Commission without previous authority from the appropriate
government agency, whenever required by law.
Foreign corporations already issued a license to transact business in the
Philippine prior to the effectivity of the Code continues to have such authority
under the terms and conditions of the license. Sec. 124 provides:
Sec. 124. Application to existing foreign corporations. - Every
foreign corporation which on the date of the effectivity of this Code is
authorized to do business in the Philippines under a license therefore
issued to it, shall continue to have such authority under the terms and
condition of its license, subject to the provisions of this Code and other
special laws.
C. MODE OF ENTRY OF FOREIGN CORPORATIONS
1. Branch Office – of a foreign corporation is one which carries out the
Upon compliance with the provision of Sec. 125, other special laws and the
rules and regulations implementing them, the SEC shall thereafter issue the
license.
Within 60 days after the issuance of the license, a foreign corporation, except
those engaged in foreign banking or insurance, shall deposit with the SEC,
for the benefit of creditors, securities consisting of (1) bonds or other
evidence of indebtedness of the Philippine government or its political
subdivision, or of a GOCC, (2) shares of stock in ―registered enterprises‖ as
this term is defined under RA 5186, (3) shares of stock in domestic
corporations registered in the stock exchange and (4) shares of stock in
domestic insurance companies and banks or any combination thereof
with an actual market value of P100,000.00.
Additional securities may be required by the SEC if the market value of the
securities n deposit has decreased by at least 10%. Sec. 126 provides:
Sec. 126. Issuance of a license. - If the Securities and
Exchange Commission is satisfied that the applicant has complied
with all the requirements of this Code and other special laws, rules and
regulations, the Commission shall issue a license to the applicant to
transact business in the Philippines for the purpose or purposes specified
in such license. Upon issuance of the license, such foreign corporation
may commence to transact business in the Philippines and continue to do
so for as long as it retains its authority to act as a corporation under the
laws of the country or state of its incorporation, unless such license is
sooner surrendered, revoked, suspended or annulled in accordance with this
Code or other special laws.
Within sixty (60) days after the issuance of the license to transact business in
the Philippines, the license, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
controlled corporations and entities, shares of stock in "registered
enterprises" as this term is defined in Republic Act No. 5186, shares of stock
in domestic corporations registered in the stock exchange, or shares of stock
in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
thousand (P100,000.) pesos; Provided, however, That within six (6) months
after each fiscal year of the licensee, the Securities and Exchange
Commission shall require the licensee to deposit additional securities
equivalent in actual market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also
require deposit of additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%) percent of their
actual market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the additional
securities deposited with it if the gross income of the licensee has decreased,
or if the actual market value of the total securities on deposit has increased,
by more than ten (10%) percent of the actual market value of the securities
at the time they were deposited. The Securities and Exchange Commission
may, from time to time, allow the licensee to substitute other securities for
those already on deposit as long as the licensee is solvent. Such licensee
shall be entitled to collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do business in the Philippines,
the securities deposited as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction of the Securities and
Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines.
OBJECTIVE OF LICENSE: is not to prevent the foreign corporation
from performing isolated or single act, but to prevent it from acquiring a
domicile for the purpose of pursuing its business without taking steps to
render it amenable to suit in the local courts. If the foreign corporation
transacts business in the Philippines without the requisite license, its
officers may be subjected to the penal provisions of Sec. 144 of the Code.
business activities of the foreign corporation itself and derives income
from the Philippines (Sec. 1, C, IRR of RA No. 7042). As such, the
juridical entity involved is one and the same;

2. Representative or Liason Office – one which deals directly with
the clients of the parent company but does not derive income from the
host country and is fully subsidized by the head office. It undertakes
activities such as but not limited to information dissemination and
promotion of the company’s products;
3. Local Subsidiary – A foreign corporation may form or organize a
separate corporation under the Foreign Investment Act (RA 7042) by
making at least a majority of the investments therein. The corporation
thus formed becomes known as a local subsidiary of the investing
foreign corporation which becomes a legally independent unit governed
by the laws of the Philippines. Ballantine calls it ―domestication‖ in
the sense that the foreign corporation is granted the right to
obtain a charter or organize itself into a domestic corporation under
the general laws of the other state;
4. Regional or Area Headquarters – is an office whose purpose is to
act as an administrative branch of a multinational company engaged in
international trade which principally serves as a supervision,
communications and coordinating center for its subsidiaries, branches or
affiliates in the Asia-Pacific Region and other foreign markets and which
does not earn or derive income in the Philippines (Sec. 2(2), RA 8756).
It cannot in any manner, participate in the management of any
subsidiary or branch office in the Philippines nor shall it market goods
and services in behalf of its mother company, branches or affiliates.
5. Regional Operating Headquarters – is a foreign business entity
which is allowed to derive income in the Philippines by performing
qualifying services exclusively to its affiliates, subsidiaries or branches in
the Philippines, in the Asia-Pacific Region and in other foreign markets
(Sec. 2(3), RA 8756).
Qualifying services, under RA 8756, include among others: general
administration and planning, business planning and coordination,
sourcing or procurement of raw materials and components, corporate
finance advisory services, marketing control and sales promotion,
training and personnel management, logistic service, research and
development services and the like.
The Regional or Area Headquarters and Regional Operating
Headquarters are granted certain tax incentives such as exemption from
all kinds of local taxes, fees or charges imposed by local government
units except real property tax on land improvements; tax and duty-free
importation of training materials and equipment; and importation of
motor vehicles.
6. Regional Warehouse – one whose activities are limited to serving as
supply depot of Regional or Area Headquarters or Regional Operating
Headquarters in the Philippines, after securing a license therefor from
the Philippine Economic Zone Authority (PEZA) or the concerned
ecozone authorities. The regional warehouse shall only be used for the
storage, deposit and safekeeping of its spare parts, components,
marking, labelling and cutting or altering to customer’s specifications but
shall not directly engage in trade nor solicit business, promote any sale
nor enter into contracts for the sale or disposition of goods in the
Philippines, except those for delivery to an authorized distributor in the
country.
7. Joint Venture – is a one-time grouping of two or more persons,
natural or juridical, for carrying out a specified undertaking. Under Sec.
1, L of RA 7042, it is combination of property, money, efforts, skill or
knowledge to carry out a single business enterprise for profit, which is
duly registered with the SEC as a corporation or partnership. No license
to do business is required on the part of the foreign corporation entering
into such kind of a business venture since mere investment does no
to do and has not designated an agent to receive summons, then service of
constitute doing business as per the Implementing Rules and
Regulations of RA 7042 unless, of course, the foreign corporation
actively participates in the management thereof.
D. RESIDENT AGENT
As a condition precedent to the grant of license to do or transact business in
the Philippines, the foreign corporation is required to designate its resident
agent on whom summons and other legal processes my be served in all
actions or legal proceedings against such corporation. Sec. 128 provides:
Sec. 128. Resident agent; service of process. - The Securities
and Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by
any foreign corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney designating some
person who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or other
legal proceedings against such corporation, and consenting that service
upon such resident agent shall be admitted and held as valid as if served
upon the duly authorized officers of the foreign corporation at its home
office. Any such foreign corporation shall likewise execute and file with the
Securities and Exchange Commission an agreement or stipulation,
executed by the proper authorities of said corporation, in form and
substance as follows:
"The (name of foreign corporation) does hereby stipulate and agree, in
consideration of its being granted by the Securities and Exchange
Commission a license to transact business in the Philippines, that if at any
time said corporation shall cease to transact business in the Philippines, or
shall be without any resident agent in the Philippines on whom any summons
or other legal processes may be served, then in any action or proceeding
arising out of any business or transaction which occurred in the Philippines,
service of any summons or other legal process may be made upon the
Securities and Exchange Commission and that such service shall have the
same force and effect as if made upon the duly-authorized officers of the
corporation at its home office."
Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or other legal
process to the corporation at its home or principal office. The sending of such
copy by the Commission shall be necessary part of and shall complete such
service. All expenses incurred by the Commission for such service shall be
paid in advance by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its
duty to immediately notify in writing the Securities and Exchange
Commission of the new address.
As to who may be appointed as resident agent, the Corporation Code
provides:
Sec. 127. Who may be a resident agent. - A resident agent may
be either an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided, That in
the case of an individual, he must be of good moral character and of
sound financial standing.
Culled from the provisions of Sec. 128 is that the necessity of the
appointment of a resident agent is only for the purpose of receiving
summons and other legal processes in any legal action or proceeding against
the foreign corporation. And, when a foreign corporation has designated
a person to receive summons in judicial proceedings affecting the
corporation that designation is exclusive and service of summons is
without force and effect unless made on him (Poizat vs. Mogan). Thus,
while the law allows service upon the SEC (Sec. 128), or any of its officers
or agents within the Philippines (Sec. 13, Rule 14, Rules of Civil Procedure),
the latter two modes may become effective only if the foreign corporation
failed or neglected to designate such a person or an agent. In a decision,
therefore, rendered by the SC in the case of General Corporation of
the Philippines vs. Union Insurance Soc. Of Canton Ltd (87 Phil 313), it
was held that ―where such foreign corporation actually doing business
here has not applied for a license
summons on it will be made pursuant to the provisions of the Rules of
Court‖. If such foreign corporation has a license to do business, then
summons to it will be served on the agent designated by it for the purpose,
or otherwise in accordance with the Corporation Law.
E. DOING BUSINESS WITHOUT LICENSE AND ITS EFFECT
A foreign corporation must secure the necessary license before it can
transact or do business in the Philippines. This is the clear import of Sec.
123 when it states that it shall have the right to transact business in the
Philippines after it shall have obtained a license. Without such a license, the
law provides for certain consequences:
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.
RESPONSIBLE OFFICERS: of a foreign corporation doing business in
the Philippines without the requisite license may be subject to the
penal sanctions provided for in Sec. 144 of the Code which may
either be imprisonment or fine.
CAPACITY TO SUE and BE SUED: The corporation may not likewise sue
or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines while it may be sued or proceeded
against before such court or agency on any valid cause of action recognized
under the law.
WHETHER OR NOT IT CAN SUE:
1. A foreign corporation transacting or doing business in the Philippines
with a license can sue before Philippine Courts;
2. Subject to certain exceptions, a foreign corporation doing business in
the country without a license cannot sue in Philippine Courts; and
3. If it is not transacting business in the Philippines, even without a license,
it can sue before the Philippine Courts.
―It is not the lack of required license but doing business without
a license which bars a foreign corporation from access to our
courts‖ (Universal Shipping vs. IAC)
EXCEPTIONS:
1. Foreign corporations can sue before the Philippine Courts if the act or
transaction involved is an ―isolated transaction‖ or the corporation
is not seeking to enforce any legal or contractual rights arising from,
or growing out of, any business which it has transacted in the
Philippines (Western Equipment Supply vs. Reyes)
2. Neither is a license required before a foreign corporation may sue
before the forum if the purpose of the suit is to protect its
trademark, trade name, corporate name, reputation or goodwill;
(Western Equipment Supply vs. Reyes)
3. Or where it is based on a violation of the Revised Penal Code (Le
Chemise Lacoste, SA vs. Fernandez);
4. Or merely defending a suit filed against it (Time, Inc. vs. Reyes)
5. Or where a party is estopped to challenge the personality of the
corporation by entering into a contract with it (Communications
Materials and Design, Inc. vs. CA and ITEC)
WHETHER OR NOT IT CAN BE SUED:
1. A foreign corporation transacting business in the Philippines with the
requisite license can be sued in Philippine Courts;
2. A foreign corporation transacting business in the Philippines without a
license can be sued in Philippine Courts;
3. If it is not doing business in the Philippines, it cannot be sued in
Philippine Courts for lack of jurisdiction.
―DOING BUSINESS‖: As to what constitutes ―doing business‖
or ―transacting business‖ which would bar a foreign corporation from
access to our courts, no general rule or governing principle can be laid
down. Indeed,
such case must be judged in the light of its peculiar environmental
circumstance. However, the TRUE TEST seems to be 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. The term implies a continuity of
commercial dealings and arrangements and contemplates, to the extent, the
performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of, the purpose and objects
of its organization (Metholatum, Inc. vs. Mangaliman)
PRESENT STATE OF LAW AS TO ―DOING BUSINESS‖: under
theForeign Investment Act (Sec. 3, d), ―doing business‖ would include:
1. Soliciting orders, service contracts;
2. Opening offices, whether called ―liason offices‖ or branches;
3. Appointing representatives or distributor domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods
totalling 180 days or more;
4. Participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
5. Any other act that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts
or works, or the exercise of functions normally incident to and in
progressive prosecution of commercial gain or of the purpose and object
of the business organization.
Provided, however, that the phrase ―doing business‖ shall not be deemed
to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or exercise of
rights as such investor, nor having a nominee director or officer to
represent its interest in such corporation; nor appointing a representative
or distributor domiciled in the Philippines which transacts business in its
own name and for its own account.
ISOLATED TRANSACTION: even if it is pursuant of the usual business
does not constitute doing business the doing of which would not bar a
foreign corporation from access to Philippine Courts (Facilities Mgt. vs. Dela
Osa)
THE MENTHOLATUM CO., INC., ET AL., petitioners,
vs.
ANACLETO MANGALIMAN, ET AL., respondents
(G.R. No. L-47701; June 27, 1941)
FACTS: A complaint was filed by herein petitioner, a foreign corporation
having Philippine-American Drug Co. as its sole distributor, for
infringement of trademark for its product ―Mentholatum‖ and unfair
competition alleging that herein respondents Anacleto and Florencio
Mangaliman prepared a medicament and salve named ―Mentholiman‖
which they sold to the public packed in the same size, color and shape as
its product Metholatum.
ISSUE: WON petitioner corporation is transacting business in the Philippines?
HELD: No. No general rule or governing principle can be laid
down as to what constitutes "doing" or "engaging in" or
"transacting" business. Indeed, each case must be judged in
the light of its peculiar environmental circumstances. The true
test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or
enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another. (Traction
Cos. v. Collectors of Int. Revenue [C. C. A. Ohio], 223 F. 984, 987.) 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, and in progressive
prosecution of, the purpose and object of its organization. (Griffin v.
Implement Dealers' Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline Oil & Gas
Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive
Material Co. v. American Standard Metal Products Corp., 158 N. E. 698, 703,
327 III. 367.)
In its decision of June 29, 1940, the Court of Appeals concluded that "it is
undeniable that the Mentholatum Co., through its agent, the
Philippine-American Drug Co., Inc., has been doing business in the
Philippines by selling
its products here since the year 1929, at least." This is assailed by petitioners
as a pure conclusion of law. This finding is predicated upon the testimony of
Mr. Roy Springer of the Philippine-American Drug Co., Inc., and the pleadings
filed by petitioners. The complaint filed in the Court of First Instance of
Manila on October 1, 1935, clearly stated that the Philippine-American
Drug Co., Inc., is the exclusive distributing agent in the Philippine Islands
of the Mentholatum Co., Inc., in the sale and distribution of its product
known as the ―Mentholatum." The object of the pleadings being to draw
the lines of battle between litigants and to indicate fairly the nature of
the claims or defenses of both parties, a party cannot subsequently
take a position contradictory to, or inconsistent with, his pleadings, as
the facts therein admitted are to be taken as true for the purpose of the
action. It follows that whatever transactions the Philippine-American Drug
Co., Inc., had executed in view of the law, the Mentholatum Co., Inc.,
did it itself. And, the Mentholatum Co., Inc., being a foreign
corporation doing business in the Philippines without the license required
by section 68 of the Corporation Law, it may not prosecute this action for
violation of trade mark and unfair competition.
The writ prayed for should be, as it hereby is, denied, with costs against the
petitioners.
ISOLATED TRANSACTION
MARSHALL-WELLS COMPANY, plaintiff-appellant,
vs.
HENRY W. ELSER & CO., INC., defendant-appellee
(G.R. No. 22015; September 1, 1924)
FACTS: Plaintiff sued defendant for the unpaid balance of a bill of goods
amounting to P2,660.74, for which the plaintiff holds accepted drafts.
Defendant demurred on the ground that plaintiff had no capacity to sue
which the trial court granted. And in as much as the plaintiff could not allege
compliance with the statute, the order was allowed to become final and no
appeal was perfected.
ISSUE: WON obtaining a license is required before a foreign corporation
can maintain any kind of action in the courts of the Philippine Islands?
HELD: No. The object of the statute was to subject the foreign
corporation doing business in the Philippines to the jurisdiction of
its courts. The object of the statute 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 local
courts. The implication of the law is that it was never the purpose of the
Legislature to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines, from securing redress in
the Philippine courts, and thus, in effect, to permit persons to avoid their
contracts made with such foreign corporations. The effect of the statute
preventing foreign corporations from doing business and from bringing
actions in the local courts, except on compliance with elaborate
requirements, must not be unduly extended or improperly applied. It
should not be construed to extend beyond the plain meaning of its
terms, considered in connection with its object, and in connection with
the spirit of the entire law.
The law simply means that no foreign corporation shall be
permitted "to transact business in the Philippine Islands," as this
phrase is known in corporation law, 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. A contrary
holding would bring the law to the verge of unconstitutionality, a result
which should be and can be easily avoided.
The order appealed from shall be set aside and the record shall be returned
to the court of origin for further proceedings. Without special finding as
to costs in this instance, it is so ordered.
HATHIBHAI BULAKHIDAS, petitioner,
vs.
THE HONORABLE PEDRO L. NAVARRO, as Presiding Judge of
the
Court of First Instance of Rizal, Seventh Judicial District,
Pasig, Metro Manila, Branch 11 and DIAMOND SHIPPING
CORPORATION, respondent.
(G.R. No. L-49695; April 7, 1986)
FACTS: Petitioner, a foreign partnership, filed a complaint for
damages against respondent Diamond Shipping Corporation having failed to
deliver the goods shipped to it by petitioner to their proper destination.
Said complaint alleged that the plaintiff is ―not doing business in
the Philippines‖ and that it is ―suing under an isolated transaction‖.
Defendant filed a motion to dismiss on the ground that plaintiff has no
capacity to sue which was granted.
ISSUE: WON a corporation not engaged in business in the Philippines can
institute an action before our courts?
HELD: Yes. This issue is already well-settled in this jurisdiction. In Aetna
Casualty and Surety Co. vs. Pacific Star Lines, 80 SCRA 635, is a case similar
to the present one in that the action is also one for recovery of damages
sustained by cargo shipped on defendants' vessels. Defendants set up the
defense that plaintiff is a foreign corporation not duly licensed to do
business in the Philippines and, therefore, without capacity to sue and be
sued. In overruling said defense, this Court said:
It is settled that if a foreign corporation is not engaged in
business in the Philippines, it may not be denied the right to file
an action in Philippine courts for isolated transactions.
The object of Sections 68 and 69 of the Corporation law 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 local courts. It was
never the purpose of the Legislature to exclude a foreign corporation
which happens to obtain an isolated order for business from the
Philippines, from securing redress in the Philippine courts.
And in Eastboard Navigation, Ltd. et al vs. Juan Ysmael & Co., Inc., this
Court held that:
(d) While plaintiff is a foreign corporation without license
to transact business in the Philippines, it does not follow that it
has no capacity to bring the present action. Such license is
not necessary because it is not engaged in business in the
Philippines. In fact, the transaction herein involved is the first business
undertaken by plaintiff in the Philippines, although on a previous occasion
plaintiff's vessel was chartered by the National Rice and Corn
Corporation to carry rice cargo from abroad to the Philippines. These
two isolated transactions do not constitute engaging in business in the
Philippines within the purview of Sections 68 and 69 of the Corporation
Law so as to bar plaintiff from seeking redress in our courts. (Marshall
Wells Co. vs. Henry W. Elser & Co. 49 Phil., 70; Pacific Vegetable Oil
Corporation vs. Angle O. Singson, G.R. No. L-7917, April 29, 1955.)
Again, in Facilities Management Corporation vs. De la Osa 89 SCRA 131, 139,
following Aetna Casualty & Surety Co. vs. Pacific Star Line, supra, held a
foreign corporation not engaged in business in the Philippines is not barred
from seeking redress from the courts of the Philippines.
WHEREFORE, the order of respondent Court dismissing the petitioner's
complaint is hereby set aside and the case remanded for further proceedings,
with costs against private respondent.
THE SWEDISH EAST ASIA CO., LTD., petitioner,
vs.
MANILA PORT SERVICE AND/OR MANILA RAILROAD COMPANY,
respondents
(G.R. No. L-26332; October 26, 1968)
FACTS: MS SUDAN, owned and operated by petitioner, a swedish company
without license in the Philippines, discharged cargo to herein respondent. By
mistake, cargo destined for Hongkong consisting of 16 bundles of ―lifts
and mild steel tees window sections‖ covering which the petitioner had
issued a bill of lading to a Hongkong consignee, were also landed at
Manila. The erroneous discharge was obviously engendered by the fact
that the same ship on the same day discharged 40 similar bundles destined
for consignee in the Philippines.
Petitioner, through a complaint filed in the CFI of Manila, sought for the
recovery of the value of the missing goods which it paid to the Hongkong
consignee, which was granted by the lower court.
On appeal, the CA reversed the trial court’s decision.
ISSUE: WON petitioner should be barred from access to our courts?
HELD: No. The respondents challenge the petitioner's capacity to sue, it
being admittedly a foreign corporation without license to engage in
business in the Philippines, citing section 69 of the Corporation Law. It
must be stated however that this section is not applicable to
a foreign corporation performing single acts or "isolated
transactions." There is nothing in the record to show that the
petitioner has been in the Philippines engaged in continuing business or
enterprise for which it was organized, when the sixteen bundles were
erroneously discharged in Manila, for it to be considered as transacting
business in the Philippines. The fact is that the bundles, the value of
which is sought to be recovered, were landed not as a result of
a business transaction, "isolated" or otherwise, but due to a
mistaken belief that they were part of the shipment of forty
similar bundles consigned to persons or entities in the Philippines.
There is no justification, therefore, for invoking the provisions of
section 69 of the Corporation Law.
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and
another judgment is hereby rendered ordering the respondents, jointly and
severally, to pay the petitioner the sum of P2,349.62 with interest thereon at
the rate of 6% per annum from March 13, 1961, the date of the filing of the
complaint, until the amount shall have been fully paid, and the sum of P600
as attorney's fees. Costs against the respondents.
ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING
CORPORATION and AURORA CONSOLIDATED SECURITIES and
INVESTMENT CORPORATION, petitioners,
vs.
THE COURT OF APPEALS, THE HONORABLE MAXIMIANO C.
ASUNCION (Court of First Instance of Laguna, Branch II [Sta.
Cruz]) and STOKELY VAN CAMP, INC., respondents
(G.R. No. L-61523; July 31, 1986)
FACTS: Respondent Stokely Van Camp, Inc., a corporation organized and
existing under the laws of the state of Indiana, filed a complaint against
Banahaw Milling Corporation, Antam Consolidated, Inc., Tambunting
Trading Corporation, Aurora Consolidated Securities and Investment
Corporation and United Coconut Oil Mills, Inc. (Unicom) for collection of sum
of money.
One of respondent’s subdivision ―Capital City Product Company‖ (Capital
City) entered into a contracts where Coconut Oil Manufacturing (Phil),
Inc. (Comphil) were to sell to the former 500 long tons of crude coconut
oil at US$0.30/lb, which it failed to comply with and Capital City was forced
to buy its coconut oil needs from the open market at a higher price
resulting in a loss of US$103,600.
A 2nd contract was entered into to settle Capital City’s loss, Comphil was
supposed to repurchase the coconut oil earlier purchased from the open
market at a price of US$ 0.3925/lb, but the latter failed to pay.
To compensate for the loss, Comphil entered into a 3rd contract agreeing
to sell the same quantity of coconut oil at a price of US$0.3425/lb which
was below the market price. That by the discounted amount, Comphil would
have compensated for the loss Capital City sustained. But still, Comphil
failed to deliver.
Petitioners filed a motion to dismiss the complaint on the ground that
respondent had no personality to maintain a suit which was denied. The
subsequent petition for certiorari was dismissed by the appellate court.
ISSUE: WON respondent is doing business in the Philippines?
HELD: No. In the case of Top-Weld Manufacturing, Inc. v. ECED, S.A. (138
SCRA 118,127-128), we stated:
There is no general rule or governing principle laid down as
to what constitutes ‗doing' or 'engaging in' or 'transacting
business in the Philippines. Each case must be judged in the
Light of its peculiar circumstance (Mentholatum Co. v. Mangaliman,
72 Phil.524). Thus, a foreign corporation with a settling agent in the
Philippines which issues twelve marine policies covering different
shipments to the Philippines (General Corporation of the Philippines
v. Union Insurance Society of Canton, Ltd., 87 Phil. 313) and a foreign
corporation which had been collecting premiums on outstanding
policies (Manufacturing Life Insurance Co., v. Meer, 89 Phil. 351) were
regarded as doing business here. The acts of these corporations should
be distinguished from a single or isolated business transaction or
occasional, incidental and casual transactions which do not come
within the meaning of the law. Where a single act or transaction ,
however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said
single act or transaction constitutes 'doing' or 'engaging in' or 'transacting'
business in the Philippines. (Far East International Import and Export
Corporation v. Nankai Kogyo, Co., 6 SCRA 725).
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
xxx xxx xxx
...The true test, however, seems to be whether the
foreign corporation is continuing the body or substance of the
business or enterprise for which it warning-organized or
whether it has substantially was retired from it and turned it
over to another. (Traction Cos. v. Collectors of Int. Revenue [CCA.,
Ohio], 223 F. 984, 987.) The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the
performance of acts or workers or the exercise of some of the
functions normally incident to, and in progressive prosecution of, the
purpose and object of its organization. (Griffin v. Implement Dealers'
Mut. Fire Ins. Co., 241 N.W. 75, 77, Pauline Oil & Gas Co. v. Mutual
Tank Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive Material Co.
v. American Standard Metal Products Corp., 158 N.E. 698, 703, 327 111.
367.) '
In the case at bar, the transactions entered into by the respondent
with the petitioners are not a series of commercial dealings which
signify an intent on the part of the respondent to do business in the
Philippines but constitute an isolated one which does not fall under
the category of "doing business." The records show that the only reason
why the respondent entered into the second and third transactions with the
petitioners was because it wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude coconut oil under the first
transaction and in order to give the latter a chance to make good on their
obligation. Instead of making an outright demand on the petitioners, the
respondent opted to try to push through with the transaction to recover the
amount of US$103,600.00 it lost. This explains why in the second
transaction, the petitioners were supposed to buy back the crude coconut oil
they should have delivered to the respondent in an amount which will earn
the latter a profit of US$103,600.00. When this failed the third
transaction was entered into by the parties whereby the petitioners were
supposed to sell crude coconut oil to the respondent at a discounted rate,
the total amount of such discount being US$103,600.00. Unfortunately, the
petitioners failed to deliver again, prompting the respondent to file the suit
below.
From these facts alone, it can be deduced that in reality, there was only one
agreement between the petitioners and the respondent and that was the
delivery by the former of 500 long tons of crude coconut oil to the latter, who
in turn, must pay the corresponding price for the same. The three seemingly
different transactions were entered into by the parties only in an effort to
fulfill the basic agreement and in no way indicate an intent on the part of the
respondent to engage in a continuity of transactions with petitioners which
will categorize it as a foreign corporation doing business in the Philippines.
Thus, the trial court, and the appellate court did not err in denying the
petitioners' motion to dismiss not only because the ground thereof does not
appear to be indubitable but because the respondent, being a
foreign corporation not doing business in the Philippines, does not need to
obtain a license to do business in order to have the capacity to sue
We agree with the respondent that it is a common ploy of defaulting local
companies which are sued by unlicensed foreign companies not engaged in
business in the Philippines to invoke lack of capacity to sue. The respondent
cites decisions from 1907 to 1957 recognizing and rejecting the improper use
of this procedural tactic. (Damfschieffs Rhedered Union v. Cia Trans-
atlantica, 8 Phil. 766 11907]; Marshall-Wells Co. v. Henry W. Elser & Co.,
49 Phil. 70 [1924]; Western Equipment Co. v. Reyes, 51 Phil. 115
[1927]; Central Republic Bank v. Bustamante, 71 Phil. 359 [1941]; Pacific
Vegetable Oil Co. v. Singson, 96 Phil.-986 [1955]; Eastboard Navigation,
Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 [1957]). The doctrine of
lack of capacity to sue based on failure to first acquire a local license is
based on considerations of sound public policy. It intended to favor domestic
corporations who enter was never into solitary transactions with unwary
foreign firms and then repudiate their obligations simply because the latter
are not licensed to do business in this country. The petitioners in this case
are engaged in the exportation of coconut oil, an export item so vital in
our country's economy. They filed this petition on the ground that Stokely
is an unlicensed foreign corporation without a bare allegation or showing
that their defenses in the collection case are valid and meritorious. We
cannot fault the two courts below for acting as they did.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is DISMISSED for
lack of merit. The Temporary Restraining Order dated February 2, 1983 is
hereby DISSOLVED. Costs against the petitioners.
HAVING A REPRESENTATIVE IN THE PHILIPPINES
FACILITIES MANAGEMENT CORPORATION, J. S. DREYER, and J. V.
CATUIRA, petitioners,
vs.
LEONARDO DE LA OSA AND THE HONORABLE COURT OF
INDUSTRIAL RELATIONS, respondents
(G.R. No. L-38649; March 26, 1979)
FACTS: Respondent Leonardo dela Osa filed a petition for reinstatement
with recovery of his overtime compensation, swing shift and graveyard
shift differentials.
Petitioner corporation filed a letter-answer interposing special defenses:
1. Facilities Management Corporation and JS Deyer are domiciled in Wake
Islands and is beyond the territorial jurisdiction of the Philippine
Government; and
2. JV Catuira, though an employee of respondent corporation and
stationed in Manila does not have power and authority of legal
representation; and
3. The employment of respondent is with approval of the Department of
Labor of the Philippines.
Subsequently, a motion to dismiss was filed which was denied.
ISSUE: WON petitioner, FMC, has been doing business in the Philippines to
vest the Philippine court with jurisdiction?
HELD: Yes. From the facts of record, the petitioner may be considered as
doing business in the Philippines within the scope of Section 14, Rule 14 of
the Rules of the Court which provide:
SEC 14. Service upon private foreign corporations. If the defendant is a
foreign corporation or a non-resident joint stock company or association:
doing business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose or, if there be no such
agent, on the government official designated by law to that effect, or on any
of its officers or agents within the Philippines.
Indeed, the petitioner, in compliance with Act 2486 as implemented by
Department of Labor Order No. IV dated May 20, 1968 had to appoint Jaime
V. Catuira, 1322 A. Mabini, Ermita, Manila as agent for FMC with authority
to execute Employment Contracts and receive, in behalf of that
corporation, legal services from and be bound by processes of the
Philippine Courts of Justice, for as long as he remains an employee of
FMC (Annex 'I', rollo, p. 56). It is a fact that when the summons for the
petitioner was served on Jaime V. Catuira he was still in the employ of the
FMC.
In his motion to dismiss Annex B', p. 19, Rollo), petitioner admits that Mr.
Catuira represented it in this country 'for the purpose of making
arrangements for the approval by the Department of Labor of the
employment of Filipinos who are recruited by the Company as its own
employees for assignment abroad.' In effect, Mr. Catuira was an officer
representing petitioner in the Philippines.
Under the rules and regulations promulgated by the Board of
Investments which took effect Feb. 3, 1969, implementing Rep.
Act No. 5455, which took effect Sept. 30, 1968, the phrase
'doing business' has been exemption with illustrations, among
them being as follows:
xxx xxx xxx
(f) the performance within the Philippines of any act or combination of acts
enumerated in section l(l) of the Act shall constitute 'doing business'
therein. in particular, 'doing business includes:
(1) Soliciting orders, purchases (sales) or service contracts. Concrete and
specific solicitations by a foreign firm, not acting independently of
the foreign firm amounting to negotiation or fixing of the terms and
conditions of sales or service contracts, regardless of whether the
contracts are actually reduced to writing, shall constitute doing
business even if the enterprise has no office or fixed place of business in
the Philippines. xxx
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for
its own account, and not in the name or for the account of the
principal.
xxx xxx xxx
(4) Opening offices, whether called 'liaison'offices, agencies or branches,
unless proved otherwise.
xxx xxx xxx
(10) 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, or in
the progressive prosecution of, commercial gain or of the purpose and
objective of the business organization
Indeed, if a foreign corporation, not engaged in business in the Philippines, is
not banned from seeking redress from courts in the Philippines, a fortiori,
that same corporation cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the Philippines.
WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST
THE PETITIONERS
SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS
FAR EAST INTERNATIONAL IMPORT and EXPORT CORPORATION,
plaintiff-appellee,
vs.
NANKAI KOGYO CO. LTD., ET AL., defendants,
NANKAI KOGYO CO., LTD., defendant-appellant
(G.R. No. L-13525; November 30, 1962)
FACTS: Plaintiff Far East entered into a contract with herein appellant Nankai
for the sale of steel scrap. Only 1,058.6 metric tons were delivered upon the
expiration of the export license of Far East.
Far East later on wrote to Everett Steamship Corporation, requesting the
issuance of a complete set of the Bill of Lading for the shipment, in order
that payment thereof be effected against the letter of credit opened by
Nankai.
For failure of Nankai and the shipping agent to comply, Far East filed a
complaint for specific performance.
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over its
person and the subject matter, which was denied.
ISSUE: WON the trial court acquired jurisdiction over the subject matter and
over the person of the defendant-appellant through the proper service of
summons?
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to
take cognizance of the case because the Nankai is not doing business in the
islands; and that while it has entered into the transaction in question, same,
however, does not constitute "doing business", so as to make it amenable to
summons and subject it to the Court's jurisdiction. It bolstered this claim by a
provision in the contract which provides that "In case of disputes, Board of
Arbitration may be formed in Japan. Decision of the Board of Arbitration
shall be final and binding on both BUYER and SELLER".
The rule pertinent to the questions in issue provides —
SEC. 14. Service upon private foreign corporations. — If the defendant is a
foreign corporation, or a non-resident joint stock company or
association, doing business in the Philippines, service may be made on
its resident agent designated in accordance with law for that purpose,
or, if there be no such agent, on the government official designated by
law to that effect, or on any officer or agent within the Philipines. (Rule 7).
The above rule indicates three modes of effecting service of
summons upon a private, foreign corporation, viz: (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 cial designated by law to that effect; and (3) by serving
on any officer or agent of said corporation with Philippines. The
plaintiff complied with the third stated above, for it has been shown that Mr.
Ishida, who personally signed the contract for the purchase of the scrap in
question in behalf of the Nankai Kogyo, the Trade Manager of said Company,
Mr. Tominaga the Chief of the Petroleum Section of the same company and
Mr. Yoshida was the man-in-charge of the Import Section of the company's
Tokyo Branch. All these three, including the first two who were served with
Summons, were officers of the defendant company.
Not only did appellant allege non-jurisdictional grounds in its pleadings to
have the complaint dismissed, but it also went into trial on the merits and
presented evidence destined to resist appellee's claim. Verily, there could not
be a better situation of acquired jurisdiction based on consent. Consequently,
the provision of the contract wherein it was agreed that disputes should be
submitted to a Board of Arbitration which may be formed in Japan (in the
supposition that it can apply to the matter in dispute - payment of the scrap),
seems to have been waived with appellant's voluntary submission. Apart from
the fact that the clause employs the word "may".
From the proven facts obtaining in this particular case, the
appellant's defense of lack of jurisdiction appears unavailing. The case
of Pacific Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L-
7154, October 23, 1954, relied upon in the Motion to Dismiss and other
pleadings presented by defendant-appellant, stand on a different footing.
Therein, We made the following pronouncements:
. . . . And the only act it did here was to secure the services of Luceno
Pelingon to act as cook and chief steward in one of its vessels authorizing
to that effect the Luzon Stevedoring Co., Inc., a domestic corporation, and
the contract of employment was entered into on July 18, 1951. It
further appears that petitioner has never sent its ships to the Philippines
nor has it transported nor even solicited the transportation passengers
and cargoes to and from the Philippines. In words, petitioner engaged
the services of Pelingon not as part of the operation of its business but
merely to employ him as member of the crew in one of its ships. That
act apparently is an
isolated one, incidental, or casual, and "not of a character to indicate a
purpose to engage in business" within the meaning of the rule.
(Emphasis ours.)
ISSUE2: WON the single act done in this case can be considered as doing
business in the Philippines?
HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that
appellant was doing business in the Philippines corroborated by no less than
Nabuo Yoshida, one of appellant's officers, that he was sent to the Philippines
by his company to look into the operation of mines, thereby revealing the
defendant's desire to continue engaging in business here, after
receiving the shipment of the iron under consideration, making the
Philippines a base thereof.
The rule stated in the preceding section that the doing of a single act
doesnot constitute business within the meaning of statutes prescribing the
conditions to be complied with the foreign corporations must be qualified
to this extent, that a single act may bring the corporation. In such a
case, the single act of transaction is not merly 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, and to make the
state a basis of operations for the conduct of a part of corporation's
ordinary business. (17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572-
573, and authorities cited therein.) (Emphasis ours.)
WHEREFORE, the judgment appealed from is hereby affirmed, with costs
against defendant-appellant Nankai Kogyo.
ESTOPPED TO QUESTION PERSONALITY TO SUE
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTI-
TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and
FRANCISCO S. AGUIRRE, petitioners,
vs.
THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
INC., respondents
(G.R. No. 102223; August 22, 1996)
FACTS: Respondent ITEC entered into a contract with petitioner ASPAC
referred to as ―Representative Agreement‖ where ASPEC was assigned
as ITEC’s ―exclusive representative‖ in the Philippines for the sale of
ITEC’s products.
By virtue of said contract, ASPAC sold electronic products exported by ITEC,
to their sole customer PLDT. ASPAC and PLDT executed a document entitled
―PLDT-ASPAC/ITEC PROTOCOL‖ which defined the project detais for
the supply of ITEC’s Interface Equipment in connection with the 5th
Expansion Program of PLDT.
ITEC later on terminated its representative agreement with ASPAC and fied a
complaint alleging that the latter and another corporation Digital
Base Communications, Inc. (DIGITAL), the president of which is Francisco
Aguirre who is also the president of ASPAC, used knowledge and
information of ITEC’s product specifications to develop their own line of
equipment and product support, which are similar, if not identical to ITEC’s
own and offering them to ITEC’s customers.
Defendants filed a motion to dismiss on the ground that ITEC had no legal
capacity to sue as it is a foreign corporation doing business in the Philippines
without the required license, which was denied. On appeal, the CA affirmed
the decision of the trial court.
ISSUE: WON private respondents ITEC is an unlicensed corporation doing
business in the Philippines, and WON it is barred from invoking the injunctive
authority of the courts?
HELD: Yes and No (by estoppel). Generally, a "foreign corporation"
has no legal existence within the state in which it is foreign.
This proceeds from the principle that juridical existence of a
corporation is confined within the territory of the state under
whose laws it was incorporated and organized, and it has no legal
status beyond such
territory. Such foreign corporation may be excluded by any other state from
doing business within its limits, or conditions may be imposed on the exercise
of such privileges. Before a foreign corporation can transact business in this
country, it must first obtain a license to transact business in the Philippines,
and a certificate from the appropriate government agency. If it
transacts business in the Philippines without such a license, it
shall not be permitted to maintain or intervene in any action, suit,
or proceeding in any court or administrative agency of the
Philippines, but it may be sued on any valid cause of action
recognized under Philippine laws.
In a long line of decisions, this Court has not altogether prohibited foreign
corporation not licensed to do business in the Philippines from suing
or maintaining an action in Philippine Courts. What it seeks to prevent
is a foreign corporation doing business in the Philippines without a license
from gaining access to Philippine Courts.
The purpose of the law in requiring that foreign corporations doing
business in the Philippines be licensed to do so and that they appoint an
agent for service of process is to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. The object
is 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 steps necessary to render it amenable to suit in the local courts. The
implication of the law is that it was never the purpose of the legislature to
exclude a foreign corporation which happens to obtain an isolated order for
business from the Philippines, and thus, in effect, to permit persons to avoid
their contracts made with such foreign corporations.
There is no exact rule or governing principle as to what constitutes "doing" or
"engaging" or "transacting" business. Indeed, such case must be judged in
the light of its peculiar circumstances, upon its peculiar facts and upon the
language of the statute applicable. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized.
Article 44 of the Omnibus Investments Code of 1987 defines
the phrase to include:
―soliciting orders, purchases, service contracts, opening
offices, whether called "liaison" offices or branches;
appointing representatives or distributors who are
domiciled in the Philippines or who in any calendar year stay
in the Philippines for a period or periods totalling one hundred
eighty (180) days or more; participating in the management,
supervision or control of any domestic business firm, entity
or corporation in the Philippines, and any other act or acts
that imply a continuity or commercial dealings or
arrangements and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization.‖
Thus, a foreign corporation with a settling agent in the Philippines which
issued twelve marine policies covering different shipments to the Philippines
and a foreign corporation which had been collecting premiums on
outstanding policies were regarded as doing business here.
The same rule was observed relating to a foreign corporation with an
"exclusive distributing agent" in the Philippines, and which has been selling
its products here since 1929, and a foreign corporation engaged in
the business of manufacturing and selling computers worldwide, and
had installed at least 26 different products in several corporations in
the Philippines, and allowed its registered logo and trademark to be used
and made it known that there exists a designated distributor in the
Philippines.
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the
uninterrupted performance by a foreign corporation of
acts pursuant to its primary purposes and functions as a regional
area headquarters for its home office, qualifies such corporation
as one doing business in the country.
Notwithstanding such finding that ITEC is doing business in the country,
These foregoing instances should be distinguished from a single
or isolated transaction or occasional, incidental, or casual
transactions, which do not come within the meaning of the law,
for in such case, the foreign corporation is deemed not engaged
in business in the Philippines.
Where a single act or transaction, however, is not merely incidental or casual
but indicates the foreign corporation's intention to do other business in the
Philippines, said single act or transaction constitutes "doing" or "engaging in"
or "transacting" business in the Philippines.
In determining whether a corporation does business in the Philippines or
not, aside from their activities within the forum, reference may be made
to the contractual agreements entered into by it with other entities in the
country. Thus, in the Top-Weld case (supra), the foreign corporation's
LICENSE AND TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT
with their local contacts were made the basis of their being regarded by
this Tribunal as corporations doing business in the country. Likewise, in
Merill Lynch Futures, Inc. vs. Court of Appeals, etc., the FUTURES
CONTRACT entered into by the petitioner foreign corporation weighed
heavily in the court's ruling.
With the above-stated precedents in mind, we are persuaded to conclude
that private respondent had been "engaged in" or "doing business" in the
Philippines for some time now. This is the inevitable result after a scrutiny of
the different contracts and agreements entered into by ITEC with its various
business contacts in the country, particularly ASPAC and Telephone
Equipment Sales and Services, Inc. (TESSI, for brevity). The latter is a local
electronics firm engaged by ITEC to be its local technical representative, and
to create a service center for ITEC products sold locally. Its arrangements,
with these entities indicate convincingly ITEC's purpose to bring about the
situation among its customers and the general public that they are dealing
directly with ITEC, and that ITEC is actively engaging in business in the
country.
In its Master Service Agreement with TESSI, private respondent required its
local technical representative to provide the employees of the technical and
service center with ITEC identification cards and business cards, and to
correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed to
answer the telephone with "ITEC Technical Assistance Center.", such
telephone being listed in the telephone book under the heading of ITEC
Technical Assistance Center, and all calls being recorded and forwarded to
ITEC on a weekly basis.
What is more, TESSI was obliged to provide ITEC with a monthly report
detailing the failure and repair of ITEC products, and to requisition monthly
the materials and components needed to replace stock consumed in the
warranty repairs of the prior month.
A perusal of the agreements between petitioner ASPAC and the respondents
shows that there are provisions which are highly restrictive in nature, such as
to reduce petitioner ASPAC to a mere extension or instrument of the private
respondent.
The "No Competing Product" provision of the Representative Agreement
between ITEC and ASPAC provides: "The Representative shall not represent
or offer for sale within the Territory any product which competes with an
existing ITEC product or any product which ITEC has under active
development." Likewise pertinent is the following provision: "When acting
under this Agreement, REPRESENTATIVE is authorized to solicit sales within
the Territory on ITEC's behalf but is authorized to bind ITEC only in its
capacity as Representative and no other, and then only to specific customers
and on terms and conditions expressly authorized by ITEC in writing."
When ITEC entered into the disputed contracts with ASPAC and
TESSI, they were carrying out the purposes for which it was
created, i.e., to market electronics and communications products.
The terms and conditions of the contracts as well as ITEC's conduct indicate
that they established within our country a continuous business, and not
merely one of a temporary character.
petitioner is nonetheless estopped from raising this fact to bar ITEC from
instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in Philippine
Courts although not authorized to do business here against a Philippine
citizen or entity who had contracted with and benefited by said corporation.
To put it in another way, 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 a 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.
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria
sua non habere debet — no person ought to derive any advantage of his
own wrong. This is as it should be for as mandated by law, "every person
must in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good
faith."
Concededly, corporations act through agents, like directors and officers.
Corporate dealings must be characterized by utmost good faith and fairness.
Corporations cannot just feign ignorance of the legal rules as in most cases,
they are manned by sophisticated officers with tried management skills and
legal experts with practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and, thereby
allow a reasonable proportion between benefits and expected burdens. This
is a norm which should be observed where one or the other is a foreign
entity venturing in a global market.
As observed by this Court in TOP-WELD (supra), viz:
The parties are charged with knowledge of the existing law at the time they
enter into a contract and at the time it is to become operative. (Twiehaus v.
Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person
is presumed to be more knowledgeable about his own state law than his
alien or foreign contemporary. In this case, the record shows that, at
least, petitioner had actual knowledge of the applicability of R.A. No. 5455
at the time the contract was executed and at all times thereafter. This
conclusion is compelled by the fact that the same statute is now being
propounded by the petitioner to bolster its claim. We, therefore sustain the
appellate court's view that "it was incumbent upon TOP-WELD to know
whether or not IRTI and ECED were properly authorized to engage in
business in the Philippines when they entered into the licensing and
distributorship agreements." The very purpose of the law was
circumvented and evaded when the petitioner entered into said
agreements despite the prohibition of R.A. No. 5455. The parties in this
case being equally guilty of violating R.A. No. 5455, they are in pari delicto,
in which case it follows as a consequence that petitioner is not entitled to
the relief prayed for in this case.
The doctrine of lack of capacity to sue based on the failure to
acquire a local license is based on considerations of sound public
policy. The license requirement was imposed to subject the foreign
corporation doing business in the Philippines to the jurisdiction of its
courts. It was never intended to favor domestic corporations
who enter into solitary transactions with unwary foreign firms
and then repudiate their obligations simply because the
latter are not licensed to do business in this country.
In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our
chagrin over this commonly used scheme of defaulting local companies which
are being sued by unlicensed foreign companies not engaged in business in
the Philippines to invoke the lack of capacity to sue of such foreign
companies. Obviously, the same ploy is resorted to by ASPAC to prevent the
injunctive action filed by ITEC to enjoin petitioner from using knowledge
possibly acquired in violation of fiduciary arrangements between the parties.
By entering into the "Representative Agreement" with ITEC, Petitioner is
charged with knowledge that ITEC was not licensed to engage in business
from, or growing out of, any business which it has transacted in the
Philippine Islands. The sole purpose of the action:
activities in the country, and is thus estopped from raising in defense such
incapacity of ITEC, having chosen to ignore or even presumptively take
advantage of the same.
In Top-Weld, we ruled that a foreign corporation may be exempted from the
license requirement in order to institute an action in our courts if its
representative in the country maintained an independent status during
the existence of the disputed contract. Petitioner is deemed to have
acceded to such independent character when it entered into the
Representative Agreement with ITEC, particularly, provision 6.2 (supra).
IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby
DISMISSED. The decision of the Court of Appeals dated June 7, 1991,
upholding the RTC Order dated February 22, 1991, denying the petitioners'
Motion to Dismiss, and ordering the issuance of the Writ of Preliminary
Injunction, is hereby affirmed in toto.
TRADEMARK INFRINGEMENT
WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN
ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C.
REYES, plaintiffs-appellees,
vs.
FIDEL A. REYES, as Director of the Bureau of Commerce
and Industry, HENRY HERMAN, PETER O'BRIEN, MANUEL B.
DIAZ, FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants.
(G.R. No. L-27897 December 2, 1927)
FACTS: The present case was filed and tried on the following facts:
1. Petitioner Western Equipment and Supply Company, through its duly
authorized agent, the plaintiff, Felix Reyes, applied to the defendant
Director of Bureau of Commerce and Industry (BCI) for the issuance of
a license to engage in business in the Philippine Islands which was
granted on Aug. 23, 1926.
2. On the other hand, Western Electric Company, Inc, also organized and
existing under the laws of Nevada, was not issued such license but it
was alleged that it has never engaged in business herein.
3. That a Philippine corporation known as Electric Supply Company, Inc.,
where defendant Henry Herman was president, has been importing the
manufactures of plaintiff Western Electric Company, Inc.
4. That defendant Henry Herman signed and filed AOI with the defendant
Fidel Reyes, as Director of BCI, with the intention to organize a
domestic corporation to be known as ―Western Electric Company,
Inc.‖ for the purpose, among others things, of manufacturing,
buying, selling and dealing generally in electrical and telephone
apparatus and supplies‖ in violation of a trademark over ―Western
Electric‖ existing in Washington, DC.
The lower court decided in favor of plaintiffs.
ISSUE: WON plaintiff corporation can maintain an action to restraint
residents and inhabitants of the Philippines from organizing a corporation,
when said inhabitants have knowledge of the existence of such foreign
corporation?
HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46
Phil., 70, 76), this court held:
The noncompliance of a foreign corporation with the statute may be
pleaded as an affirmative defense. Thereafter, it must appear from the
evidence, first, that the plaintiff is a foreign corporation, second, that it is
doing business in the Philippines, and third, that it has not obtained the
proper license as provided by the statute.
If it had been stipulated that the plaintiff, Western Electric Company, Inc.,
had been doing business in the Philippine Islands without first obtaining a
license, another and a very different question would be presented. That
company is not here seeking to enforce any legal or contract rights arising
"Is to protect its reputation, its corporate name, its goodwill,
whenever that reputation, corporate name or goodwill
 have, through the natural development of its trade,
established themselves." And it contends that its rights to the use of
its corporate and trade name:
Is a property right, a right in rem, which may assert and protect against all
the world, in any of the courts of the world — even in jurisdictions where it
does not transact business — just the same as it may protect its tangible
property, real or personal, against trespass, or conversion. Citing sec. 10,
Nims on Unfair Competition and Trade-Marks and cases cited; secs. 21-22,
Hopkins on Trade-Marks, Trade Names and Unfair Competition and cases
cited." That point is sustained by the authorities, and is well stated in
Hanover Star Milling Co. vs. Allen and Wheeler Co. (208 Fed., 513), in which
they syllabus says:
Since it is the trade and not the mark that is to be protected, a
trade-mark acknowledges no territorial boundaries of
municipalities or states or nations, but extends to every market
where the trader's goods have become known and identified by
the use of the mark
It is very apparent that the purpose and intent of Herman and his associates
in seeking to incorporate under the name of Western Electric Company, Inc.,
was to unfairly and unjustly compete in the Philippine Islands with the
Western Electric Company, Inc., in articles which are manufactured by, and
bear the name of, that company, all of which is prohibited by Act No. 666,
and was made known to the defendant Reyes by the letter known in the
record to the defendant Reyes by the letter known in the record as Exhibit A.
The plaintiff, Western Electric Company, Inc., has been in existence as a
corporation for over fifty years, during which time it has established a
reputation all over the world including the Philippine Islands, for the kind and
quality of its manufactured articles, and it is very apparent that the whole
purpose and intent of Herman and his associates in seeking to incorporate
another corporation under the identical name of Western Electric
Company, Inc., and for the same identical purpose as that of the plaintiff, is
to trespass upon and profit by its good name and business reputation. The
very fact that Herman and his associates have sought the use of that
particular name for that identical purpose is conclusive evidence of the
fraudulent intent with which it is done.
The judgment of the lower court is affirmed, with costs
GENERAL GARMENTS CORPORATION, petitioner,
vs.
THE DIRECTOR OF PATENTS and PURITAN
SPORTSWEAR CORPORATION, respondents
(G.R. No. L-24295; September 30, 1971)
FACTS: Respondent Puritan Sportswear Corporation, a corporation organized
and exiting under the laws of the state of Pensylvania, USA filed a petition
with the Philippine Patent Office for the cancellation of the petitioner’s
trademark ―Puritan‖, alleging ownership and prior use in the Philippines
of the said trademark for assorted men’s wear, such as sweaters, shirts,
jackets, undershirts and briefs, which has not been abandoned. It further
alleged that the registration thereof by petitioner had been obtained
fraudulently and in violation of Sec. 17(c) of RA 166, in relation to Sec. 4(d)
thereof.
Petitioner filed a motion to dismiss on several grounds which may be
synthesized to respondent’s lack of capacity to maintain suit in the Philippines
which was denied.
ISSUE: WON Respondent Puritan Sportswear can maintain the suit?
HELD: Yes. That respondent is a juridical person should be beyond serious
dispute. The fact that it may not transact business in the Philippines unless it
has obtained a license for that purpose, nor maintain a suit in
Philippine courts for the recovery of any debt, claim or demand without
such license
FACTS: Petitioner, a corporation organized and existing under the laws of
the Federal Republic of Germany filed a complaint of patent or trademark
infringement against herein respondent before the RTC of Makati.
Private respondent filed a motion to dismiss on the ground that petitioner
had no capacity to sue which was denied. On appeal, the CA reversed the
(Secs. 68 and 69, Corporation Law) does not make respondent any less a
juridical person. Indeed an exception to the license requirement has been
recognized in this jurisdiction, namely, where a foreign corporation sues on
an isolated transaction. As first enunciated in Marshall-Wells Co. v. Elser &
Co. "the object of the statute (Secs. 68 and 69, Corporation Law) 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 local courts ... the
implication of the law (being) that it was never the purpose of the legislature
to exclude a foreign corporation which happens to obtain an isolated
order for business from the Philippines, from securing redress in the
Philippine Courts. ..." The principle has since then been applied in a
number of other cases.
A more or less analogous question arose in Western Equipment & Supply Co.
v. Reyes, 51 Phil. 115. The syllabus of the report, which is a correct
statement of the doctrine laid down in the decision, reads as follows:
A foreign corporation which has never done ... business in the Philippine
Islands and which is unlicensed and unregistered to do business here, but
is widely and favorably known in the Islands through the use therein of its
products bearing its corporate and trade name has a legal right to
maintain an action in the Islands.
Parenthetically, it may be stated that the ruling in the Mentholatum case was
subsequently derogated when Congress, purposely to "counteract the
effects" of said case, enacted Republic Act No. 638, inserting Section
21-A in the Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine courts for
infringement of a mark or trade-name, for unfair competition, or
false designation of origin and false description, "whether or not it
has been licensed to do business in the Philippines under Act
Numbered Fourteen hundred and fifty-nine, as amended, otherwise
known as the Corporation Law, at the time it brings complaint."
Petitioner argues that Section 21-A militates against respondent's capacity
to maintain a suit for cancellation, since it requires, before a foreign
corporation may bring an action, that its trademark or tradename has
been registered under the Trademark Law. The argument misses the
essential point in the said provision, which is that the foreign corporation is
allowed there under to sue "whether or not it has been licensed to do
business in the Philippines" pursuant to the Corporation Law (precisely to
counteract the effects of the decision in the Mentholatum case).
In any event, respondent in the present case is not suing for infringement or
unfair competition under Section 21-A, but for cancellation under Section 17,
on one of the grounds enumerated in Section 4. The first kind of action, it
maybe stated, is cognizable by the Courts of First Instance (Sec. 27); the
second partakes of an administrative proceeding before the Patent Office
(Sec. 18, in relation to Sec. 8). And while a suit under Section 21-A requires
that the mark or tradename alleged to have been infringed has been
"registered or assigned" to the suing foreign corporation, a suit for
cancellation of the registration of a mark or tradename under Section 17 has
no such requirement. For such mark or tradename should not have been
registered in the first place (and consequently may be cancelled if so
registered) if it "consists of or comprises a mark or tradename which so
resembles a mark or tradename ... previously used in the Philippines by
another and not abandoned, as to be likely, when applied to or used in
connection with goods, business or services of the applicant, to cause
confusion or mistake or to deceive purchasers; ..."(Sec. 4d).
WHEREFORE, the petition is dismissed, and the resolution of the Director of
Patents dated August 6, 1964 is affirmed, with costs.
PUMA SPORTSCHUHFABRIKEN RUDOLF DASSLER, K.G., petitioner
vs.
THE INTERMEDIATE APPELLATE COURT and MIL-ORO
MANUFACTURING CORPORATION, respondents
(G.R. No. 75067; February 26, 1988)
trial court.
ISSUE: WON petitioner had capacity to sue?
HELD: Yes. Petitioner maintains that it has substantially complied with the
requirements of Section 21-A of Republic Act R.A. No. 166, as amended.
According to the petitioner, its complaint specifically alleged that it is not
doing business in the Philippines and is suing under the said Repulbic Act;
that Section 21-A thereof provides that "the country of which the said
corporation or juristic person is a citizen, or in which it is domiciled, by
treaty, convention or law, grants a similar privilege to corporate or juristic
persons of the Philippines" but does not mandatorily require that such
reciprocity between the Federal Republic of Germany and the Philippines
be pleaded; that such reciprocity arrangement is embodied in and supplied
by the Union Convention for the Protection of Industrial Property Paris
Convention) to which both the Philippines and Federal Republic of
Germany are signatories and that since the Paris 'Convention is a treaty
which, pursuant to our Constitution, forms part of the law of the land, our
courts are bound to take judicial notice of such treaty, and,
consequently, this fact need not be averred in the complaint.
We agree.
In the leading case of La Chemise Lacoste, S.A .v. Fernandez, (129
SCRA 373), we ruled:
But even assuming the truth of the private respondents allegation that the
petitioner failed to allege material facto in its petition relative to capacity to
sue, the petitioner may still maintain the present suit against respondent
Hernandes. As early as 1927, this Court was, and it still is, of the view that
a foreign corporation not doing business in the Philippines needs
no license to sue before Philippine courts for infringement of
trademark and unfair competition. Thus, in Western Equipment and
Supply Co. v. Reyes (51 Phil. 11 5), this Court held that a foreign
corporation which has never done any business in the Philippines and
which is unlicensed and unregistered to do business here, but is widely
and favorably known in the Philippines through the use therein of its
products bearing its corporate and tradename, has a legal right to
maintain an action in the Philippines to restrain the residents and
inhabitants thereof from organizing a corporation therein bearing the
same name as the foreign corporation, when it appears that they have
personal knowledge of the existence of such a foreign corporation, and
it is apparent that the purpose of the proposed domestic corporation is
to deal and trade in the same goods as those of the foreign corporation.
Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T.
Eaton, Co. (234 F. 2d 633), this Court further said:
By the same token, the petitioner should be given the same treatment in
the Philippines as we make available to our own citizens. We are obligated
to assure to nationals of 'countries of the Union' an effective protection
against unfair competition in the same way that they are obligated to
similarly protect Filipino citizens and firms.
In the case of of Cerverse Rubber Corporation V. Universal Rubber Products,
Inc. (174 SCRA 165), we likewise re-aafirmed our adherence to the Paris
Convention:
The ruling in the aforecited case is in consonance with the Convention of
Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47
SCRA 165), we likewise re-affirmed our adherence to the Paris Convention:
the Union of Paris for the Protection of Industrial Property to which the
Philippines became a party on September 27, 1965. Article 8 thereof
provides that 'a trade name [corporation name] shall be protected in all
the countries of the Union without the obligation of filing or registration,
whether or not it forms part of the trademark.'
provisions of Section 21-A of Republic Act No. 166, as amended. Compliance
with the requirements imposed by the above-cited provision was necessary
because Section 21-A of Republic Act No. 166 having explicitly laid down
The mandate of the aforementioned Convention finds implementation in
Section 37 of RA No. 166, otherwise known as the trademark Law:
Rights of Foreign Registrants. — Persons who are nationals of, domiciled
in, or have a bona fide or effective business or commercial establishment
in any foreign country, which is a party to an international convention or
treaty relating to marks or tradenames on the represssion of unfair
competition to which the Philippines may be party, shall be entitled to the
benefits and subject to the provisions of this Act ...
Tradenames of persons described in the first paragraph of this section
shall be protected without the obligation of filing or registration whether
or not they form part of marks.
We, therefore, hold that the petitioner had the legal capacity to file the action
below.
SUING FOR VIOLATION OF THE PENAL CODE AND AGENT
DOING BUSINESS UNDER ITS OWN NAME
LA CHEMISE LACOSTE, S. A., petitioner,
vs.
HON. OSCAR C. FERNANDEZ, Presiding Judge of Branch
XLIX, Regional Trial Court, National Capital Judicial Region,
Manila and GOBINDRAM HEMANDAS, respondents.
(G.R. No. L-63796-97; May 2, 1984)
GOBINDRAM HEMANDAS SUJANANI, petitioner,
vs.
HON. ROBERTO V. ONGPIN, in his capacity as Minister of Trade
and Industry, and HON. CESAR SAN DIEGO, in his capacity as
Director of Patents, respondents
(G.R. No. L-65659 May 2l, 1984)
FACTS: Petitioner, a corporation organized and existing under the laws of
France and not doing business in the Philippines, filed with the NBI a letter-
complaint alleging therein the acts of unfair competition being committed by
respondent Hemandas and requesting their assistance in his apprehension
and prosecution, after Hermandas acquired a patent for the use of
―CHEMISE LACOSTE & DEVICE‖.
NBI filed with the respondent court for two search warrant which was issued
and for which a motion to quash was filed by Hermandas alleging that his
trademark is different from that of petitioner, which was granted by
respondent court.
ISSUE: WON petitioner, having a representative, is doing business in the
Philippines?
HELD: No. Respondent states that not only is the petitioner not doing
business in the Philippines but it also is not licensed to do business in the
Philippines. He also cites the case of Leviton Industries v. Salvador (114
SCRA 420) to support his contention The Leviton case, however, involved a
complaint for unfair competition under Section 21-A of Republic Act No. 166
which provides:
Sec. 21 — A. Any foreign corporation or juristic person to which a mark or
tradename has been registered or assigned under this Act may bring an
action hereunder for infringement, for unfair competition, or
false designation of origin and false description, whether or not it has
been licensed to do business in the Philippines under Act numbered
Fourteen Hundred and Fifty-Nine, as amended, otherwise known as the
Corporation Law, at the time it brings the complaint; Provided, That
the country of which the said foreign corporation or juristic person is a
citizen, or in which it is domiciled, by treaty, convention or law, grants a
similar privilege to corporate or juristic persons of the Philippines.
We held that it was not enough for Leviton, a foreign corporation organized
and existing under the laws of the State of New York, United States of
America, to merely allege that it is a foreign corporation. It averred in
Paragraph 2 of its complaint that its action was being filed under the
certain conditions in a specific proviso, the same must be expressly averred
before a successful prosecution may ensue. It is therefore, necessary for the
foreign corporation to comply with these requirements or aver why it should
be exempted from them, if such was the case. The foreign corporation may
have the right to sue before Philippine courts, but our rules on pleadings
require that the qualifying circumstances necessary for the assertion of such
right should first be affirmatively pleaded.
In contradistinction, the present case involves a complaint for
violation of Article 189 of the Revised Penal Code. The Leviton
case is not applicable.
Asserting a distinctly different position from the Leviton argument, Hemandas
argued in his brief that the petitioner was doing business in the Philippines
but was not licensed to do so. To support this argument, he states that the
applicable ruling is the case of Mentholatum Co., Inc. v. Mangaliman: (72
Phil. 524) where Mentholatum Co. Inc., a foreign corporation and
Philippine-American Drug Co., the former's exclusive distributing agent in the
Philippines filed a complaint for infringement of trademark and unfair
competition against the Mangalimans.
The argument has no merit. The Mentholatum case is distinct from and
inapplicable to the case at bar. Philippine American Drug Co., Inc., was
admittedly selling products of its principal Mentholatum Co., Inc., in the
latter's name or for the latter's account. Thus, this Court held that "whatever
transactions the Philippine-American Drug Co., Inc. had executed in view of
the law, the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co.,
Inc., being a foreign doing business in the Philippines without the license
required by Section 68 of the Corporation Law, it may not prosecute this
action for violation of trademark and unfair competition."
In the present case, however, the petitioner is a foreign corporation not
doing business in the Philippines. The marketing of its products in the
Philippines is done through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which buys and then markets
not only products of the petitioner but also many other products bearing
equally well-known and established trademarks and tradenames. In other
words, Rustan is not a mere agent or conduit of the petitioner.
The rules and regulations promulgated by the Board of Investments pursuant
to its rule-making power under Presidential Decree No. 1789, otherwise
known as the Omnibus Investment Code, support a finding that the petitioner
is not doing business in the Philippines. Rule I, Sec. 1 (g) of said rules
and regulations defines "doing business" as one" which includes, inter alia:
(1) ... A foreign firm which does business through middlemen
acting on their own names, such as indentors, commercial brokers or
commission merchants, shall not be deemed doing business in the
Philippines. But such indentors, commercial brokers or commission
merchants shall be the ones deemed to be doing business in the
Philippines.
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for its
account, and not in the name or for the account of a principal. Thus,
where a foreign firm is represented by a person or local company which
does not act in its name but in the name of the foreign firm the latter is
doing business in the Philippines.
xxx xxx xxx
Applying the above provisions to the facts of this case, we find and
conclude that the petitioner is not doing business in the Philippines.
Rustan is actually a middleman acting and transacting business in its own
name and or its own account and not in the name or for the account of the
petitioner.
ISSUE2: WON the criminal case can be maintained even if the foreign
corporation is doing business without a license?
ARTICLE 8
A trade name shall be protected in all the countries of the Union without
the obligation of filing or registration, whether or not it forms part of
HELD: Yes. But even assuming the truth of the private respondent's
allegation that the petitioner failed to allege material facts in its petition
relative to capacity to sue, the petitioner may still maintain the present suit
against respondent Hemandas. As early as 1927, this Court was, and it
still is, of the view that a foreign corporation not doing business in
the Philippines needs no license to sue before Philippine courts for
infringement of trademark and unfair competition.
Our recognizing the capacity of the petitioner to sue is not by any means
novel or precedent setting. Our jurisprudence is replete with cases illustrating
instances when foreign corporations not doing business in the Philippines
may nonetheless sue in our courts. In East Board Navigation Ltd, v. Ysmael
and Co., Inc. (102 Phil. 1), we recognized a right of foreign corporation
to sue on isolated transactions. In General Garments Corp. v. Director
of Patents (41 SCRA 50), we sustained the right of Puritan Sportswear
Corp., a foreign corporation not licensed to do and not doing
business in the Philippines, to file a petition for cancellation of a trademark
before the Patent Office.
More important is the nature of the case which led to this petition. What
preceded this petition for certiorari was a letter complaint filed before the NBI
charging Hemandas with a criminal offense, i.e., violation of Article 189 of
the Revised Penal Code. If prosecution follows after the completion of
the preliminary investigation being conducted by the Special Prosecutor
the information shall be in the name of the People of the
Philippines and no longer the petitioner which is only an
aggrieved party since a criminal offense is essentially an act
against the State. It is the latter which is principally the injured party
although there is a private right violated. Petitioner's capacity to sue
would become, therefore, of not much significance in the main
case. We cannot snow a possible violator of our criminal statutes to escape
prosecution upon a far-fetched contention that the aggrieved party or victim
of a crime has no standing to sue.
ISSUE3: WON petitioner has a right to maintain a suit for infringement
of trademarks?
HELD: Yes. We are moreover recognizing our duties and the rights of
foreign states under the Paris Convention for the Protection of Industrial
Property 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 to which we are a party and
which we entered into because it is in our national interest to do so.
The Paris Convention provides in part that:
ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the
protection of industrial property, enjoy in all the other countries of the
Union the advantages that their respective laws now grant, or may
hereafter grant, to nationals, without prejudice to the rights specially
provided by the present Convention. Consequently, they shall have
the same protection as the latter, and the same legal remedy against
any infringement of their rights, provided they observe the conditions
and formalities imposed upon nationals.
xxx xxx xxx
ARTICLE 6
(1) The countries of the Union undertake, either administratively if their
legislation so permits, or at the request of an interested party, to refuse or
to cancel the registration and to prohibit the use of a trademark which
constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country
of registration or use to be well-known in that country as being already the
mark of a person entitled to the benefits of the present Convention and
used for Identical or similar goods. These provisions shall also apply when
the essential part of the mark constitutes a reproduction of any such well-
known mark or an imitation liable to create confusion therewith.
xxx xxx xxx
a trademark.
xxx xxx xxx
 ARTICLE 10bis
(1) The countries of the Union are bound to assure to persons entitled to
the benefits of the Union effective protection against unfair competition
A treaty or convention is not a mere moral obligation to be
enforced or not at the whims of an incumbent head of a Ministry. It
creates a legally binding obligation on the parties founded on the
generally accepted principle of international law of pacta sunt
servanda which has been adopted as part of the law of our land.
(Constitution, Art. II, Sec. 3).
We have carefully gone over the records of all the cases filed in this Court
and find more than enough evidence to sustain a finding that the petitioner is
the owner of the trademarks "LACOSTE", "CHEMISE LACOSTE", the crocodile
or alligator device, and the composite mark of LACOSTE and the
representation of the crocodile or alligator. Any pretensions of the
private respondent that he is the owner are absolutely without basis. Any
further ventilation of the issue of ownership before the Patent Office
will be a superfluity and a dilatory tactic.
The records show that the goodwill and reputation of the
petitioner's products bearing the trademark LACOSTE date back even before
1964 when LACOSTE clothing apparels were first marketed in the
Philippines. To allow Hemandas to continue using the trademark Lacoste
for the simple reason that he was the first registrant in the Supplemental
Register of a trademark used in international commerce and not
belonging to him is to render nugatory the very essence of the law on
trademarks and tradenames.
WHEREFORE, the petition in G.R. NOS. 63797-97 is hereby GRANTED. The
order dated April 22, 1983 of the respondent regional trial court is REVERSED
and SET ASIDE.
F. CAPACITY TO SUE
GENERAL RULE: A corporation’s capacity to sue must be
affirmatively pleaded in order that it may proceed and effectively
institute a case in Philippine courts. Thus, in the case for instance of a
complaint for unfair labor competition under Sec. 21-A of RA No. 166, it
was held that it is necessary for the foreign corporation to comply with the
provision thereof or aver why it should be exempted from them, if such be
the case. The foreign corporation may have the right to sue before our
courts but our rules on pleadings require that the qualifying circumstances
necessary for the assertion of such right should first be affirmatively pleaded
(Leviton Industries vs Salvador).
EXCEPTIONS:
EFFECT OF NON-PLEADING: If the dismissal of the case is based on
the failure of the foreign corporation to aver its capacity to sue, would
not, however, bar the institution of the same action, dismissal should
not be allowed, especially so if it would be an idle, circuitous ceremony
considering the absence of any meritorious substantial defense of the
defendant. Technical rules should not be accorded undue importance to
frustrate and defeat a plainly valid claim (Olympia Business Machines vs. E.
Razon, Inc.)
COMPLAINT BASED ON VIOLATION OF RPC OR THE
CORPORATION IS MERELY DEFENDING ITSELF: averment of
capacity to sue is not likewise necessary as laid down in the case
of Chemise Lacoste vs. Fernandez, or when the foreign corporation is not
suing or maintaining a suit but is merely defending itself from one filed
against it (Times, Inc. vs. Reyes).
ATLANTIC MUTUAL INSURANCE COMPANY and CONTINENTAL
INSURANCE COMPANY, plaintiffs and appellants,
vs.
CEBU STEVEDORING CO., INC., defendant and appellee
(G.R. No. L-18961; August 31, 1966)
Both Olympia (Phil.) and California thereafter brought a suit against E.
Razon, Inc., the carrier and the container company, which had earlier
refused to make good the loss of the goods.
FACTS: Plaintiff-appellants, organized and existing under the laws of the US,
sued herein defendant-appellee, as subrogee to the shipper and consignee,
alleging that the latter undertook to carry a shipment of copra for delivery to
P&G Company at Cebu City but upon discharge, a portion of the copra was
found damaged.
Defendant moved to dismiss on the ground that the complaints on the
ground of failure to allege compliance with Sec. 69 of the Corporation Law
which was granted after failure of the plaintiff to comply with the
amendment of the complaint.
ISSUE: WON plaintiff-appellants have the right to sue as to the defects n the
pleadings and procedures?
HELD: No. It should be noted that insofar as the allegations in the complaint
have a bearing on appellants' capacity to sue, all that is averred is that they
are both foreign corporations existing under the laws of the United
States. This averment conjures two alternative possibilities: either they are
engaged in business in the Philippines or they are not so engaged. If the
first, they must have been duly licensed in order to maintain this suit; if the
second, if the transaction sued upon is singular and isolated, no such
license is required. In either case, the qualifying circumstance is an
essential part of the element of plaintiffs' capacity to sue and must be
affirmatively pleaded.
To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to
the promulgation of the Revised Rules on January 1, 1964, it was not
necessary to aver the capacity of a party to sue except to the extent required
to show jurisdiction of the court. In our opinion, however, such rule does not
apply in all situations and under all circumstances. The theory behind a
similar rule in the United States is "that capacity ... of a party for purpose of
suit is not in dispute in the great bulk of cases, and that pleading and proof
can be simplified by a rule that an averment of such matter is not necessary,
except to show jurisdiction."1 But where as in the present case, the law
denies to a foreign corporation the right to maintain suit unless it has
previously complied with a certain requirement, then such compliance, or the
fact that the suing corporation is exempt therefrom, becomes a necessary
averment in the complaint. These are matters peculiarly within the
knowledge of appellants alone, and it would be unfair to impose upon
appellee the burden of asserting and proving the contrary. It is enough that
foreign corporations are allowed by law to seek redress in our courts under
certain conditions: the interpretation of the law should not go so far as to
include, in effect, an inference that those conditions have been met from the
mere fact that the party suing is a foreign corporation.
It was indeed in the light of these and other consideration that this Court has
seen fit to amend the former rule by requiring in the Revised Rules (Section
4, Rule 8) that "facts showing the capacity of a party to sue or be sued or
the authority of a party to sue or be sued in a representative capacity or the
legal existence of an organized association of persons that is made a party,
must be averred."
The orders appealed from are affirmed, with costs against plaintiffs-
appellants
OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA
INSURANCE CO., LTD., petitioners,
vs.
E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE
CONTAINER SHIPPING LINES, INC., respondents.
(G.R. No. 75631; October 28, 1987)
FACTS: Olympia Office Machines, Ltd., a foreign corporation with offices
at Hongkong, shipped 300 portable typewriters to its sister company in
Manila, Olympia Business Machines Company (Phil.), Inc., such shipment
insured with California Insurance Co., Ltd. another foreign corporation.
The typewriters were discharged at North Harbor, Manila into the custody of
the carrier’s agent which in turn turned it over to E. Razon, Inc. While in the
latter’s possession, part of the shipment was stolen. California Insurance was
subrogated to the claim for loss after paying Olympia (Phil).
For E.Razon’s failure to appear at the pre-trial and after ex-parte reception of
evidence, the trial court decided for California. On Razon’s motion, the order
was set aside and Razon amended his answer that California is a foreign
corporation doing business in the Philippines without a license to do so
and that it cannot maintain suit in this jurisdiction. But once again, Razon
failed to appear at the pre-trial, as a result, the trial court revived the
decision.
On appeal, the IAC reversed the decision holding, among others, that
California failed to allege in the complaint its capacity to sue.
ISSUE: WON the failure of California to aver its capacity to sue is fatal?
HELD: The slightest reflection will however immediately make — Tear that
between the factual settings of the Atlantic Mutual case and the case at bar,
there are distinctions of no little significance. In the former, Atlantic Mutual
Insurance Co. and Continental Insurance Co., two (2) American firms,
brought suit as subrogees of the shipper and/or consignee of the goods
ensured without joining the latter. In the case at hand, the action was
instituted by both the subrogee, California Insurance Co., Ltd.,
and the subrogor, a domestic corporation, Olympia (Philippines)
about whose capacity to sue no dispute exists. In Atlantic
Mutual, the plaintiffs' lack of capacity to sue was raised by the
defendant at the earliest opportunity, through a motion to
dismiss filed within the reglementary period to answer in
accordance with Rule 16 of the Rules of Court. In the case at bar,
the defendant was twice declared in default, and the defense of
lack of capacity to sue, was not raised until after 'the first
declaration of default had been lifted. Moreover, there Is a
pronouncement by the Court of Appeals in the instant case, that the
defendant had no meritorious defenses save that of lack of capacity to sue
on the part of the plaintiff.
These circumstances proscribe the application to the controversy at bar of
the doctrine in Atlantic Mutual. The defendant's conduct in this case
strongly indicates the absence of any valid defense on its part
against the plaintiffs' claims: the defendant failed to appear for pre-trial
despite notice, not once, but twice and was in consequence twice declared in
default. The lack of any meritorious defense on its part was in fact confirmed
by the declaration of the Court of Appeals, which it has not challenged, that
three (3) errors attributed by it to the Trial Court were "unmeritorious except
the second," i. e., plaintiff's lack of capacity to sue. Even assuming incapacity
on the part of California, no such incapacity may be attributed to its co-
plaintiff, Olympia Business Machines Co. (Phil.), Inc. And if strictly necessary,
the latter could quite easily execute a cancellation of the deed of subrogation
or of re-assignment of the right of action from California back to Olympia.
Moreover, the dismissal of the case at this stage, would not bar the
institution by California of the same action, this time alleging in its complaint
that it was suing on a single, isolated transaction. But this would be an Idle,
circuitous ceremony in the light of the unchallenged declaration by the Court
of Appeals of the absence of any meritorious substantial defense on the part
of defendant Razon. This would be to accord undue importance and
significance to technical rules, to allow an inflexible, unreasoning
adherence to such technical rules to frustrate and defeat a plainly valid claim.
WHEREFORE, the judgment of the Intermediate Appellate Court subject of
the appeal is reverse and that of the Trial Court, dated February 1, 1980
reinstated and affirmed, with costs against the respondents.
TIME, INC., petitioner,
vs.
HON. ANDRES REYES, as Judge of the Court of First Instance
of Rizal, ELISEO S. ZARI, as Deputy Clerk of Court, Branch VI,
Court of First Instance of Rizal, ANTONIO J. VILLEGAS and
JUAN PONCE ENRILE, respondents.
(G.R. No. L-28882; May 31, 1971)
FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought to
recover from herein petitioner damages upon an alleged libel arising from a
provide that only a stockholder who own at least 3% of the
outstanding capital stock of a corporation may make a written request to the
treasurer or other fiscal officer for a statement of its affairs; that plaintiff
publication of Time (Asia Edition) magazine, in its issue entitled
―Corruption in Asia‖.
Petitioner filed a motion to dismiss on lack of jurisdiction and improper venue
which was deferred until after the trial of the case.
ISSUE: WON the petition for certiorari and prohibition will prosper?
HELD: The dismissal of the present petition is asked on the ground that the
petitioner foreign corporation failed to allege its capacity to sue in the courts
of the Philippines. Respondents rely on section 69 of the Corporation law,
which provides:
SEC. 69. No foreign corporation or corporations formed, organized,
or existing under any laws other than those of the Philippines shall
be permitted to ... maintain by itself or assignee any suit for the
recovery of any debt, claim, or demand whatever, unless it shall have
the license prescribed in the section immediately preceding. ..." ...;
They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc. 7 that
no foreign corporation may be permitted to maintain any suit in the local
courts unless it shall have the license required by the law, and the ruling in
Atlantic Mutual Ins. Co., Inc. vs. Cebu Stevedoring Co., Inc. 8 that "where ...
the law denies to a foreign corporation the right to maintain suit unless it has
previously complied with a certain requirement, then such compliance or the
fact that the suing corporation is exempt therefrom, becomes a necessary
averment in the complaint." We fail to see how these doctrines can be
a propos in the case at bar, since the petitioner is not
"maintaining any suit" but is merely defending one against itself;
it did not file any complaint but only a corollary defensive petition
to prohibit the lower court from further proceeding with a suit
that it had no jurisdiction to entertain.
Petitioner's failure to aver its legal capacity to institute the present petition is
not fatal, for ...
A foreign corporation may, by writ of prohibition, seek relief against the
wrongful assumption of jurisdiction. And a foreign corporation seeking
a writ of prohibition against further maintenance of a suit, on the
ground of want of jurisdiction in which jurisdiction is not bound
by the ruling of the court in which the suit was brought, on a
motion to quash service of summons, that it has jurisdiction.
WHEREFORE, the writs applied for are granted: the respondent Court of First
Instance of Rizal is declared without jurisdiction to take cognizance of its Civil
Case No. 10403; and its orders issued in connection therewith are hereby
annulled and set aside,. Respondent court is further commanded to desist
from further proceedings in Civil case No. 10403 aforesaid. Costs against
private respondents, Antonio J. Villegas and Juan Ponce Enrile.
G. LAWS GOVERNING FOREIGN CORPORATIONS
Sec. 129. Law applicable. - Any foreign corporation lawfully
doing business in the Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of the same class, except
such only as provide for the creation, formation, organization or dissolution
of corporations or those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members, or officers of
corporations to each other or to the corporation.
M. E. GREY, plaintiff-appellant,
vs.
INSULAR LUMBER COMPANY, defendant-appelle
(G.R. No. L-45144; April 3, 1939)
FACTS: Herein defendant-appellee Insular Lumber Company is a corporation
existing and organized under the laws of the State of New York licensed to
engage business in the Philippines.
The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% of the
outstanding capital stock of defendant corporation), was denied access to the
books and records of the company because, as alleged, the laws of New York
neither has the 3% requirement nor made the written request.
Plaintiff raises the Corporation Law which does not provide such
requirements and gives any stockholder the right to examine the books of the
corporation. Such law, being the law upon which the defendant corporation
was issued a license to do business in the Philippines.
ISSUE: WON appellant, as a stockholder, is entitled to inspect and
examine the books and records of transactions of appellee?
HELD: Under ection 77 Stock Corporation Law of New York. Under this law,
plaintiff has the right to be furnished by the treasurer or other fiscal officer of
the corporation with statement of its affairs embracing a particular account
of all its assets and liabilities. In the third place, inasmuch as plaintiff, either
at the hearing or in his motion for new trial, did not ask to have the
stipulation of facts altered or changed, he cannot now, for the first time on
appeal, raise the question that aside from the right conferred upon him by
section 77 of the Stock Corporation Law of New York, he also entitled
under the common law to examine and inspect the books and records
of the defendant corporation. In the fourth place, neither can this right
under the common law be granted the defendant in the present case,
since the same can only be granted at the discretion of the court, under
certain conditions, to wit:
(a) That the stockholder of a corporation in New York has the right to
inspect its books and records if it can be shown that he seeks information
for an honest purpose (14 C. J., 853), or to protect his interest as
stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E., 1103; 45 L. R. A.,
461 [aff. 31 App. Div., 70; 52 N. Y. S., 343]).
(b) That said right to examine and inspect the books of the corporation
must be exercised in good faith, for a specific and honest purpose, and not
to gratify curiosity, or for speculative or vexatious purposes. (14 C. J., 854,
855.)
The appellant has made no effort to prove or even allege that the
information he desired to obtain through the examination and inspection of
defendant's books was necessary to protect his interests as
stockholder of the corporation, or that it was for a specific and honest
purpose, and not to gratify curiosity, nor for speculative or vexatious
purposes.
In view of the foregoing, we affirm the judgment of the lower court, with
costs against the appellant.
H. AMENDMENTS TO THE ARTICLES OF INCORPROATION
Sec. 130. Amendments to articles of incorporation or by-laws
of foreign corporations. - Whenever the articles of incorporation or by-
laws of a foreign corporation authorized to transact business in the
Philippines are amended, such foreign corporation shall, within sixty (60)
days after the amendment becomes effective, file with the Securities
and Exchange Commission, and in the proper cases with the
appropriate government agency, a duly authenticated copy of the articles of
incorporation or by-laws, as amended, indicating clearly in capital letters
or by underscoring the change or changes made, duly certified by the
authorized official or officials of the country or state of incorporation. The
filing thereof shall not of itself enlarge or alter the purpose or purposes
for which such corporation is authorized to transact business in the
Philippines.
I. AMENDMENT OF LICENSE
Sec. 131. Amended license. - A foreign corporation authorized to
transact business in the Philippines shall obtain an amended license in the
event it changes its corporate name, or desires to pursue in the Philippines
other or additional purposes, by submitting an application therefor to the
Securities and Exchange Commission, favorably endorsed by the
appropriate government agency in the proper cases.
Philippines may be allowed to withdraw from the Philippines by filing a
petition for withdrawal of license. No certificate of withdrawal shall be
issued by the Securities and Exchange Commission unless all the
Sec. 132. Merger or consolidation involving a foreign
corporation licensed in the Philippines. - One or more foreign
corporations authorized to transact business in the Philippines may merge
or consolidate with any domestic corporation or corporations if such is
permitted under Philippine laws and by the law of its incorporation:
Provided, That the requirements on merger or consolidation as provided in
this Code are followed.
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home country
or state as permitted by the law of its incorporation, such foreign corporation
shall, within sixty (60) days after such merger or consolidation becomes
effective, file with the Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a copy of the articles of
merger or consolidation duly authenticated by the proper official or officials
of the country or state under the laws of which merger or consolidation
was effected: Provided, however, That if the absorbed corporation is the
foreign corporation doing business in the Philippines, the latter shall at the
same time file a petition for withdrawal of it license in accordance with this
Title.
K. REVOCATION OF LICENSE
Sec. 134. Revocation of license. - Without prejudice to other
grounds provided by special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked or suspended by the
Securities and Exchange Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as
required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to
the Securities and Exchange Commission a statement of such change as
required by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or
by-laws or of any articles of merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter in any application, report,
affidavit or other document submitted by such corporation pursuant to
this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes
for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in
behalf of any foreign corporation or entity not duly licensed to do business in
the Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines.
Sec. 135. Issuance of certificate of revocation. - Upon the revocation
of any such license to transact business in the Philippines, the Securities
and Exchange Commission shall issue a corresponding certificate of
revocation, furnishing a copy thereof to the appropriate government agency
in the proper cases.
The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of revocation.
L. WITHDRAWAL OF FOREIGN CORPORATIONS
following requirements are met;
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have
been paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.
CHAPTER 19: MISCELLANEOUS PROVISIONS (TITLE XVI)
Sec. 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.
Sec. 138. Designation of governing boards. - The provisions of
specific provisions of this Code to the contrary notwithstanding, non-stock
or special corporations may, through their articles of incorporation or
their by-laws, designate their governing boards by any name other
than as board of trustees.
Sec. 139. Incorporation and other fees. - The Securities and
Exchange Commission is hereby authorized to collect and receive fees as
authorized by law or by rules and regulations promulgated by the
Commission.
Sec. 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, business 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 business and industry.
Sec. 141. Annual report or corporations. - Every corporation,
domestic or foreign, lawfully doing business in the Philippines shall
submit to the Securities and Exchange Commission an annual report of
its operations, together with a financial statement of its assets and liabilities,
certified by any independent certified public accountant in appropriate
cases, covering the preceding fiscal year and such other requirements
as the Securities and Exchange Commission may require. Such report
shall be submitted within such period as may be prescribed by the
Securities and Exchange Commission.
Sec. 142. Confidential nature of examination results. -
All interrogatories propounded by the Securities and Exchange Commission
and
the answers thereto, as well as the results of any examination made by the
Commission or by any other official authorized by law to make an
examination of the operations, books and records of any corporation, shall
be kept strictly confidential, except insofar as the law may require the
same to be made public or where such interrogatories, answers or
results are necessary to be presented as evidence before any court.
Sec. 143. Rule-making power of the Securities and
Exchange Commission. - The Securities and Exchange Commission
shall have the power and authority to implement the provisions of this
Code, and to promulgate rules and regulations reasonably necessary
to enable it to perform its duties hereunder, particularly in the
prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers.
Sec. 144. Violations of the Code. - Violations of any of the provisions
of this Code or its amendments not otherwise specifically penalized therein
shall be punished by a fine of not less than one thousand (P1,000.00)
pesos but not more than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30) days but not more than five (5)
years, or both, in the discretion of the court. If the violation is committed
by a corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of
the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code.
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.
Sec. 146. Repealing clause. - Except as expressly provided by this
Code, all laws or parts thereof inconsistent with any provision of this Code
shall be deemed repealed.
Sec. 147. Separability of provisions. - Should any provision of this
Code or any part thereof be declared invalid or unconstitutional, the
other provisions, so far as they are separable, shall remain in force.
Sec. 148. Applicability to existing corporations. - All
corporations lawfully existing and doing business in the Philippines on the
date of the effectivity of this Code and heretofore 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, subject to the terms and conditions of its license, and shall
be governed by the provisions hereof: Provided, That if any such
corporation is affected by the new requirements of this Code, said
corporation shall, unless otherwise herein provided, be given a period of
not more than two (2) years from the effectivity of this Code within which to
comply with the same.
Sec. 149. Effectivity. - This Code shall take effect immediately upon
its approval.