Professional Documents
Culture Documents
Principle No. 1
A corporation is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
Notes No.1
Attributes:
1. Artificial being;
2. Created by operation of law;
3. Right of succession; and
4. Powers, attributes and properties expressly authorized by law or incident to its existence.
Principle No. 2
A corporation may claim for moral damages under Art. 2219 (7) of the Civil Code in cases of libel, slander or any
form of defamation. (Filipinas Broadcasting Network vs. Ago Medical and Educational Center)
Notes No. 2
Advantages of corporate form of business:
5. Capacity to act as a single unit;
6. Limited shareholder‟s liability;
7. Continuity in existence;
8. Feasibility of greater undertaking;
9. Transferability of shares;
10. Centralized management; and
Standardized method of organization, management and finance
Notes No. 3
Disadvantage of corporate form of business:
11. To have valid and binding corporate act, formal proceedings, such as board meetings are
required.
12. The business transactions of a corporation is limited to the State of its incorporation and
may not act as such corporation in other jurisdiction unless it has obtained a license or
authority from the foreign state.
13. The shareholders‟ limited liability tends to limit the credit available to the corporation as a
separate legal entity.
14. By the very nature of shares of stock which are personal properties, transferable at will by
the owners thereof, transfers of share may result to uniting incompatible and conflicting
interests.
15. The minority shareholders have practically no say in the conduct of corporate affairs.
16. In large scale enterprises, stockholders‟ voting rights may become merely fictitious and
theoretical because of disinterest in management, wide-scale ownership and inaccessible
place of meeting.
17. Double taxation may be imposed on corporate income.
18. Corporations are subject to governmental regulations supervision and control including
submission of reportorial requirements not otherwise imposed in other business form.
Corporation Law Reviewer
Notes No. 4
Distinctions between a corporation and a partnership
CORPORATION PARTNERSHIP
1. Created by law or operation of law 1. Created by mere agreement of the
parties
2. Generally there must be at least 5 2. May be formed by 2 or more natural
Incorporators persons
3. Can exercise only such powers and 3. Can do anything by agreement of the
functions expressly granted to it by law parties provided only that it is not
and those necessary or incident to its contrary to law, morals, good customs,
Existence public policy and public order
4. Unless validly delegated expressly or 4. In absence of agreement to the contrary,
impliedly, must transact its business any one of the partners may validly bind
through the board of directors the partnership
5. Has the right of succession which 5. Based on mutual trust and confidence
presupposes that it continues to exist such that the death, incapacity,
despite the death, withdrawal, incapacity insolvency, civil interdiction or mere
or civil interdiction of the stockholders or withdrawal of one partner would result in
Members it dissolution
6. Any stockholder can ordinarily transfer, 6. A partner cannot transfer his rights or
sell or assign his shares of stock without interest in the partnership so as to make
the consent of the other stockholders the transferee a partner without the
consent of the other partners
7. The liability of the stockholders or 7. All partners are liable pro rata with all
members in is limited to the extend of their property and after all the partnership
their subscription or their promised property has been exhausted, for all
Contribution partnership liability
8. Term of existence is limited only to 50 8. May exist for an indefinite period
years unless extended
9. Consent of the State is necessary for its 9. Partners may dissolve at will
Dissolution
Notes No. 5
Classes of corporations:
1. Stock
2. Non-stock
Requisites to be classified as a stock corporation:
1. That they have a capital stock divided into shares; and
2. That they are authorized to distribute dividends or allotments as surplus profits to its
stockholders on the basis of the shares held by them
Non-stock corporations – no part of their income is distributable as dividends to its members, trustees or officers
subject to the provisions on dissolution. (Sec. 87)
The plain and ordinary meaning of a business is restricted to activities or affairs where profit is the
purpose or livelihood is the motive, and the term business when used without qualification, should
be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood. (CIR
vs. Club Filipino, Inc.)
The test in determining whether a government owned or controlled corporation 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 Corporation
Law are not within its coverage. (PNOC-EDC vs. NLRC)
Notes No. 6
Other classes of corporations:
1. Public and Private.
a. Public corporations – those 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 civil government.
b. Private corporations – those formed for some private purpose, benefit, aim or
end.
2. Ecclesiastical (religious societies or corporation sole) and Lay (eleemosynary or civil).
a. Ecclesiastical or religious corporations – those composed exclusively of
ecclesiastics organized for spiritual purposes or for administering properties held
for religious ones. They are further classified as religious societies or corporation
sole.
b. Lay corporations – those established for the purposes other than religion. They
are further classified as eleemosynary or civil. Eleemosynary corporations are
created for charitable and benevolent purposes. Civil corporations are organized
not for the purpose of public charity but for the benefit, pecuniary or otherwise, of
its members.
3. Aggregate and Sole.
a. Aggregate corporations – those composed of a number of individuals vested with
corporate powers.
b. Corporations sole – those that 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.
4. Close and Open.
a. Close corporations – those whose shares of stock are held by limited number of
persons.
b. Open corporations – those formed to openly accept outsiders as stockholders or
investors.
5. Domestic and Foreign.
a. Domestic corporations – those that are organized or created under or by virtue of
the Philippine laws. Note: issues of intra-corporate nature are governed by
Philippine law.
b. Foreign corporations – 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.
6. Parent or Holding Companies and Subsidiaries and Affiliates.
a. Holding corporations – corporations that confine their activities to owning stock
in, and supervising management of other companies.
b. Subsidiary corporations – those which another corporation owns at least a
majority of the shares, and thus have control.
c. Affiliates – those corporations which are subject to common control and operated
as part of a system.
7. Quasi-public.
a. Quasi-public corporations – private corporations which have accepted from the
State the grant of a franchise or contract involving the performance of public
duties (public service corporations).
REMEMBER THESE CORPORATIONS
8. Quasi corporations.
a. Quasi corporations – public bodies or municipal societies such as townships,
counties, school districts, road or highway districts which, though not vested with
the general powers of corporations, are organized by statutes or immemorial
usage, as persons or aggregate corporations with precise duties which may be
enforced, and privileges which may be maintained, by suits of law.
9. De jure corporations.
a. De jure corporations – juridical entities created or organized in strict or
substantial compliance with the statutory requirements of incorporation and
whose right to exist as such cannot be successfully attacked even by the State in
a quo warranto proceeding.
10. De facto corporations.
a. De facto corporations – those which exist by virtue of an irregularity or defect in
the organization or constitution or from some other omission to comply with the
conditions precedent by which corporations de jure are created, but there was
colorable compliance with the requirements of the law under which they might be
lawfully incorporated for the purposes and powers assumed, and user of the
rights claimed to be conferred by law.
11. Corporations by estoppel.
a. Corporations 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.
PRINIPLE NO. 2
The mere fact that the government happens to be a majority
stockholder does not make it a public corporation. (National
Coal vs. CIR)
NOTES NO. 7
Stages in the life of a corporation:
1. Creation
2. Reorganization or quasi-reorganization
3. Dissolution and winding up
NOTES NO. 8
Steps in creation:
4. Promotional stage
5. Process of incorporation
6. Organization and commencement of business
PROMOTIONAL STAGE
PROCESS OF INCORPORATION
Process of incorporation:
1. Drafting the articles of incorporation
2. Preparation and submission of additional and supporting documents
3. Filing with the SEC
4. Subsequent issuance of certificate of incorporation
NOTES NO. 10
PRINCIPLE NO. 3
CORPORATE NAME
PRINCIPLE NO. 4
The law gives a corporation no 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. (Red Line Transportation Co. vs. Rural Transit Co.)
PRINCIPLE NO. 5
A word or phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been used so
long and so exclusively by one producer with reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase has come to mean that the article was his
product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA)
PRINCIPLE NO. 6
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. (Philips Export B.V. vs. CA)
NOTES NO. 10
To come within the scope of the prohibition of Sec. 18, two requisites must be proven, namely:
3. That the complainant corporation acquired a prior right over the use of such corporate
name; and
4. 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. (Philips Export B.V. vs. CA)
PRINCIPLE NO. 8
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. Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely to occur. (Philips Export
B.V. vs. CA)
PRINCIPLE NO. 9
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. (Philips Export B.V. vs. CA)
PRINCIPLE NO. 10
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.
PRINCIPLE NO. 11
PURPOSE CLAUSE
A corporation has only such powers as are expressly granted to it by law and by its articles of
incorporation including those which are incidental to such conferred powers, those reasonably
necessary to accomplish its purpose and those which may be incidental to its existence.
NOTES NO. 12
NOTES NO. 13
General limitations on the purpose clause:
1. The purpose 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.
4. The purpose must be capable of being lawfully combined.
NOTES NO. 14
TERM OF EXISTENCE
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.
NOTES NO. 16
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.
PRINCIPLE NO. 13
General rule: Only natural persons can be incorporators.
Exception: Cooperatives and corporations primarily organized to hold equities in rural banks
PRINCIPLE NO. 14.
Minors are not qualified to become incorporators.
PRINCIPLE NO. 15
General rule: There must be at least 5 but not more than 15 directors or trustees in a private corporation.
NOTES NO. 17
Exceptions:
1. Educational corporations registered as a non-stock corporation 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 the stockholders are considered as members of the board
of directors thereby effectively allowing 20 members in the board; and
3. Corporation sole.
PRINCIPLE NO. 16
The by-laws may provide for additional qualifications and disqualifications. However, it may not do away with
the minimum disqualifications laid down by the Code.
NOTES NO. 18
Qualifications:
1. Directors must own at least one (1) share of the capital stock of the corporation. Trustees
must be members.
2. A majority of the directors or trustees must be residents of the Philippines.
Disqualifications:
1. Conviction 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 election or appointment.
2. Other disqualifications under applicable special laws.
PRINCIPLE NO. 17
A by-laws may validly provide that no person may be elected as director unless he owns a specified number of
shares required for the directorate qualification.
PRINCIPLE NO. 18
It may likewise disqualify a stockholder from being elected into office if he has a substantial interest in a
competitor corporation to avoid any possible adverse effects of conflicting interest of a director.
PRINCIPLE NO. 19
In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the stock as appearing IN
THE CERTIFICATE.
PRINCIPLE NO. 20
If no election is conducted or no qualified candidate is elected, the incumbent director shall
continue to act as such in a hold over capacity until the election is held and a qualified candidate is
so elected. (Detective and Protective Bureau vs. Cloribel)
NOTES NO. 19
CAPITALIZATION
Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or secured to be
paid by the subscribers.
Subscribed capital stock – the total number of shares and its total value for which there are contracts for their
acquisition or subscription.
Paid-up capital stock – the actual amount or value which has been actually contributed or paid to the
corporation in consideration of the subscriptions made thereon.
Stocks shall not be issued for a consideration less than the par or issued price thereof.
NOTES NO. 20
Consideration for the issuance of stock may be any or a combination of any two or more of the ff:
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 or services actually rendered to the corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.
PRINCIPLE NO. 21
NOTES NO. 22
Purpose of classification:
1. To specify and define the rights and privileges of the stockholders.
2. For regulation and control of the issuance of sale of corporate securities for the protection
of purchasers and stockholders.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.
NOTES NO. 23
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share
shall be equal in all respects to every other share.
Preferred shares are presumed to be non-participating.
Participating preferred shares – the holders thereof are still given the right to participate with the common
stockholders in dividends beyond their stated preference.
PRINCIPLE NO. 26
Cumulative preferred share – those that entitle the owner thereof to payment not only of current dividends but
also back dividends not previously paid whether or not, during the past years, dividends were declared or paid.
NOTES NO. 24
PRINCIPLE NO. 27
Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote.
Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with other
shares.
NOTES NO. 26
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and thus, non assessable;
2. The consideration for its issuance should not be less than P5.00;
3. The entire consideration for its issuance 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 loan associations.
NOTES NO. 28
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and
3. Disappearance of personal liability on the part of the holder thereof for unpaid
subscription.
NOTES NO. 29
PRINCIPLE
NO. 28
Except as provided in the penultimate paragraph of Sec. 6, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights.
NOTES NO. 29
Founders’ shares
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.
NOTES NO. 30
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.
NOTES NO. 31
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 may again be issued for a price less than par.
Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding shares of
stock. (CIR vs. Manning)
NOTES NO. 32
CAPITAL REQUIREMENT
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 date
PRINCIPLE NO. 33
s 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.
NOTES NO. 26
PRINCIPLE NO. 29
NO TRANSFER CLAUSE
No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the
required percentage of the capital stock as provided by existing laws shall be allowed or permitted
to be recorded in the books of the corporation and this restriction shall be indicated in all of the
stock certificates to be issued by the corporation.
NOTES NO. 34
NOTES NO. 35
NOTES NO. 36
DE FACTO CORPORATION
De facto corporation – 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.
NOTES NO. 37
Requisites:
1. There is a valid law under which the corporation could have been created as a de jure
corporation;
2. An attempt, in good faith, to form a corporation according to the requirements of law
(colorable compliance);
3. A user of corporate powers; and
4. Good faith in claiming to be and doing business as a corporation.
NOTES NO. 37
Rules on collateral and direct attack against corporate existence:
1. The corporate existence of a de jure corporation cannot be directly attacked either directly
or collaterally, even by the State.
2. The corporate existence of a de facto corporation can be directly attacked on a quo
warranto proceeding.
3. The corporate existence of a de facto corporation is not subject to collateral attack by any
party.
NOTES NO. 38
A municipal corporation created by an unconstitutional law cannot be cannot exist as a de facto
corporation unless there is some other valid law giving corporate vitality to the organization. An
unconstitutional law confers no rights. (Municipality of Malabang vs. Benito)
Without having obtained a certificate of incorporation, a corporation – even its stockholders – may not claim in
good faith to be a corporation. (Hall vs. Piccio)
NOTES NO. 39
CORPORATION BY ESTOPPEL
Sec. 21. Corporation by estoppel. - All persons who assume to act as corporation knowing it 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.
The doctrine of corporation by estoppel may apply to the alleged corporation or to a third party transacting with
the former.
The principle of estoppel cannot be invoked in favor of a person who is a member of the
association and therefore must be presumed to know that it is not a corporation. (Lozano vs. De
Los Santos)
The principle of estoppel 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. (Lozano vs. De
Los Santos)
One who has induced another to act upon his willful 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. Such persons becomes liable for the contracts entered into by such
ostensible corporation. (Albert vs. University Publishing Co., Inc.)
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 to be applicable where fraud takes part in
the said transaction. (Salvatierra vs. Garlitos)
Persons who have continuously and for a long period misrepresented themselves as a corporation
as estopped from denying such personality to defeat claims against it. (Chiang Kai Shek School vs.
CA)
In the absence of fraud, a person who has contracted or 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 an action leading out of or involving such contract or dealing, unless the
existence is attacked for causes which have arisen since making the contract or other dealing
relied on as an estoppel. (Asia Banking Corp. vs. Standard Products Co., Inc.)
The doctrine of estoppel applies to a third party only when he tries to escape liability on a contract
from which he has benefited. It does not apply when the third party is the one claiming from the
contract. (International Express Travel & Tours Services, Inc. vs. CA)
The doctrine of estoppel applies to foreign as well as domestic corporations. Foreign corporations
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. (Georg Grotjahn GMBH & Co. vs. Isnani)
NOTES NO. 40
If a corporation by estoppel exists and enters into a contract or transacts business with a third party, the latter
has three 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 who held out the
association a corporation; and
3. Against both the ostensible corporation and persons forming it, jointly and severally.
NOTES NO. 41
As regards the liability of the associates of the alleged corporation, only those who actively participated in
holding out the association as a corporation should be held personally liable.
NOTES NO. 42
ORGANIZATION OF BUSINESS
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.
NOTES NO. 43
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.
Organization – the election of officers, providing for the subscription and payment of capital stock,
the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the
capacity to transact the legitimate business for which it was created.
NOTES NO. 44
Failure of the corporation to organize within the prescribed period would result in its automatic dissolution, unless its failure to
do so is due to causes beyond its control.
PRINCIPLE NO. 31
Substantial compliance is sufficient.
PRINCIPLE NO. 32
Subsequent inoperation is merely a ground for suspension or revocation of corporate franchise. Dissolution is
not automatic.
NOTES NO. 45
THE CORPORATE CHARTER WITH AMENDMENTS
Corporate charter – an instrument or authority from the sovereign power, bestowing rights and power.
The corporate charter is a 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; and
3. Between and among the stockholders or members themselves as far as their relationship
with one another is concerned.
PRINCIPLE NO. 33
The charter of corporations created under the Corporation Code consists of the articles of
incorporation and the Corporation Code inclusive of the by-laws adopted thereunder and all
pertinent provisions of any statute governing them.
The charter of corporations created by special laws consists of the special law creating the same and any and all
laws, rules and regulations affecting or applicable to them.
NOTES NO. 46
Franchise – the right or privilege itself to be and act as a corporation or to do a certain act.
Kinds of franchises:
1. Primary franchise – the right or privilege of being a corporation which the state confers
upon the applicant for this faculty.
2. Secondary franchise – the powers and privileges vested in, and to be exercised by the
corporate body as such.
PRINCIPLE NO. 34
CORPORATE ENTITY THEORY
The corporation is possessed with a personality separate and distinct from the individual stockholders or
members.
PRINCIPLE NO. 35
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. Conversely, a corporation has no interest in the
individual property of its stockholders unless transferred to the corporation, even in case of a one-
man corporation. (Sulo ng Bayan, Inc. vs. Gregoria Araneta, Inc.)
PRINCIPLE NO. 36
A bona fide corporation should alone be liable for its corporate acts as duly authorized by its directors and
officers. (Caram vs. CA)
PRINCIPLE NO. 37
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 the corporation being separate and distinct from the person
composing it. (Rustan Pulp and Paper Mills, Inc. vs. IAC)
PRINCIPLE NO. 38
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 and
possesses the property of the corporation, since the president, as an individual, and the corporation
are separate entities. (Cruz vs. Dalisay)
PRINCIPLE NO. 39
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not, of itself, sufficient ground for disregarding the separate corporate
personality. (Palay Inc. vs. Clave)
PRINCIPLE NO. 40
In a right of action against the corporation, the officers may not be held personally liable as long as they act within the scope of
their authority. (Soriano vs. CA)
PRINCIPLE NO. 41
NOTES NO. 46
Test in determining the applicability of the doctrine of piercing the veil of corporation fiction:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of. (Instrumentality Rule, Concept Builders, Inc. vs. NLRC)
NOTES NO. 47
WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
Corporate fiction cannot be disregarded in the absence of intent to defraud in corporate transactions. (Remo,
JR vs. IAC)
For the separate juridical personality of a corporation to be disregarder, the wrongdoing must be clearly and
convincingly established. (Del Rosario vs. NLRC)
Mere corporate ownership of all the stocks of another corporation will not justify their being treated as single
entity. (PNB vs. Ritratto)
There being not the least indication that the second corporation is a dummy or serves as a client of
the first corporation, the fiction of separate and distinct corporate entities cannot be disregarder and
brushed aside. (Yu vs. NLRC)
NOTES NO. 48
AMENDMENT OF THE CORPORATE CHARTER
Steps to be followed for an effective amendment of the articles of incorporation:
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 stock or 2/3 of the members in case of non-stock corporation.
3. Submission and filing of the amendments with the SEC as follows:
a. The original and amender articles together shall contain all the 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.
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 duly 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.
NOTES NO. 49
NOTES NO. 50
Special amendments:
1. Extension or shortening of corporate term (Sec. 37)
2. Increase or decrease of capital stock (Sec. 38)
3. Incurring, creating or increasing bonded indebtedness (Sec. 38)
PRINCIPLE NO.42
PROVISIONS SUBJECT TO AMENDMENT
Matters which are fait accompli are not subject to change.
A change in the name of the corporation does not affect the identity of the corporation, nor in any
way affect the rights, privileges, or obligations previously acquired or incurred by it. (Philippine First
Insurance Co. vs. Hartigan)
NOTES NO. 51
AMENDMENT OF THE CORPORATE TERM
Procedure to amend the corporate term:
1. Approval by a majority vote of the board or 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 representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
4. In case of extension of corporate term, the extension 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 his
appraisal rights.
PRINCIPLE NO. 42
Extension may be made only before the term provided in the corporate charter expires. (Alhambra Cigar &
Cigarette Mfg. Co., Inc. vs. SEC)
NOTES NO. 52
POWERS OF THE BOARD
Sec. 23. The board of directors and trustees. - Unless otherwise provided in the 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.
PRINCIPLE NO. 43
The authority of the board of directors does not extend to the fundamental changes in the corporate charter.
PRINCIPLE NO. 44
PRINCIPLE NO. 45
A corporation is bound by the acts of its corporate officers if they act within the scope of the 5 classifications of
powers of corporate agents:
1. Those expressly conferred or those granted by the articles of incorporation, the 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.
5. Powers arising out of customs, usage or emergency.
PRINCIPLE NO. 46
Where a corporation seeks to evade liability on a contract on the ground of lack of authority on the part of the
person who assumed to act for it, such defense should be specially pleaded. Failure to make an issue as to such
authority eliminates any questions regarding it. (Ramirez vs. Orientalist Co.)
PRINCIPLE NO. 47
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 the board can create liability, like an individual, by other means than
by a formal expression of its will. (Ramirez vs. Orientalist Co.)
PRINCIPLE NO. 48
The power to make corporate contracts resides primarily in the company's board of directors; but
the board may ratify an unauthorized contract made by an officer of the corporation. Ratification in
this case is held to have occurred when the board, with knowledge that the contract had been
made, adopted a resolution recognizing the existence of the contract and directing that steps be
taken to enable the corporation to utilize its benefits. (Ramirez vs. Orientalist Co.)
PRINCIPLE NO. 49
Where a corporate contract has been effected with the approval of the board of directors, a
resolution adopted at a meeting of stockholders refusing to recognize the contract or repudiating it
is without effect. (Ramirez vs. Orientalist Co.)
PRINCIPLE NO. 50
Contracts between a corporation and third persons must be made by or under the authority of its board of
directors and not of its stockholders. (Barreto vs. La Previsora)
NOTES NO. 53
PRINCIPLE NO. 52
If no election is conducted or no qualified candidate is elected, the incumbent director shall
continue to act as such in a hold-over capacity until the election is held and a qualified candidate is
so elected. (Detective and Protective Bureau vs. Cloribel)
NOTES NO. 55
ELECTION AND VOTING
In stock corporations, the majority of the outstanding capital stock, in person or by representative authorized to
act by written proxy, must be present at the election of directors.
In non-stock corporations, a majority of the members entitled to vote, in person or by proxy, if allowed in its
articles of incorporation or by-laws, must be present in the election.
The election may be adjourned if, for any reason, no election is held, or if the required quorum is not obtained.
However, it may not be adjourned indefinitely.
The election must be by ballot if requested by any voting stockholder or member.
Candidates receiving the highest number of votes shall be declared elected.
In stock corporations, cumulative voting is a matter of right.
PRINCIPLE NO. 53
In non-stock corporations, cumulative voting is not available unless provided for in the articles of
incorporation or by-laws. I.e., a member may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate.
PRINCIPLE NO. 54
In stock corporations, the stockholder may:
1. Vote such number of shares for as many persons as there are directors to be elected;
2. 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;
3. Distribute them on the same principle among as many candidates as he shall see fit.
PRINCIPLE NO. 55
No delinquent stock shall be voted.
NOTES NO. 56
Officers to be elected
PRINCIPLE NO. 57
The directors or officers shall hold office for one (1) year until their successors are elected and qualified.
NOTES NO. 57
VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
PRINCIPLE NO. 58
General rule: the quorum requirement for a valid board meeting is the majority of the number of the directors or
trustees as fixed in the articles of incorporation.
Exception: The articles of incorporation or the by-laws may provide for a greater majority.
PRINCIPLE NO. 59
General rule: To have a valid corporate act, the decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum is required.
Exception: The election of corporate officers requires the vote of a majority of all the members.
PRINCIPLE NO. 60
General rule: Individual directors cannot bind the corporation by their individual acts.
Exceptions:
1. By delegation of authority;
2. Where expressly conferred; or
3. Where the officer or agent is clothed with actual or apparent authority.
NOTES NO. 58
Although 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 is 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) the acquiescence in
his acts of a particular nature, with actual or constructive knowledge thereof, whether within or
without the scope of his ordinary powers. (Yao Ka Sin Trading vs. CA)
PRINCIPLE NO. 61
Any 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 impliedly. (Lopez vs. Fontecha)
PRINCIPLE NO. 62
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, the
authority is implied and that the corporation is bound. (Pua Casim & Co. vs. Neumark and Co.)
PRINCIPLE NO. 63
An invalid contract may be validated by the ratification only of the board of directors; the president has no
authority to ratify such contract. (Yu Chuck vs. Kong Li Po)
PRINCIPLE NO. 64
Silence coupled with acceptance of benefits constitutes a binding ratification. (Francisco vs. GSIS)
PRINCIPLE NO. 65
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 Board of Directors, perform all acts of an ordinary nature, which by usage or necessity are
incident to his office, and may bind the corporation by contracts in matters arising in the usual
course of business. Where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. (Board of liquidators vs. Kalaw)
PRINCIPLE NO. 66
Lack of repudiation, acquiescence and acceptance of benefits are equivalent to an implied
ratification by the Board of Directors and binds the corporation even without formal resolution
passed and recorded. (Buenaseda vs. Bowen & Co., Inc.)
PRINCIPLE NO. 67
Express ratification: through formal board action.
PRINCIPLE NO. 68
Implied ratification:
1. Silence or acquiescence;
2. Acceptance and/or retention of benefits; or
3. By recognition or adoption.
NOTES NO. 59
REMOVAL AND FILLING UP OF VACANCIES
Requirements and procedure:
1. The removal should take place at a general or special meeting duly called for that
purpose;
2. The removal must be a vote of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in case of non-stock corporations;
3. Prior notice of the proposed removal must be made stating the time and place of meeting
either by publication or by written notice.
The special meeting must be called by the secretary, on order of the president or on the written
demand of the stockholders representing a majority of the outstanding capital stock, or 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 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 signing the
demand.
PRINCIPLE NO. 69
General rule: Directors or trustees may be removed with or without just cause.
Exception: Removal without just cause may not be used to deprive minority stockholders or members of the
right of representation to which they may be entitled under Sec. 24.
NOTES NO. 60
PD 902-A grants the court the power and authority to remove or oust a director and it can do so, even motu
propio by the appointment of a management committee.
In case of a deadlock in a close corporation, the SEC is authorized to issue an order cancelling,
altering, or enjoining any resolution or other act of the corporation or its board of directors or
directing or prohibiting any act of the corporation or the board of directors thereby effectively taking
away the rights of the directors to act as managers of the corporation.
NOTES NO. 61
Vacancies to be filled by the stockholders or members in a regular or special meeting:
1. Vacancy due to removal;
2. Vacancy due to expiration of term;
3. Vacancy due to an increase in the number of board of directors; and
4. Vacancy due to other causes when the remaining directors or trustees do not constitute a
quorum.
Vacancy due to removal may be filled by an election at the same meeting without further notice.
Any change in the constitution of the board of directors or trustees must be reported to the SEC.
The tenure of the director filling up the vacancy shall only be for the unexpired term of his predecessor in office.
If the successor is not qualified, the predecessor shall hold office in a hold-over capacity until such successor is
duly elected and qualified. (Detective and Protective Bureau vs. Cloribel)
NOTES NO. 62
COMPENSATION OF DIRECTORS
General rule: Directors shall not receive any compensation, as such directors, except for reasonable per diems.
Exceptions:
1. When there is a provision in the by-laws fixing their compensation;
2. When the stockholders, by a majority vote the outstanding capital stock grant the same;
and
3. If the director renders extra-ordinary or unusual service.
In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income
before income tax of the corporation during the preceding year.
NOTES NO. 63
If there is wastage of corporate assets, the courts may be justified to look into the reasonableness
and fairness of the compensation despite the fact that the grant thereof is authorized pursuant to
the by-laws and by the vote of the majority of the holders of the outstanding capital stock of the
corporation.
The board may not grant compensation upon itself without authorization of the by-laws or in contravention of the
by-laws. (Central Cooperative Exchange vs. Tibe, Jr.)
Members of the board of directors may receive compensation, in addition to reasonable per diems,
when they render services to the corporation in a capacity other than as directors or trustees.
(Western Institute of Technology, Inc. vs. Salas)
The fact that the amount paid as compensation to directors under a by-law provision has increased
beyond what would probably be necessary to secure adequate service from them is a matter that
cannot be corrected by the court. The remedy is in the hands of the stockholders who have the
power at any lawful meeting to change the rule. (Govt. vs. El Hogar Filipino)
NOTES NO. 64
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, 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; or
4. He is made, by specific provision of law, to personally answer for his corporate action.
(Tramat Mercantile, Inc. vs. CA)
Where a 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. (Sec. 1, BP 22)
In labor cases, 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. (Uichico vs.
NLRC)
NOTES NO. 65
THREE-FOLD DUTY OF DIRECTORS
Three-fold duty of directors:
1. Obedience
2. Diligence
3. Loyalty
NOTES NO. 66
3.
Solidarily liability for all damages suffered by the corporation, its stockholders or members or other persons
shall be imposed upon directors or trustees:
1. Who willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
2. Who are guilty of gross negligence or bad faith in directing the affairs of the corporation; or
3. Who acquire any personal property or pecuniary interest in conflict with their duty as such
directors or trustees.
PRINCIPLE NO. 70
Business judgment rule – directors are not liable for losses due to imprudence or honest error of
judgment. 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.
PRINCIPLE NO. 71
Resolutions passed in good faith by the board of directors are valid and binding, and whether or not
it will cause losses or decrease in profits are not subject to the review of the court. (Montelibano vs.
Bacolod Murcia Milling, Co., Inc.)
General rule: A director is not liable for misconduct of co-directors or other officers.
Exceptions:
PRINCIPLE NO. 72
3.
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 a business opportunity which in
fairness should belong to the corporation.
NOTE NO. 67
Distinction between Secs. 31 & 34:
1. Sec. 31, where a director is 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 by the stockholders.
2. Sec. 34, where the director acquires for himself 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 owning or representing at least 2/3 of the outstanding capital stock.
PRINCIPLE NO. 73
Directors are liable for fraud committed by concealment of information as to the state and probable
result of the negotiations for the sale of corporate assets which may affect the price of the
corporation‟s stock. (Strong vs. Repide)
NOTES NO. 68
SELF-DEALING DIRECTORS
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 of the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of
directors.
PRINCIPLE NO. 74
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, provided:
5. The contract is 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
6. Such ratification is made at a meeting called for that purpose;
7. Full disclosure of the adverse interest of the directors or trustees involved is made; and
The contract is fair and reasonable under the circumstances.
PRINCIPLE NO. 75
8.
In the absence of express delegation, a contract entered into by the president, on behalf of the
corporation, may bind the corporation if the board should ratify the same expressly or impliedly.
Furthermore, the president as such may bind the corporation by a contract in the ordinary course of
business, provided the same is reasonable under the circumstances. These rules only apply where
the president or other officer, purportedly acting for the corporation, is dealing with a third person,
i.e., person outside the corporation. It does not apply to self-dealing directors or officers. (Prime
White Cement Corp. vs. IAC)
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. (Mead vs. Mc
Cullough)
PRINCIPLE NO. 76
INTERLOCKING DIRECTORS
Sec. 33. Contracts between corporations with interlocking directors. - Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a contract between two or
more corporations having interlocking directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he shall be subject to the
provisions of the preceding section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
A director who owns a substantial interest in one corporation dealing with another where he has a
nominal interest is a regarded as a self-dealing director in so far as the latter corporation is
concerned.
PRINCIPLE NO. 77
DERIVATIVE SUIT
Suits that stockholders may bring against erring directors or officers:
1. Individual or personal suit – one brought by the shareholders for direct injury to his rights,
such as denial of his right to inspect corporate books and records or pre-emptive right;
2. Representative of class suit - ; and
3. Derivative suit – an action based on injury to the corporation – to enforce a corporate right
– wherein the corporation is joined as a necessary party, and recovery is in favor of the
corporation.
NOTES NO. 69
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, can not maintain a derivative
suit unless such transactions continue and are injurious to the stockholder, or affect him specifically
in some other way. (Pascual vs. Orozco, et al.)
When the board is under the complete control of the principal defendants in the case, demand
upon such board to institute action and prosecute the same is not required. The law does not
require litigants to do useless acts. (Everett vs. Asia Banking Corporation)
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 issue. On what side the corporation appears is not important.
(Republic Bank vs. Cuaderno)
The minority shareholder who is suing for and in 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 vest
jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of
the action. (Western Institute of Technology, Inc. vs. Salas)
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. (SMC vs. Khan)
Where corporate directors are guilty of breach of trust – not mere error of judgment or abuse of
discretion – and intra-corporate 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.
(Reyes vs. Tan, et al.)
The stockholders in a derivate suit cannot allege or vindicate their own individual interests or prejudice.
(Gamboa vs. Victoriano, et al.)
In a derivative suit, the injury complained of is primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders. The stockholders
may not directly claim those damages for themselves for that would result in the appropriation by,
and the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities. (Evangelista vs. Santos)
PRINCIPLE NO. 78
Rules, requirements and procedure so that a derivative suit may proceed or prosper:
1. The party bringing the action 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 affects him specifically in some other way. The number of shares is
immaterial.
2. He has tried to exhaust intra-corporate remedies, i.e. 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.
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.
5. Any benefit or damages recovered shall pertain to the corporation.
NOTES NO. 70
EXECUTIVE COMMITTEE
An executive committee may be created when authorized by the by-laws.
General rule: The executive 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.
Exceptions:
1. Approval of any action for which shareholders' approval is also required;
2. The filling 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.
PRINCIPLE NO. 79
CORPORATE POWERS
Classification of corporate authority:
1. Those expressly granted or authorized by law inclusive of the corporate charter or articles
of incorporation
2. Those impliedly granted as are essential or reasonably necessary to the carrying out of
the express powers
3. Those that are incidental to its existence.
NOTES NO. 71
Powers expressly granted
1. Power to sue and be sued (Sec. 36)
2. Power of succession (Sec. 36)
3. Power to adopt and use a corporate seal (Sec. 36)
4. Power to amend its articles of incorporation (Sec. 36)
5. Power to adopt, amend or repeal by-laws (Sec. 36)
6. Power to issue or sell stocks/ to admit members (Sec. 36)
7. Power to acquire or alienate real or personal property (Sec. 36)
8. Power to enter into merger or consolidation (Sec. 36)
9. Power to make reasonable donations (Sec. 36)
10. Power to establish pension, retirement, and other plans (Sec. 36)
11. Power to extend or shorten corporate term (Sec. 37)
12. Power to increase or decrease capital stock (Sec. 38)
13. Power to incur, create or increase bonded indebtedness (Sec. 38)
14. Power to deny pre-emptive right (Sec. 39)
15. Power to sell or dispose corporate assets (Sec. 40)
16. Power to acquire own shares (Sec. 41)
17. Power to invest corporate funds in another corporation or business or for any other
purpose (Sec. 42)
18. Power to declare dividends (Sec. 43)
19. Power to enter into management contract (Sec. 44)
NOTES NO. 72
POWER TO SUE AND BE SUED
The residence of the corporation is the place of its principal office as may be indicated in its articles of
incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)
Service of summons upon a corporation must be made upon:
1. President,
2. Managing partner,
3. General manager,
4. Corporate secretary,
5. treasurer, or
6. In-house counsel
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. (Delta Motor Sales Corp. vs. Mangosing)
Under the new rules, service of summons upon an agent of the corporation is no longer authorized. (E.B.
Villarosa & Partner Co., LTD. vs. Benito)
NOTES NO. 73
POWER OF SUCCESSION
Right of succession – a corporation persists to exist despite the death, incapacity, civil interdiction or withdrawal
of the stockholders or members thereof.
POWER TO ADOPT AND USE COMMON SEAL
Statutes empowering corporations to make and own a seal are not mandatory but merely permissive.
NOTES NO. 75
3 ways of increasing the capital stock:
1. Increasing the par value of the existing number of shared without increasing the number of
shares;
2. Increasing the number of existing shares without increasing the par value thereof; and
3. Increasing the number of existing shares and at the same time increasing the par value of
the shares.
Existence of unissued or unsubscribed share out of the original capital stock will not prohibit the increase of
capital stock.
NOTES NO. 78
Reasons for decreasing capital stock:
1. To reduce or wipe out existing deficit where no creditors would thereby be affected;
2. When capital is more than what is necessary to procreate the business or reduction of
capital surplus; or
3. To write down the value of its fixed assets to reflect the present actual value in case where
there is a decline in the value of the fixed assets of the corporation.
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 law. Moreover, strict compliance with the statutory regulations is necessary.
(Philippine Trust Company vs. Rivera)
A reduction of capital stock may not be used as a subterfuge, a deception as it were, to camouflage
the fact that a corporation has been making profits to obviate a just sharing to labor. (Madrigal &
Co. vs. Zamora)
A corporation which has the power to borrow or raise money, to contract for labor or services, or
otherwise contract a debt has the implied power to issue bonds in payment or as a security
provided it violates no prohibition or restriction in its charter or any other statutes.
Corporate bonds must be registered and approved by the SEC before they are issued.
POWER TO DENY PRE-EMPTIVE RIGHTS
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
stockholdings, subject only to the limitations imposed under Sec. 39.
The basis for the grant of this right is the preservation, unimpaired and undiluted, of the old
stockholders‟ relative and proportionate voting strength and control, that is, the existing ratio of
their proprietary interest and voting power in the corporation.
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.
Exceptions:
1. Shares to be issued 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 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.
The exceptions do not apply to stockholders of a close corporation.
The right may be lost by waiver, expressly or impliedly by inability or failure to exercise it after having been
notified.
The pre-emptive right covers all issues or disposition of share of any class. It includes new share
issued pursuant to an increase in capital stock, unissued shares which form part of the original
capital stock and treasury shares.
POWER TO SELL/DISPOSE ASSETS
There is a sale or other disposition of substantially all the corporate property and assets if the
corporation would thereby be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
Conditions for the valid exercise of this right:
1. Resolution by the majority vote of the board of directors or trustees;
2. Authorization from the stockholders representing at least 2/3 of the outstanding capital
stock or 2/3 of the members in case of non-stock corporations;
3. The ratification must be at a meeting duly called for that purpose;
4. Prior written notice of the proposed action 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. 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.
7. (Note: 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 such transaction.)
Exception to application of the procedure and requirements:
1. The sale, lease, exchange, mortgage, pledge or other dispose of property and assets is
necessary in the usual and regular course of business of the corporation; or
2. The sale or other disposition of property and assets is appropriated for the conduct of the
corporation‟s remaining business.
The sale or other disposition of all or substantially all of the corporate property or assets must be
voted for by the legitimate board and concurred in by the bona fide stockholders or members. (IDP
vs. CA)
General rule: Where a corporation sells or otherwise transfers all of its assets to another corporation, the latter
is not liable for the debts and liabilities of the transferor.
Exceptions:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations;
3. Where the purchasing corporation is merely a continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently in order to escape liability for such
debts.
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:
1. Where a stockholder or stockholders representing the same interest of both the managing
and the managed corporations own or control more than 1/3 of the total outstanding
capital stock entitled to vote of the managing corporation;
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; or
3. Where the contract would constitute the management or operation of all or substantially all
of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise.
PRINCIPLE NO. 80
ULTRA-VIRES ACTS
Ultra-vires acts – are those that can not be executed or performed by a corporation because they
are not within its express, inherent or implied powers as defined by its charter or articles of
incorporation.
Consequences of ultra-vires acts:
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 either an individual or derivative suit
to enjoin a threatened ultra-vires act or contract.
3. On the immediate parties – (a) if the contract is fully executed on both sides, the contract
is effective; (b) if the contract is executory on both sides, neither party can maintain an
action for its non-performance; and (c) if the contract is executory on one side only, and
has been fully performed on the other, the party who has received the benefits is estopped
to set up that the contract is ultra-vires.
PRINCIPLE NO. 81
Acts which are clearly beneficial to the company or necessary to promote the interest or welfare of
the corporation, its employees and their families, or in the legitimate furtherance of its business are
within corporate powers. (Republic vs. Acoje Mining)
Mere ultra-vires acts which are not illegal per se may become binding and enforceable either by
ratification, estoppel or on equitable grounds unless the public or third parties are thereby
prejudiced. (Privano vs. De la Rama Steamship)
Corporations authorized to acquire the bonds have the 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. 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
ultra 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. (Carlos vs. Midoro Sugar Co.)
Actions which are beyond the powers of the corporation as embodied in its articles of incorporation
and have absolutely no relation to the avowed purpose of the corporation are ultra-vires. (Japanese
War Notes Claimants Assoc., Inc. vs. SEC)
Corporate officers 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 shall be personally liable therefor, as well as for the
consequences arising from their acts in connection therewith. (Crisologo-Jose vs. CA)
NOTES NO. 79
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 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 member and
directors and officers with relation thereto and among themselves in their relation to it.
Requirements and procedure for adoption of by-laws:
1. The by laws must not be inconsistent with the Code;
2. If adopted prior to incorporation:
a. Approved and signed by all the incorporators;
b. Submitted together with the articles of incorporation to the SEC;
3. If adopted subsequent to incorporation:
a. Adopted within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC;
b. 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,
c. Signed by the stockholders or members voting for them
d. Kept in the principal office of the corporation, subject to the inspection of the
stockholders or members during office hours.
e. A copy thereof, duly certified to by a majority of the directors or trustees
countersigned by the secretary of the corporation, must be filed with the SEC
which shall be attached to the original articles of incorporation.
4. Certification of the appropriate government agency concerned to the effect that such by-
laws or amendments are in accordance with law.
5. Issuance by the Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
NOTES NO. 80
Contents of by-laws:
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.
By-laws are subordinate to the articles of incorporation, the Corporation Code and other statutes which form
part of the corporate charter.
By-laws become effective only upon the approval of the SEC
NOTES NO. 81
Time of filing:
1. Prior to incorporation – must be signed by all the incorporators, must be filed together with
the articles of incorporation
2. After incorporation – approval of at least a majority of the outstanding capital stock
Failure to file by-laws may result to suspension or revocation of corporate franchise after proper notice and
hearing
Failure to file by-laws does not result in automatic dissolution. (LGVHA vs. CA)
By-laws are internal rules an cannot bind, effect or prejudice third persons without knowledge. (Fleisher vs.
Botica Nolasco)
Two modes of amending or repealing by laws or adopting a new one:
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 2/3 of the outstanding capital stock or
members
Delegated power to amend, repeal or adopt by-laws may be revoked
Incorporation of an invalid by-law provision is not a misdemeanor. It does not justify the dissolution of the
corporation. (Govt. vs. El Hogar)
The by-laws may disqualify a stockholder from being elected into office if he has a substantial
interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a
director. (Gokongwei, Jr. vs. SEC)
Elements of a valid by laws:
1. It must not be contrary to law, public policy or morals.
2. It must not be inconsistent with the articles of incorporate.
3. It must be general and uniform in its effect or applicable to all alike or those similarly
situated.
4. It must not impair obligations and contracts or vested rights.
5. It must be reasonable.
NOTES NO. 82
Meetings – applies to every duly convened assembly either stockholders, members, directors or trustees,
manages, etc. for any legal purpose, or the transaction of business of a common interest.
Classes of meetings:
1. General
2. Special
NOTES NO. 83
STOCKHOLDER’S MEETINGS
Requirements to have a valid stockholder‟s meeting:
1. It must be held on the date fixed in the by-laws or in accordance with law.
2. Prior notice must be given.
3. It must be held at the proper place.
4. It must be called by the proper party.
5. Quorum and voting requirements must be met
It must be held on the date fixed in the by-laws or in accordance with law.
Regular meetings 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.
Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-
laws.
NOTES NO. 84
NOTES NO. 85
It must be called by the proper party.
Persons who may call the meeting:
1. The person or persons authorized under the by-laws;
2. Absent of any provision in the by-laws, the president;
3. Under Sec. 28 (removal of director), by the secretary on order of the president or on
written demand of the stockholder representing or holding at least a majority of the
outstanding capital stock or majority of the members entitled to vote in a non-stock
corporation, or the stockholder or member making the demand if there is no secretary or
he refuses to do so; and
4. On order of the proper forum under Sec. 50.
A stockholder may only petition the SEC to issue an order directing the petitioner to call a meeting
when there is no person authorized to call a meeting. Otherwise, the remedy is to file a petition for
mandamus.
NOTES NO. 86
NOTES NO. 88
PROXY
Proxy – the authority given by the stockholder or member to another to vote for him at a
stockholders‟ or members‟ meeting. It also refers to the instrument or paper which is evidence of
the authority of the agent or the holder thereof to vote for and in behalf of the stockholder or
member.
Two types of proxies:
1. General – gives a general discretionary power of attorney to vote for directors and all
ordinary matters that may properly come before a meeting. It is not an authority, however,
to vote for fundamental changes in the corporate charter or for other unusual transactions,
unless specified.
2.Limited – restricts the authority to vote on specified matters only and may direct the
manner in which the vote will be cast.
Proxy voting may not be denied except in a non-stock corporation.
Requirements:
1. In writing
2. Signed by the stockholder or member
3. Filed before the scheduled meeting with the corporate secretary
By-laws may reasonably regulate the form and execution of proxies.
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.
A proxy is revocable unless coupled with an interest.
Revocation may be expresses:
NOTES NO. 90
VOTING TRUST
A voting trust is one created by an agreement between a group of stockholders of a corporation
and a trustee, or a group of identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over the stock owned by such stockholders,
shall be lodged in the trustee, either with or without reservation to the owners or persons
designated by them the power to direct how such control shall be used. It is a device of binding
stockholders to vote as a unit and thus assuring a desirable stability and continuity in management
in situations where it is needed.
Requirements:
1. It should confer upon the trustee or trustees the right to vote and other rights pertaining to
the shares;
2. It should be for a period not exceeding five (5) years at any time unless the voting trust is
specifically required as a condition in a loan agreement, in which case, the voting trust
may be for a period exceeding five (5) years but shall automatically expire upon full
payment of the loan;
3. It must be in writing and notarized, and shall specify the terms and conditions thereof;
4. A certified copy thereof must be filed with the corporation and with the Securities and
Exchange Commission, otherwise, said agreement is ineffective and unenforceable;
5. The certificate or certificates of stock covered by the voting trust agreement shall be
canceled and new ones shall be issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement;
6. 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.
7. It should not 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.
NOTES NO. 91
Voting trust distinguished from proxy
VOTING TRUST PROXY
The beneficial owner of the shares ceases Legal title remains with the beneficial owner
to be a stockholder of record of the
Corporation
The trustee votes as owner of the shares The proxy holder votes merely as an agent
The beneficial owner of the shares is The owner of the shares may be elected as
disqualified to be a director a director since legal title remains with him
The purpose is to acquire voting control of Generally used to secure voting and quorum
the corporation requirements or merely for the purpose of
representing an absent stockholder
Irrevocable Revocable unless coupled with an interest
The trustee can act and vote at any meeting A proxy holder can generally act as such
during the duration of the voting trust only at a particular meeting
Agreement
The trustee may vote in person or by proxy A proxy holder must vote in person
The duration may exceed 5 years The duration may not exceed 5 years
Must be notarized and filed with the SEC Need not be notarized nor filed with the SEC
A corporation is not a party to a voting trust agreement therefore it is not a real party interest in a suit to enforce
the same. (NIDC vs. Aquino)
A voting trust transfers only voting and other rights pertaining to the shares subject of the
agreement or control over the stock. It does not include the assets, operation and management of
the corporation. (NIDC vs. Aquino)
STOCKS AND STOCKHOLDERS
NOTES NO. 92
Three ways in which a person may become a stockholder:
1. By a contract of subscription with the corporation;
2. By the purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing stockholders (includes purchase from
the stock exchange).
NOTES NO. 93
SUBSCRIPTION CONTRACT
Subscription – the mutual agreement of the subscribers to take and pay for the stocks of a corporation.
Subscription contract – any contract for the acquisition of unissued stock in an existing corporation
or a corporation still to be formed, not withstanding the fact that the parties refer to it as a purchase
or some other contract.
A subscription contract is not required to be written; an oral contract for subscription is valid and
enforceable. The statutes of fraud do not apply to a subscription contract because such
subscription does not fall under the statutory definition of a sale.
Conditional subscription – one made upon a condition precedent, does not make the subscriber a
stockholder, or render him to pay the amount of his subscription, until the performance or fulfillment
of the condition.
Subscription upon special terms – an absolute 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, a subscription shall be considered one upon special terms in order to protect the creditors and
other subscribers.
NOTES NO. 94
General rule: Conditional subscriptions are valid.
Exceptions:
NOTES NO. 95
PRE-INCORPORATION SUBSCRIPTIONS
Types of subscriptions as to time of execution:
1. Pre-incorporation subscriptions – subscriptions for shares of stock of a corporation still to
be formed; and
2. Post-incorporation subscriptions – those made or executed after the formation or
organization of the corporation.
General rule: A subscription for shares of stock of a corporation still to be formed is irrevocable.
Exceptions:
NOTES NO. 96
NOTES NO. 99
No transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the
corporation.
Until registration is accomplished, the transfer of stock, though valid between the parties, cannot be
effective as against the corporation. The corporation looks only though its books for the purpose of
determining who its stockholders are.
Non-registration of a transfer of stock will not, however, affect the validity thereof at least in so far as the contracting
parties are concerned.
Transfer – refers to absolute and unconditional conveyance of the title and ownership of a share of stock to
warrant registration in the books of the corporation in order to bind the latter and other third persons. (Monserrat
vs. Ceron)
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
a necessary requisite to its validity. (Monserrat vs. Ceron)
Chattel mortgages over shares of stock 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 order to bind third
persons. The ownership of shares in a corporation is property distinct from the certificates which
are merely the evidence of such ownership. The property in the shares are deemed to be situated
in the province in which the corporation has its principal office or place of business. (Chua Guan vs.
Samahang Magsasaka, Inc.)
NOTES NO. 104
All transfers of shares should be entered in the books of the corporation. Transfers 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 transfer. (Uson vs. Diosomito)
A clause contained in the by-laws of a corporation which provides that the owner of a share of
stock cannot sell it to another person except to the defendant corporation is ultra-vires, violative of
the property rights of shareholders, and in restraint of trade. (Fleischer vs. Botica Nolasco Co.)
Shares of stock being regarded as property, the owner of such shares may, as a general rule, dispose
of them as they see 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. (Padgett vs. Babcock & Templeton)
NOTES NO. 112
Two theories advanced as the basis for the liability on water stocks:
1. Trust fund doctrine – treating the capital of the corporation, 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.
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 shared has been paid or promised to be paid full.
NOTES NO. 113
Effects of issuance of watered stock:
1. As to the corporation – when a corporation is guilty of ultra-vires 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; the subscriber is
liable to pay the full 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 stockholder – 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, solidary against the responsible directors/officers and the stockholders
concerned.
6. As against transferees of the watered stock – 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.
NOTES NO. 114
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.
NOTES NO. 115
NOTES NO. 116
Procedure for the enforcement of payment through board action:
1. The board of directors, by a formal resolution, declares the whole or any percentage of
unpaid subscriptions to be due and payable on a specific date. However, if the contract of
subscription provides the date or dates when payment is due, no “call” declaration of 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 in 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 stated in the call or as may be provided in the contract of
subscription 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 became delinquent;
8. Notice of the sale, with the copy of the board resolution should be sent to every delinquent
stockholder either personally or by registered mail;
9. Publication of the notice of sale must be made once a week for two consecutive weeks in
the newspaper of general circulation in the province or city where the principal officer is
located;
10. 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;
11. 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;
12. 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;
13. If there is no bidder at the public auction who offers to pay the total amount due plus
interest, cost and expenses, 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
14. The shares so purchased by the corporation shall be vested in the latter as treasury
shares.
NOTES NO. 117
Highest bidder – 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.
Grounds to question the delinquency sale:
NOTES NO. 118
Two conditions before an action to recover delinquent stocks irregularly sold may be allowed:
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 six months from the
date of the sale.
A “call” is a condition precedent before the right of action to institute a recovery suit accrues. A demand is required
before a debtor may incur a delay in the performance of his obligation.
Instances when a “call” is not necessary:
1. The contract of subscription provides for a date or dates when payment is due; or
2. The corporation has become insolvent.
NOTES NO. 120
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. 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. (Velasco vs.
Poizat)
Notwithstanding the fact that the by-laws of the corporation provides for a method for the collection
of the unpaid portion of stock subscriptions, the corporation may still make use of the methods
provided by the Code. (De Silva vs. Aboitiz & Co.)
Principle NO. 81
General rule: A valid and binding subscription for stock of a corporation cannot be cancelled so as to release
the subscriber from liability thereon.
Exception: Consent of all the stockholders is given.
Exceptions to the exception:
General rule: No delinquent stock shall not be entitled to:
1. Be voted for or to vote;
2. Representation at any stockholder's meeting; or
3. Any of the rights of a stockholder.
Exception: Delinquent stocks are entitled to the right to dividends (any cash dividends 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).
PRINCIPLE NO. 82
General rule: Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a
stockholder.
Exception: Shares of stock not fully paid are not entitled to be issued a certificate of stock.
NOTES NO. 123
Requirements and procedure for issuance of new certificates of stock in lieu of those lost, stolen or destroyed:
.
NOTES NO. 124
NOTES NO. 125
Certain obligations and liabilities of stockholders:
1. To pay the corporation the balance of his unpaid subscriptions;
2. To pay interest on his unpaid subscription if required by the by-laws or by the contract of
subscription;
3. To answer to creditors for the unpaid portion of their subscription;
4. To answer the “water” in their stocks;
5. To be liable, as general partners, for all debts, liabilities and damages of ostensible
corporations; and
6. In case of a close corporation, to be personally liable for corporate torts when they actively
participate in the management of the corporation.
NOTES NO. 127
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.
The basis of the right of the stockholder to inspect the books and records of the corporation for a proper
purpose is to protect his interest as a stockholder.
NOTES NO. 128
General rule: The right of stockholders 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. (Gokongwei vs. SEC)
Exception: The subsidiary and the parent are legally being operated as separate and distinct entities.
NOTES NO. 129
The right to inspect corporate books, although personal, may be exercised through an agent or
representative since it may be unavailing in many instances. (W.G. Philpotts vs. Philippine
Manufacturing Co.)
The corporation, or its responsible directors and officers cannot unduly restrict the right of
inspection and may not arbitrarily set a few days of the year within which the stockholder may make
the inspection. (Pardo vs. Hercules Lumber, Co.)
Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable hours. However, there is no absolute right to secure certified copies of
the minutes of the corporation until these minutes have been written up and approved by the
directors. (Vegaruth vs. Isabela Sugar Co., Inc.)
It is a required condition for the inspection of corporate books that the one requesting it must not
have been guilty of using improperly any information secured through a prior examination and that
the person asking for such examination must be acting in good faith and for a legitimate purpose in
making his demand. (Gonzales vs. PNB)
Remedies of a stockholder who is denied inspection of corporate books:
1. Mandamus;
2. Damages either against the corporate or the responsible officer; or
3. Criminal complaint based on Sec. 144 of the Code.
NOTES NO. 130
MERGER AND CONSOLIDATION
Merger – a union effected by absorbing one or more existing corporations by another which
survives and continues the combined business; the uniting of two or more corporations by the
transfer of property to one of them which continues in existence, the other or others being dissolved
and merged therein.
Consolidation – the uniting or amalgamation of two or more existing corporations to form a new corporation and
the termination of existence of the old ones.
NOTES NO. 131
Requirements and procedure for merger or consolidation:
1. The board of directors or trustees of each constituent corporation shall approve a plan of
merger or consolidation setting forth the following:
a. The names of the constituent corporations;
b. The terms of the merger or consolidation and the mode of carrying the same into
effect;
c. A statement of changes, if any, in the articles of incorporation; and
d. Other provisions deemed necessary and desirable.
2. Approval of the plan by the stockholders representing 2/3 of the outstanding capital stock
or 2/3 of the members in a non-stock corporations of each constituent corporation 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 corporation to be
signed by the president or vice-president and certified by the corporate secretary or
assistant secretary setting forth the following:
a. The plan of the merger or consolidation;
b. As to stock corporations, the number of shares outstanding, or in the case of
non-stock corporations, the number of members; and
c. As to each corporation, the number of shares or members voting for and against
such plan, respectively.
5. Submission of the articles of merger or consolidation in quadruplicate to the SEC subject
to the requirement of that if it involves corporations under the 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 proper notice and thereafter, the SEC shall proceed as provided in the Code.
Effects of merger or consolidation:
1. There will only be a single corporation. In case of merger, the surviving corporation, or in
case of consolidation, the consolidated corporation;
2. Termination of the corporate existence of the constituent corporations, except that of the
surviving or the consolidated corporation;
3. The surviving 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 the consolidated corporation shall possess all the rights, privileges,
immunities and franchises of the constituent corporations; and all property 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; 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.
PRINCIPLE NO. 83
APPRAISAL RIGHT
Appraisal right – the method of paying a shareholder for the taking of his property; the statutory
means whereby a stockholder can avoid the conversion of his property into another property not of
his own choosing. The purpose of the right is to protect the property rights of dissenting
stockholders from actions by the majority shareholders which alters the nature and character of
their investment. 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.
NOTES NO. 134
Instances when a stockholder may have the right to dissent and demand payment of the fair value of his
shares:
1. In case any amendment to the articles of incorporation has the effect of:
a. Changing or restricting the rights of any stockholder or class of shares;
b. Authorizing preferences in any respect superior to those of outstanding shares of
any class; or
c. Extending or shortening the term of corporate existence.
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
1. From the time of demand for payment – all rights accruing to such shares, including voting
and dividend rights, are suspended, except the right to receive payment.
2. After either the right ceases or the purchase of the said shares by the corporation – all
rights accruing to such shares are restored and all dividend distributions which would have
accrued on the shares shall be paid to the holder thereof.
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.
No demand for payment may be withdrawn unless the corporation consents thereto.
Instances when the right to payment ceases:
1. The stockholder withdraws his demand for payment with the consent of the corporation;
2. The proposed corporate action is abandoned or rescinded by the corporation;
3. The proposed corporate action is disapproved by the SEC where such approval is
necessary;
4. The SEC determines that such stockholder is not entitled to the appraisal right;
5. The stockholder fails within 10 days after demanding payment for his shares to submit the
certificates of stock representing his shares to the corporation for notation and the
corporation, at its option, terminates the right.
The shares represented by the certificates bearing such notation are transferred and the certificates subsequently
canceled
. PRINCIPLE NO. 84
General rule: The costs and expenses of appraisal shall be borne by the corporation.
Exception: The fair value ascertained by the appraisers is approximately the same as the price which the
corporation offered to pay the stockholder.
PRINCIPLE NO. 85
General rule: In an action to recover the fair value of stocks, all costs and expenses shall be assessed against
the corporation.
Exception: The refusal of the stockholder to receive payment is unjustified.
PRINCIPLE NO. 86
A dissenting stockholder is required within 10 days after demanding payment for his shares to
submit the stock certificates representing his shares to the corporation for notation. His failure to do
so shall, at the option of the corporation, terminate his rights.
The dissenting stockholder is not prohibited from selling, transferring or assigning his shares. If
such be the case, once the certificates are subsequently canceled, the rights of the transferor as a
dissenting stockholder 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.
PRINCIPLE NO. 87
A director who exercises his appraisal right remain to be a director until his shares are no longer registered in
his name.
A stockholder whose subscription is not fully paid is still entitled to exercise his appraisal right.
NON-STOCK CORPORATIONS
Non-stock corporation - one where no part of its income is distributable as dividends to its members, trustees,
or officers, subject to the provisions of the Code on dissolution.
Even if a corporation has capital stock divided into shares it is considered as non-stock so long as it does not
distribute dividends to its members and officers. (CIR vs. Club Filipino de Cebu)
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.
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 articles of incorporation and is not distributable to its incorporators, members or
officers, since mere intangible or pecuniary benefits of the members does 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 articles of incorporation. 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.
Purposes: 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 (non-exclusive).
The provisions governing stock corporation, when pertinent, shall be applicable to non-stock corporations.
PRINCIPLE NO. 88
Exception: The right to vote is limited, broadened or denied in the articles of incorporation or the by-laws.
PRINCIPLE NO. 89
General rule: A member may vote by proxy.
Exception: Proxy voting is denied in the articles of incorporation or the by-laws.
PRINCIPLE NO. 90
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 SEC.
PRINCIPLE NO. 91
General rule: Membership in a non-stock corporation and all rights arising therefrom are personal and non-
transferable.
Exception: The articles of incorporation or the by-laws provide otherwise.
PRINCIPLE NO. 92
MEmbership in non-stock corporations may be acquired by complying with the provisions of its
rules prescribed in the by-laws. In absence of restrictions, a non-stock corporation may act
arbitrarily and exclude any persons it may see fit, and the courts have no power to interfere. It is
free to fix qualifications for membership and to provide for termination of membership.
PRINCIPLE NO. 93
General rule: The board of directors of a non-stock corporation shall have the authority to admit members.
Exception: The by-laws provide otherwise.
Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by- laws
PRINCIPLE NO. 94
General rule: Termination of membership shall have the effect of extinguishing all rights of a member in the
corporation or in its property.
Exception: The articles of incorporation or the by-laws provide otherwise.
In terminating membership, 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. (Carmoan vs,
PED)
In absence of any provision in the articles of incorporation or by-laws relative to the manner and causes of
termination, the power is nonetheless inherent in the following situations:
Qualifications of trustees:
1. He is a member of the corporation;
2. Majority thereof must be residents of the Philippines; and
3. Other qualifications as may be provided for in the by-laws.
General rule: officers of a non-stock corporation may be directly elected by the members.
Exception: The articles of incorporation or the by-laws provide otherwise.
Trustees elected to fill vacancies occurring before the expiration of a particular term hold office only for the unexpired period.
General rule: The courts will not interfere on matters involving the internal affairs of an unincorporated
association such as elections, the manner by which it was conducted and the results thereof. (Lions Club
International vs. CA)
Exceptions:
1. There is fraud, oppression or bad faith;
2. The action complained of is capricious, arbitrary or unjustly discriminatory;
3. Property and civil rights are invaded;
4. The proceedings are violative of the laws of society, or the law of the land, as by depriving
a person of due process of law;
5. There is lack of jurisdiction on the part of the tribunal conducting the proceedings;
6. The organization exceeds its powers;
7. The proceedings are illegal; or
8. An incorporated association or its members avail of the remedy of instituting an intra-
corporate dispute case.
General rule: Regular or special meetings of members of a non-stock corporation shall be held in
the city or municipality where the principal office is located, and if practicable in the principal office
of the corporation.
Exceptions:
1. The by-laws of the corporation provide otherwise; and
2. Metro Manila is considered a city or municipality.
Requirements for meetings held outside the location of the principal office as provided for by the by-laws:
1. Proper notice is sent to all members indicating the date, time and place of the meeting;
and
2. The place of meeting must be within the Philippines.
General rule: All proceedings and business transactions at a meeting improperly held or called are invalid.
Exception: All of the members are present or duly represented at the meeting.
CLOSE CORPORATIONS
Close corporation - 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 20;
2. All the issued stock of all classes shall be subject to one or more specified restrictions on
transfer permitted by Title XV of the Code; and
3. The corporation shall not list in any stock exchange or make any public offering of any of
its stock of any class.
Absent any of the three requisites, a corporation cannot be considered a close corporation and would thus be
governed by the general provisions on ordinary corporations.
A corporation does not become a close corporation just because a husband and wife owns 99.86% of the
capital stock. (San Juan Structural Steel vs. CA)
NOTES NO. 146
A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation.
General rule: Any corporation may be incorporated as a close corporation.
Exceptions:
1. Delete or remove any provision required by Title XV of the Code to be contained in the
articles of incorporation, or
2. Reduce a quorum or voting requirement stated in said articles of incorporation,
must be approved by the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without
voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.
Deadlock - the directors or stockholders are so divided respecting the management of the
corporation's business and affairs that the votes required for any corporate action cannot be
obtained, with the consequence that the business and affairs of the corporation can no longer be
conducted to the advantage of the stockholders generally.
In case of a deadlock and upon written petition by any stockholder, the SEC has the power to arbitrate the
dispute and the authority to:
1. Cancel or alter any provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement;
2. Cancel, alter or enjoin any resolution or act of the corporation or its board of directors,
stockholders, or officers;
3. Direct or prohibit any act of the corporation or its board of directors, stockholders, officers,
or other persons party to the action;
4. Require 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. Appoint a provisional director;
6. Dissolve the corporation; or
7. Grant such other relief as the circumstances may warrant.
NOTES NO. 152
Provisional director:
1. 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 SEC.
2. A provisional director is not a receiver of the corporation and does not have the title and
powers of a custodian or receiver.
3. 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 SEC or by all the stockholders.
4. His compensation shall be determined by agreement between him and the corporation
subject to approval of the SEC, which may fix his compensation in the absence of
agreement or in the event of disagreement between the provisional director and the
corporation.
Any stockholder of a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued value, when
the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock.
Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such
corporation whenever:
1. Any of acts of the directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any
stockholder; or
2. Corporate assets are being misapplied or wasted.
NOTES NO. 153
NOTES NO. 155
SPECIAL CORPORATIONS
EDUCATIONAL CORPORATIONS
Educational corporations – those which provide facilities for teaching or instruction.
Educational corporations are governed primarily by special laws and secondarily by the Code.
Educational institutions are required to incorporate within 90 days after their recognition as such. However,
failure to comply will not immune the educational institution from suit as a corporation.
A favorable recommendation of the Secretary of Education, Culture and Sports is required before the SEC
accepts or approves the articles of incorporation or by-laws of any educational institution.
Trustees of non-stock educational corporations shall not be less than 5 nor more than fifteen 15, in multiples of
5.
Unless otherwise provided in the articles of incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so
classify themselves that the term of office of 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 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.
General rule: Educational institutions shall be owned solely by citizens of the Philippines or
corporations or associations at least 60% of the capital of which is owned by such citizens. The
control and administration of educational institutions shall be vested in citizens of the Philippines.
Exception: Educational institutions established by religious groups and mission boards.
General rule: No educational institution shall be established exclusively for aliens and no group of aliens shall
comprise more than 1/3 of the enrollment in any school.
Exception: The rule shall not apply to schools established for foreign diplomatic personnel and their dependents
and, unless otherwise provided by law, for other foreign temporary residents.
NOTES NO. 156
RELIGIOUS CORPORATIONS
Religious corporation – one composed entirely of spiritual persons which is 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:
1. Corporations sole; and
2. Religious societies.
Religious corporations are governed by the appropriate chapter of the Code and the general provisions on non-
stock corporations.
NOTES NO. 157
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 – Administration and management, as trustee, of the affairs, properties and temporalities of any
religious denomination, sect or church.
Who – Chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination,
sect or church.
NOTES NO. 158
Requirements and procedure of incorporation:
1. The chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church must file the articles of incorporation with the SEC
which must contain the following:
a. 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;
b. 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;
c. 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;
d. 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
e. The place where the principal office of the corporation sole is to be established
and located, which place must be within the Philippines.
2. The articles of incorporation may include any other provision not contrary to law for the
regulation of the affairs of the corporation.
3. The articles of incorporation must be:
Verified by affidavit or affirmation of the chief archbishop, bishop, priest, minister,
rabbi or presiding elder, as the case may be;
Accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding
elder; and
NOTES NO. 160
All temporalities, estate and properties of the religious denomination, sect or church administered
or managed by the corporation sole shall be held in trust for the use, purpose, behalf and sole
benefit of the religious denomination, sect or church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof.
A provision relative to its term of existence is not required since a corporation sole is supposed to exist in
perpetuity.
General rule: A corporation acquires juridical personality only upon the issuance of a certificate of incorporation
by the SEC.
Exception: A corporation sole becomes endowed with corporate personality after filing of the verified articles of
incorporation together with other required documents.
A 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.
NOTES NO. 161
General rule: A court order is required before a corporation sole may sell or mortgage real property
held by it. Before such an order is granted, a verified petition must be made by the chief
archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole and it must
be shown that notice of the application has been given as directed by the court and that it is to the
interest of the corporation that the petition be granted. However, such application may be opposed
by any member of the religious denomination, sect or church represented by the corporation sole.
Exception: Court intervention is not necessary when 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.
NOTES NO. 162
Registration of real property in the name of the corporation sole does not vest ownership unto the head thereof.
The constitutional requirement that 60% of the capital of a corporation must be owned by Filipino
citizens before it may register land in its own name does not apply to a corporation sole. A
corporation sole has no nationality and the framers of the constitution did not have in mind the
corporation sole when it provided for such requirement. (Roman Catholic Apostolic Adm. of Davao,
Inc. vs. LRC)
Whether or not a corporation sole, or any private corporation for that matter, can acquire alienable
land of the public domain depends upon the character of the land at the time of the institution of the
registration proceeding. If it still forms part of the public domain, no. If it is private, yes. (Republic
vs. INC)
Under the Public Land Act, alienable public land may be subject to registration by a possessor if
he, personally or through his predecessor-in-interest, had openly, continuously, exclusively and
notoriously possessed the same for 30 years. The 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. CA)
In case of 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 successors in office shall become the corporation sole and shall be permitted to transact
business as such only upon the filing with the SEC of a copy of their commission, certificate of
election, or letters of appointment, duly certified by a notary public.
Requirements for the voluntary dissolution of corporations sole:
1. Filing with the SEC of a verified declaration of dissolution which must set forth the
following:
a. The name of the corporation;
b. The reason for dissolution and winding up;
c. The authorization for the dissolution of the corporation by the particular religious
denomination, sect or church; and
d. The names and addresses of the persons who are to supervise the winding up of
the affairs of the corporation.
2. Approval of the SEC.
Religious Societies
Religious society – a body of person associated together for the purpose of maintaining religious worship.
Purpose – the administration of its temporalities or for the management of its affairs, properties and estate
Who – any religious society or religious order, or any diocese, synod, or district organization of any religious
denomination, sect or church.
NOTES NO. 163
Requirements and procedure for incorporation:
1. Filing of the articles of incorporation with the SEC;
2. The articles of incorporation must set forth the following:
a. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
b. That at least 2/3 of its membership have given their written consent or have
voted to incorporate, at a duly convened meeting of the body;
c. 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;
d. 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;
e. The place where the principal office of the corporation is to be established and
located, which place must be within the Philippines; and
f. The names, nationalities, and residences of the trustees elected by the religious
society or religious order, or the diocese, synod, or district organization to serve
for the first year or such other period as may be prescribed by the laws of the
religious society or religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than 5 nor more than 15.
3. The articles of incorporation must be 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.
4. Issuance of the SEC of the certificate of incorporation.
The articles of incorporation of a religious society need not indicate a term since it is supposed to exist in
perpetuity.
NOTES NO. 165
DISSOLUTION
Dissolution – the extinguishment of the corporate franchise and the termination of corporate existence.
General rule: When a corporation is dissolved, it ceases to be a juridical entity and can no longer pursue the
business for which it is incorporated.
Exception: The corporation will continue as a body corporate for another period of 3 years from the time it is
dissolved for the purpose of winding up its affairs and the liquidation of its assets.
Three modes of dissolution:
1. By expiration of the corporate term;
2. By voluntary surrender of its primary franchise (voluntary dissolution); or
3. By the revocation of its corporate franchise (involuntary dissolution).
NOTES NO. 166
NOTES NO. 169
INVOLUNTARY DISSOLUTION
Requirements for involuntary dissolution by the SEC:
1. Filing of a verified complaint; and
2. Proper notice and hearing on the grounds provided by laws, rules and regulations.
Notwithstanding the fact that RA 8799 transferred the jurisdiction of the SEC under Sec. 5 of PD
902-A to the Special Commercial Courts, the same law granted the SEC concurrent jurisdiction
over revocation proceedings. Sec. 5 (m) of RA 8799 provides that the SEC shall have the power to
suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any ground provided by law.
Grounds for involuntary dissolution under Sec. 6, PD 902-A:
1. Fraud in procuring the 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 5 years;
5. Failure to file by-laws within the required period; and
6. Failure to file required reports in appropriate forms as determined by the Commission
within the prescribed period.
Other grounds provided for the in Corporation Code:
1. Violation of any provision of the Code (Sec. 144);
2. In case of deadlock in a close corporation (Sec. 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 (Sec. 105).
Other grounds can be found in special laws, e.g. the Securities Regulation Code and the General Banking Act.
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. But 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 franchise were granted and thus defeat the purpose of the grant, then dissolution will be
granted. (Government vs. Philippine Sugar Estates Co.)
The court has a discretion with respect to the infliction of capital punishment upon corporations and
there are certain misdemeanors and misusers of franchises which should not be recognized as
requiring their dissolution. (Government vs. El Hogar)
That the corporation is guilty of willful and repeated violation of the law and that its continuance inflicts
substantial injury to the public warrants its dissolution. (Republic vs. Security Credit)
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. The
several acts of misuse and misapplication of the funds and/or assets of the corporation were
committed more particularly by the corporation‟s president, for the commission of which they may
be held personally liable. (Republic vs. Bisaya Land Transportation Co., Inc.)
Under the present state of law, any stockholder or member of a corporation can institute a dissolution
proceeding against his own corporation before the proper forum.
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 corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such entity. (PD 902-A)
The SEC has concurrent jurisdiction to suspend, revoke, after proper notice and hearing, the
franchise or certificate of registration of corporations, partnership or associations upon any of the
grounds provided by law. (Sec. 5(m) RA 8799)
The existence of a de jure corporation may be determined in a private suit for its dissolution between
stockholders, without intervention of the State. (Hall vs. Piccio)
In a close corporation, a petition for the dissolution of the corporation may be instituted by any shareholder on
the ground of mere dishonesty.
NOTES NO. 170
EFFECTS OF DISSOLUTION
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 by the subsequent dissolution of said
corporation.
Dissolution terminates a corporation‟s primary franchise and generally prevents it from further exercising other
or secondary franchises which have been conferred to it.
Dissolution terminates the corporation‟s power to enter into contracts or to continue the business as a going
concern. (Hall vs. Piccio)
General rule: In a lease to a corporation, the rights and obligations thereunder are not extinguished
by the corporation‟s dissolution since leases affect property rights and survives the death of
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.
Exception: The lease, by its terms, terminates when the corporation ceases to exist.
Contracts for personal services are deemed terminated by the dissolution of the corporation. There is an implied
condition that the contract shall terminate in such event. (Gelano vs. CA)
A dissolved corporation has no juridical personality; it ceases to exist as a corporation and cannot apply for a
new certificate or a secondary franchise. (Buenaflor vs. Camarines Sur Industry Corp.)
The 3-year period allowed by the law is only for the purpose of liquidation or winding up of
corporate affairs. No act can be done for the purpose of continuing the business for which it was
established. Neither can it enforce a contract executed prior to its dissolution. (Cebu Port Labor
Union vs. State Marine Co.)
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. Debts due to or against the corporation will not be
extinguished. Otherwise, it will amount to an impairment of contracts or a denial of due process.
(Gonzales vs. Sugar Regulatory Administration)
NOTES NO. 171
NOTES NO. 173
MODES OF ENTRY OF FOREIGN CORPORATIONS
Modes of entry of foreign corporations:
1. Branch office;
2. Representative or liaison office;
3. Local subsidiary;
4. Regional or area headquarters;
5. Regional operating headquarters;
6. Regional warehouse; or
7. Joint venture.
NOTES NO. 174
RESIDENT AGENT
The appointment of a resident agent is a condition precedent to the issuance of a license to transact business in
the Philippines by a foreign corporation.
The following may be appointed as a resident agent:
1. An individual residing in the Philippines, of good moral character and of sound financial
standing; or
2. A domestic corporation lawfully transacting business in the Philippines (includes
partnerships such as law firms and accounting firms).
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.
Modes of service of summons upon a foreign corporation:
1. Service upon the resident agent – service upon the resident agent is mandatory if the
foreign corporation is license to do business in the Philippines;
2. Service upon the SEC – if the licensed foreign corporation has ceased to transact
business in the Philippines or has no resident agent in the Philippines; or
3. Service upon any of its officers or agents within the Philippines.
General rule: A foreign corporation must have the requisite license to sue before the Philippine courts.
Exceptions:
1. The act or transaction involved is an “isolated transaction;”
2. The foreign 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;
3. The purpose of the suit is to protect its trademark, tradename, corporate name, reputation
or goodwill;
4. The suit is based on a violation of the Revised Penal Code;
5. The foreign corporation is merely defending a suit filed against it;
6. The party is estopped to challenge the personality of the corporation by entering into a
contract with it.
Exception to an exception: 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.
The true test regarding “doing” or “engaging in” or “transacting” business is whether the foreign
corporation is continuing the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another. 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. (Mentholatum Co., Inc. vs.
Mangaliman)
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 is from acquiring domicile for the purpose of business
without taking the steps necessary to render it amenable to suit in the local courts. The law simply
means that no foreign corporation shall be permitted “to transact business in the Philippine Islands”
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. (Marshall-Wells Co. vs. Henry W. Elser & Co.)
A foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in
Philippine courts for isolated transactions. (Bulakhidas vs. Navarro)
If A foreign corporation not engaged in business in the Philippines has the right to sue on an
isolated transaction, more so may it sue based on a mistake. (Swedish East Asia Co., Ltd. vs.
Manila Port Service)
There was only one agreement between petitioners and the respondent. 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. 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. (Atnam
Consolidated, Inc. vs. CA)
Under the rules of the BOI, the phrase „doing business‟ has been exemplified with illustrations, among them
being as follows:
1. Soliciting orders, purchase (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 contract, regardless of whether the
contracts are actually reduced to writing, shall constitute doing business even in the
enterprise has no office or fixed place of 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 own account, and not in the name or for the account of the pricipal.
3. Opening offices, whether called „liaison‟ offices, agencies or branches, unless provided
otherwise.
4. 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. (Facilities Management Corp.
vs. De La Rosa)
A single act may bring the corporation within the purview of the statute where it is an act of the
ordinary business of the corporation. In such a case, the single act of transaction is not merely
incidental or casual, but is of such character as distinctly to indicate a purpose on the part of the
operations for the conduct of a part of the corporation‟s ordinary business. (Far East Int‟l Import vs.
Nankai)
ITEC‟s arrangement with its various business contacts in the country indicate its 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 engage in business in the country. 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. (Communication Materials and Design, Inc. vs. CA)
A foreign corporation doing business in the Philippines may sue in Philippine courts although no
authorized to do business here against a Philippine citizen or entity who had contracted with and
benefited by said corporation. To put it 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.
An 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.
(Communication Materials and Design, Inc. vs. CA)
The right of a corporation to use its corporate and trade name is a property right, a right in rem,
which it 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. Since it is the trade and not the make
that is to be protected, a trademark acknowledges no territorial boundaries or municipalities or
states or nations, but extends to every market where the trader‟s goods have become known and
identified by the use of the mark. (Western Equipment and Supply Co. vs. Reyes)
NOTES NO. 176
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 the Trademark Law 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. (General Garments Corporation vs. Director of Patents)
Article 8 of the Paris Convention to which the Philippines became a party provides that 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 the trademark. (Puma vs. IAC)
A foreign corporation not doing business not doing business in the Philippines needs no license to
sue before Philippine courts for infringement of trademark and unfair competition. (Le Chemise
Lacoste vs. Fernandez)
In a suit involving the violation of the Revised Penal Code the complainant foreign corporation‟s capacity to sue
is not significant. (Le Chemise Lacoste vs. Fernandez)
NOTES NO. 177
CAPACITY TO SUE
General rule: A foreign corporation must affirmatively plead its capacity to sue in order that it may proceed and
effectively institute a case in Philippine courts.
Exceptions:
1. The action involves a complaint for violation of the Revised Penal Code.
2. The foreign corporation is not suing or maintaining a suit but is merely defending itself
from one filed against it.
The qualifying circumstance of whether or not a foreign corporation has engaged in business in the
Philippines is an essential part of the element of a foreign corporation‟s capacity to sue and must
be affirmatively pleaded. (Atlantic Mutual Insurance Co. vs. Cebu Stevedoring Co., Inc.)
If the dismissal of the case, based on 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 defense of the defendant. Technical rules should not be accorded undue
importance to frustrate and defeat a plainly valid claim. (Olympia Business Machines Co. vs.
Razon, Inc.)
Since 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), its failure to aver its legal capacity to
institute the present petition is not fatal. (Time, Inc. vs. Reyes)
NOTES NO. 178
LAWS ON FOREIGN CORPORATIONS
General rule: 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.
Exceptions:
1. Laws which provide for the creation, formation, organization or dissolution of corporations;
or
2. Laws which fix the relations, liabilities, responsibilities, or duties of stockholders, members
or officers of a corporation to each other or to the corporation.
Intra-corporate or internal matters not affecting creditors or the public in general are governed not by Philippine
laws but the law under which the foreign corporation was formed or organized.
Special laws may provide or grant certain restrictions, limitations, privileges or incentives to a
foreign corporation not otherwise applicable or granted to domestic corporations (e.g. import duties
and tax incentives under the Omnibus Investments Code).
A foreign corporation authorized to transact business in the Philippines which amends its articles of
incorporation or by-laws must file a copy of such amended articles of incorporation or by-laws with
the SEC or the appropriate government agency within 60 days from the effectivity of such
amendment.
NOTES NO. 179
Instances when a foreign corporation authorized to transact business in the Philippines must obtain an
amended license:
NOTES NO. 180
NOTES NO. 183
Outstanding capital stock – the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
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.
The NEDA 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 Congress, whenever deemed necessary, a report of its findings,
including recommendations for their prevention or correction.
NOTES NO. 184
Maximum limits may be set by Congress 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 Congress corporations, business or industries to be declared vested with
a public interest and in formulating proposals for limitations on stock ownership, the NEDA 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.
NOTES NO. 185
Every corporation, domestic or foreign, lawfully doing business in the Philippines shall submit to the
SEC 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 SEC may require. Such report shall be
submitted within such period as may be prescribed by the SEC.
NOTES NO. 186
All interrogatories propounded by the SEC 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.
The SEC 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.
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.
NOTES NO. 187
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.
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.
NOTES NO. 188
PD 902-A, AS AMENDED
The SEC‟s quasi-judicial functions under Sec. 5 of PD 902-A, as amended were transferred to the Special
Commercial Courts by RA 8799.
General rule: The Special Commercial Courts shall have exclusively and originally jurisdiction over cases falling
under Sec. 5 of PD 902-A.
Exception: The SEC shall retain jurisdiction over cases involving suspension of payments and corporate
rehabilitation filed on or before June 30, 2000.
Distribution of Special Commercial Courts:
1. Two in Makati City;
2. Two in Quezon City;
3. One in each in other cities in Metro Manila; and
4. One per region.
NOTES NO. 189
DEVICES OR SCHEMES AMOUNTING TO FRAUD AND MISREPRESENTATION (Sec. 5 [a])
General rule: The Special Commercial Courts shall have original and exclusive jurisdiction to hear
and decide cases involving devices or schemes employed by or any acts of the board of directors,
business associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholder, partners, members of
associations or organizations registered with the SEC.
Exception: The complaint is based on the violation of the Revised Penal Code (Ex. Syndicated Estafa)
Even if the action is for recovery of sums of money paid or given to the corporation through devices
and schemes amounting to fraud or misrepresentation detrimental to the investing public, the same
must be filed, heard and tried by the Special Commercial Courts.
Examples of acts amount to fraud or misrepresentation within the original and exclusive jurisdiction of the
Special Commercial Courts:
NOTES NO. 190
INTRA-CORPORATE CONTROVERSIES (Sec. 5 [b])
Intra-corporate controversies include those of corporations, partnerships and associations.
Elements of intra-corporate controversies:
1. An intra-corporate relationship:
a. Between and among the stockholders, members, associates of a corporation,
partnership or association;
b. Between them and the corporation, partnership or association; or
c. Between the corporation, partnership or association and the State.
2. The controversy must arise out of said relationship.
NOTES NO. 191
The dispute among the parties must be intrinsically connected with the regulation of the
corporation. If the nature of the controversy involves matters that are purely civil in character
necessarily the case does not involve an intra-corporate controversy. (Speed Distributing Corp. vs.
CA)
The fact that shares of stock were issued to be used as part payment for lease rentals does not
convert it into a intra-corporate controversy. (DMRC Enterprises vs. Este del Sol Mountain
Reserve, Inc.)
Recovery of the control and management of a corporation in the guise of a complaint for rescission
of a memorandum of agreement which vested such control and management is an intra-corporate
controversy. (DPB vs. Ilustre, Jr.)
NOTES NO. 192
If all of the requirements for a valid transfer have been complied the dispute is intra-corporate and
is within the jurisdiction of the Special Commercial Court. (Abejo vs. de la Cruz; Rural Bank of
Salinas, Inc. vs. CA)
If the petitioner does not have a “prima facie” title to the share sought to be recorded in his name
the dispute is not intra-corporate and the ordinary or regular court can assume jurisdiction over the
case. (Rivera vs. Florendo; Tay vs. CA)
A dispute regarding the automatic rescission clause of a Memorandum of Agreement regarding the
sale of shares of a group of stockholders to another group of stockholders is intra-corporate.
(Saavedra vs. SEC)
Where the conflict involves the enforcement of rights and obligations under the Corporation Code
or the inter and intra-corporate affairs of the corporation, jurisdiction would fall with the Special
Commercial Courts. But if it requires a mere determination of the contractual rights of the parties
under an ordinary agreement, the ordinary/regular courts can acquire jurisdiction thereto.
NOTES NO. 193
The factor which decides whether the action is within the jurisdiction of the Special Commercial
Courts is that the controversy arose out of an intra-corporate relation between and among the
parties. (SEC vs. CA)
The filing of the civil/intra-corporate case before the SEC does not preclude the simultaneous and
concomitant filing of a criminal action before the regular courts; such that, a fraudulent act may give
rise to liability for violation of the rules and regulations of the SEC cognizable by the SEC itself, as
well as criminal liability for violation of the Revised Penal Code cognizable by the regular courts,
both charges to be filed and proceeded independently, and may be simultaneously, with the other.
(Fabia vs. CA)
NOTES NO. 194
The proper court may issue an order suspending payments of claims due from a distress corporation.
Upon the appointment of a management committee, rehabilitation receiver, board or body all
actions for claims against the corporation, partnership or association under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly.
The reason for suspension of payments for claims against a distressed corporation is to enable the
management committee to effectively exercise its powers free from judicial or extrajudicial
interference that might unduly hinder or prevent the „rescue‟ of the debtor company. (PAL vs. Sps.
Sadic and Kurangking)
The suspension of all actions for claims against a corporation embraces all phases of the suit, be it
before the trial court or any tribunal or before this Court. No other action may be taken, including
the rendition of judgment during the state of suspension. It must be stressed that what are
automatically stayed or suspended are the proceedings of a suit and not just the payment of claims
during the execution stage after the case had become final and executory. Once the process of
rehabilitation, however, is completed, this Court will proceed to complete the proceedings on the
suspended actions. Furthermore, the actions that are suspended cover all claims against the
corporation whether for damages founded on a breach of contract of carriage, labor cases,
collection suits or any other claims of a pecuniary nature. No exception in favor of labor claims is
mentioned in the law. (PAL vs. Zamora)
Claims – refers to debts or demands of pecuniary nature; the assertion of right to have money paid.
Suspended proceedings include extra judicial foreclosures. You cannot even consolidate. All proceedings at
whatever stage are suspended.
Even if the suspension order is issued after a creditor‟s action in court has already become final but pending
execution, the execution of the decision is likewise suspended. (Filinvest vs. Ejercito)
Note the words “against the corporation.”
NOTES NO. 198
If a corporation secures a loan, and one of its key officers uses his private properties to guarantee
the loan, corporation files for suspension, the bank want to foreclose on the prop, may the bank
foreclose? Yes. It is not an action for ac claim against the corporation. Union bank case.
Properties of an individual stockholder, director or officer, as surety of corporate liabilities, are not,
and will not be covered by the suspension of payments order issued by the court pursuant to PD
902-A.
Same with regard to criminal proceedings, personal to corporate officer concerned.
Despite the appointment of a receiver for a corporation under PD 902-A, an action against a
corporation seeking the nullification of corporate documents cannot be suspended by reason
thereof, since the civil action does not present a monetary claim against the corporation. (Finasia
Investment and Finance Corporation vs. CA)
The SEC does not have jurisdiction to entertain petitions for suspension of payments filed by parties other than
corporations, partnerships or associations. (Union Bank vs. CA)
Equality is Equity – during suspension the assets are held in trust for the equal benefit of all
creditors to preclude one from obtaining an advantage or preference over another by the
expediency of an attachment, execution or otherwise. The creditors should stand on equal footing.
Not anyone of them should be given any preference by paying one of them ahead of the others.
(Alemars Sibal and Son, Inc. vs. Elibenas)
The issue of whether or not preferred creditors of distressed corporations stand on equal footing
with all other creditors gains relevance and materiality only upon the appointment of a management
committee, rehabilitation receiver, board or body. Suspension of claims against the corporation
under rehabilitation is counted or figured up only upon the appointment of a management
committee or a rehabilitation receiver. (RCBC vs. IAC)
NOTES NO. 199
1. All claims against corporations, partnerships or associations that are pending before any
court, tribunal or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management
committee, rehabilitation receiver, board or body in accordance with the provisions of PD
902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of
such preferences is equally suspended upon the appointment of a management
committee, rehabilitation receiver, board or body. In the event that the assets of the
corporation, partnership or association are finally liquidated, however, secured or
preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured ones.
If the rehabilitation of the corporation is not feasible, the court muto propio or the management committee may
petition the lifting and the preferences will be there again.
NOTES NO. 201
In the absence of a strong showing of an imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of a corporation and paralysis of its business operations, the
mere apprehension of future misconduct based upon prior mismanagement will not authorize the
appointment of a management committee/receiver. (Sy Chim vs. Sy Siy Ho & Sons, Inc.)
NOTES NO. 202
Mere disagreement among stockholder as to the fairness of the corporation would not in itself
suffice as a ground for the appointment of a management committee. However, where the
dissention among the stockholders is such that the corporation cannot successfully carry on its
corporate functions, the appointment of a management committee becomes imperative. (Jacinto
vs. First Women‟s Credit Corporation)
A management committee shall have the power to take custody of and control all assets and
properties owned and possessed by the entity under management. It shall take the place of the
management and board of directors of the entity under management, assume their rights and
responsibilities, and preserve the entity‟s assets and properties in its possession.
The rehabilitation receiver shall not take over the management and control of the debtor but shall closely
oversee and monitor the operations of the debtor during the pendency of the proceedings. He shall be
primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the
debtor‟s property is reasonably maintained pending the determination of whether or not the debtor should
be rehabilitated, as well as implement the rehabilitation plan after its approval.
Venue of actions in intra-corporate controversies – Special Commercial Court which has jurisdiction over the
principal office of the corporation, partnership or association.
Nature of proceedings is in rem. Jurisdiction acquired upon publication of the proceeding.
Creditors have the personality (at least 25% of the total outstanding liablitities) may file, ex. Bayantel.
Their compensation is subject to agreement of the parties.
Actuations of the board, body, committee subject to….
Service of pleadings . Sec. 6 rule 1. may be by fax or email. When authorized by the court.
Service of summons. Sec. 5 rule 2. made upon any of the statutory or corporate officers or their respective
secretaries. vs. Eb Villarosa case. (Rule of Court)
NOTES NO. 208
Tender Offer
Tender Offers – a publicly announced intention by the purchaser to acquire a certain block of equities of a
company through open market purchases or private negotiations.
A tender offer is required of any person or group of persons acting in concert who intend to acquire:
1. At least 15% of any class of any equity security of a listed corporation or of any class of
any equity security of a corporation with assets of at least P50M and having 200 or more
stockholders with at least 100 shares each; or
2. At least 30% of such equity over a period of 12 months.
NOTES NO. 209
Proxies
Proxies must be issued and proxy solicitation must be made in accordance with rules and regulations to be
issued by the Commission.
Requisites for proxies:
1. In writing;
2. Signed by the stockholder or his duly authorized representative; and
3. Filed before the scheduled meeting with the corporate secretary.
General rule: A proxy shall be valid only for the meeting for which it is intended.
Exception: It is otherwise provided in the proxy.
No proxy shall be valid and effective for a period longer than 5 years at one time.
No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried
for the account of a customer, to a person other than the customer, without the express written
authorization of such customer.
A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the
Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying
the beneficial owner within 10 days after such acquisition, for its own account or customer, to the
issuer of the security, to the Exchange where the security is traded and to the Commission.
NOTES NO. 210
Independent Director
Any corporation with a class of equity securities listed for trading on an Exchange or with assets in
excess of P50M and having 200 or more holders, at least of 200 of which are holding at least 100
shares of a class of its equity securities or which has sold a class of equity securities to the public
pursuant to an effective registration statement shall have at least 2 independent directors or such
independent directors shall constitute at least 20% of the members of such board, whichever is the
lesser.
Independent director – a person other than an officer or employee of the corporation, its parent or
subsidiaries, or any other individual having a relationship with the corporation, which would
interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The SEC may exempt corporations from the required independent directors as it did in the rehabilitation of
Victorias Milling Co. Inc..
Insider Trading
Insider:
1. The issuer;
2. A director or officer (or person performing similar functions) of, or a person controlling the
issuer;
3. A person whose relationship or former relationship to the issuer gives or gave him access
to material information about the issuer or the security that is not generally available to the
public;
4. A government employee, or director, or officer of an exchange, clearing agency and/or
self-regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public; or
5. A person who learns such information by a communication from any of the foregoing
insiders.
General rule: An insider may not sell or buy a security of the issuer while in possession of material information
with respect to the issuer or the security that is not generally available to the public.
Exceptions:
1. The insider proves that the information was not gained from such relationship; or
2. The insider disclosed the information to a party reasonably believed by the insider to
possess the information.
Material non-public information – has not been generally disclosed to the public and:
1. would likely affect the market price of the security after being disseminated to the public
and the lapse of a reasonable time for the market to absorb the information; or
2. would be considered by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a security.
An insider may not communicate material non-public information to any person who will likely buy or sell a
security of the issuer while in possession of such information.
Trading by persons who have material non-public information about a tender offer is prohibited.
Wash sale and matched order is illegal when used as a means to create a false or misleading appearance of active trading in
the security concerned.
Marking the close, painting the tape, squeezing the float, hype and dump, and boiler room operations are illegal
when they are effected to:
Limitation of Actions
SEC. 62. Limitation of Actions. - 62.1. No action shall be maintained to enforce any liability created
under Section 56 or 57 of this Code unless brought within two (2) years after the discovery of the
untrue statement or the omission, or, if the action is to enforce a liability created under Subsection
57.1(a), unless brought within two (2) years after the violation upon which it is based. In no event
shall any such action be brought to enforce a liability created under Section 56 or Subsection 57.1
(a) more than five (5) years after the security was bona fide offered to the public, or under
Subsection 57.1 (b) more than five (5) years after the sale.
62.2. No action shall be maintained to enforce any liability created under any other provision of this
Code unless brought within two (2) years after the discovery of the facts constituting the cause of action
and within five (5) years after such cause of action accrued.
NOTES NO. 216
Fasle registration statement - liable civily - sec. 56
Ceiling as to amount of damages - triple of the amount involved
limitation of actions - not later than 5 years after the cause of action accrues