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NOTE: There is no willful misconduct if the airplane
was lost without a trace. In such case, no willful
misconduct can be proved because if the airplane is
lost without a trace, there is no proof of the act or
omission or the proximate cause of the accident.
(Wyman and Barlett v. Pan American Airways, Inc.,
CCH 1 AVI 1093 (1943)
THE CORPORATION CODE (CC)
CORPORATION
(Note: Those which are affected by the Revised
Corporation Code is not included in the 2019 Bar
Syllabus. The reader must be guided accordingly.)
DEFINITION
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 (CC,
Sec. 2).
ATTRIBUTES OF A CORPORATION
[ALS– PAPI]
1. It is an Artificial being
2. It is created by operation of Law
3. It enjoys the right of Succession
4. It has the Powers, Attributes and Properties
expressly authorized by law or Incident to its
existence.
1. Artificial Personality
A corporation is a legal or juridical person with a
personality separate and apart from individual
stockholders or members and from any other legal
entity into which it may be connected or related.
2. Corporation as a Creation of Law or By
Operation of Law
No corporation can exist without the consent or
grant of the sovereign, and that the power to create
corporations is one of the attributes of sovereignty.
Corporations cannot come into existence by mere
agreement of the parties (De Leon, 2010).
GR: A legislative grant or authority is required for
the creation of a corporation, either by a special
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incorporation law or charter or by means of general
corporation law.
XPN: For corporations by prescription, such
authority is not necessary (De Leon, 2010).
NOTE: A corporation by prescription is one which
has exercised powers for an indefinite period
without interference on the part of the sovereign
power and which by fiction of law, is given the status
of a corporation (De Leon, 2010).
The creation of a corporation is by operation of
law
NOTE: The Philippine jurisprudence adopted the
Concession or fiat theory, which states that a
corporation is conceived as an artificial person
owing existence through creation by a foreign
power. Further, a corporation has without any
existence until it has received the imprimatur of the
State acting according to law, through the SEC
(Tayag v. Benguet Consolidated, Inc., GR No. L-23145,
November 29, 1968).
Q: Since February 8, 1935, the legislature has
not passed even a single law creating a private
corporation. What provision of the constitution
precludes the passage of such law? (2008 Bar)
A: Article XII, Section 16 of the 1987 Constitution
provides that Congress shall not, except by general
law, provide for the formation, organization, or
regulation of private corporations. Government-
owned and controlled corporations may be created
or established by special charters in the interest of
the common good and subject to the test of
economic viability.
Private corporations owned or controlled by the
government can only be created by special law often
referred to as “Charters”.
Q: A corporation was created by a special law.
Later, the law creating it was declared invalid.
May such corporation claim to be a de facto
corporation?
A: NO. A private corporation may be created only
under the Corporation Code. Only public
corporations may be created under a special law.
Where a private corporation is created under a
special law, there is no attempt at a valid
incorporation and it cannot claim a de facto status.
Q: A Special Audit Team from COA audited the
accounts of Leyte Metropolitan Water District
(LMWD). Subsequently, LMWD and received a
requested for payment of auditing fees from
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COA. As LMWD GM Feliciano sent a reply
informing COA that the water district could not
pay the auditing fees, citing as basis for his
action Presidential Decree 198 (PD 198) as well
as Republic Act No. 6758 (RA 6758). Thereafter,
Feliciano asked COA for refund of all auditing
fees LMWD previously paid to COA. The COA
Chairman denied LMWD’s request. Feliciano
maintains that LWDs are not GOCCs with
original charters. He argues that LWDs are
private corporations, and thus not subject to
COA’s jurisdiction. Is a Local Water District
created under PD 198, as amended, a GOCC
subject to the audit jurisdiction of COA?
A: YES. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
laws mandate COA to audit all government agencies,
including GOCCs with original charters. An LWD is a
GOCC with an original charter. The Constitution
recognizes two classes of corporations. The first
refers to private corporations created under a
general law. The second refers to GOCCs created by
special charters. Congress cannot enact a law
creating a private corporation with a special
charter. Such legislation would be
unconstitutional. Private corporations may exist
only under a general law. The Constitution
authorizes Congress to create GOCCs through
special charters. Since private corporations cannot
have special charters, it follows that Congress can
create corporations with special charters only if
such corporations are government-owned or
controlled. Obviously, LWDs are not private
corporations because they are not created under the
Corporation Code (Engr. Ranulfo C. Feliciano v. COA,
et al., G.R. No. 147402, January 14, 2004).
Q: In Liban, et al. v. Gordon (July 15, 2009) the
Court held that Richard Gordon did not forfeit
his seat in the Senate when he accepted the
chairmanship of the Philippine National Red
Cross Board of Governors, as the office of the
PNRC Chairman is neither a government office
nor an office in a government-owned or
controlled corporation for purposes of the
prohibition in Section 13, Article VI of the 1987
Constitution. However, the decision declared
void the PNRC Charter as it creates the PNRC as
a private corporation and ruled that the PNRC
should incorporate under the Corporation Code
and register with the SEC if it wants to be a
private corporation. Is PNRC a private
corporation?
A: NO. Although the PNRC was created by a special
charter, it cannot be considered as a GOCC in
absence of the essential elements of ownership and
control by the government. It does not have
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government assets and does not receive any
appropriation from the Philippine Congress. It is a
non-profit, donor-funded, voluntary organization,
whose mission is to bring timely, effective and
compassionate humanitarian assistance for the
most vulnerable without consideration of
nationality, race, religion, gender, social status or
political affiliation. This does not mean however
that the charter of PNRC is unconstitutional. PNRC
is sui generis. Although it is neither a subdivision,
agency or instrumentality of the government nor a
GOCC or a subsidiary thereof, so much so that
Gordon was correctly allowed to hold his position as
Chairman thereof concurrently while he served as a
Senator, such a conclusion does not ipso facto imply
that the PNRC is a private corporation within the
contemplation of the provision of the Constitution
that must be organized under the Corporation Code.
The PNRC enjoys a special status as an important
ally and auxiliary of the government in the
humanitarian field in accordance with its
commitments under international law (Liban, et al.,
v. Gordon, G. R. No. 175352, January 18, 2011, in
Divina, 2014).
Q: Dennis A.B. Funa requested the COA for a copy
of the latest financial and audit report of the
Manila Economic and Cultural Office (MECO).
The MECO was organized as a non-stock, non-
profit corporation under the Corporation Code,
in view of the desire of the Philippines and
Taiwan to maintain an unofficial relationship in
lieu of official diplomatic ties severed by the
One-China policy. Upon receipt of COA’s reply
that it does not audit MECO, Funa filed a petition
for mandamus to compel COA to audit MECO as
the latter was a GOCC as it performs functions
relating to public needs and is controlled by the
government through the appointment of its
board of directors. Is Funa correct?
A: NO. The MECO is not owned or controlled by the
government, hence it is not a GOCC or a government
instrumentality. GOCCs are "stock or non-stock"
corporations "vested with functions relating to
public needs" that are "owned by the Government
directly or through its instrumentalities." By
definition, three attributes thus make an entity a
GOCC:
a. First, its organization as stock or non-
stock corporation;
b. Second, the public character of its
function; and
c. Third, government ownership over the
same.
Possession of all three attributes is necessary to
deem an entity a GOCC. In this case, there is not
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much dispute that the MECO possesses the first and
second attributes. It is the third attribute, which the
MECO lacks.
The MECO is not owned or controlled by the
government. Organization as a non-stock
corporation and the mere performance of functions
with a public aspect, however, are not by
themselves sufficient to consider the MECO as a
GOCC. In order to qualify as a GOCC, a corporation
must also, if not more importantly, be owned by the
government.
its non-governmental character, the MECO handles
government funds in the form of the "verification
fees" it collects on behalf of the DOLE and the
"consular fees" it collects under Section 2(6) of EO
No. 15, s. 2001. Hence, under existing laws, the
accounts of the MECO pertaining to its collection of
such "verification fees" and "consular fees" should
be audited by the COA (Funa v. Manila Economic and
Cultural Office and COA, G.R. No. 193462, February,
2014).
Franchise

The government owns a stock or non-stock A franchise includes any special privilege or right
corporation if it has controlling interest in the affected with public interest, conferred by the State
corporation. In a stock corporation, the controlling on corporations or persons and which does not
interest of the government is assured by its belong to the citizens of the country, generally as a
ownership of at least fifty-one percent (51%) of the matter of common right (De Leon, 2010, citing JRS
corporate capital stock. In a non-stock corporation, Business Corp. v. Imperial Insurance, Inc., G.R. No. L-
like the MECO, jurisprudence teaches that the 19891, July 31, 1964)
controlling interest of the government is affirmed
when "at least majority of the members are Kinds of franchise
government officials holding such membership by
appointment or designation" or there is otherwise Primary vs. Secondary Franchise
"substantial participation of the government in the
selection" of the corporation’s governing board. PRIMARY
SECONDARY FRANCHISE
FRANCHISE
The fact of the incorporation of the MECO under the Special authority given to a
Corporation Code is the key. The MECO was correct corporation to engage in a
in postulating that, as a corporation organized specialized business (e.g.
under the Corporation Code, it is governed by the banks, insurance companies,
appropriate provisions of the said code, its articles right to use the streets of a
of incorporation and its by-laws. In this case, it is the municipality to lay pipes of
by-laws of the MECO that stipulates that its tracks, erect poles, or string
directors are elected by its members; its officers are wires).
elected by its directors; and its members, other than
the original incorporators, are admitted by way of a Certain rights and privileges
unanimous board resolution. conferred upon existing
The franchise corporations (J.R.S. Business
It is significant to note that none of the original or authority to Corp. v. Imperial Insurance,
incorporators of the MECO were shown to be exist as a supra).
government officials at the time of the corporation’s corporation
organization. Indeed, none of the members, officers The franchise to exercise
or board of directors of the MECO, from its powers and privileges granted
incorporation up to the present day, were to such corporation to the
established as government appointees or public business for which it was
officers designated by reason of their office. There created, including those
is, in fact, no law or executive order that authorizes conferred for purposes of
such an appointment or designation. Hence, from a public benefit such as the
strictly legal perspective, it appears that the power of eminent domain and
presidential "desire letters" pointed out by Funa other powers and privileges
are, no matter how strong its persuasive effect may enjoyed by public utilities (De
be, merely recommendatory. Leon, 2010).
GR: Granted by
It is a sui generis private entity especially entrusted the
by the government with the facilitation of unofficial Granted by a Government
Corporation
relations with the people in Taiwan without Agency, or a Municipal
Code
jeopardizing the country’s faithful commitment to Corporation
XPN: In GOCC’s
the One China policy of the PROC. However, despite with a special

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charter, a using the right to take property for private use (De
special law Leon, 2010, citing SEC Opinion, October 28, 1968).
grants the
franchise Rule on whether a defective incorporation
It may ordinarily be conveyed result into a partnership
or mortgaged under a general
power granted to a The answer depends on whether or not there is a
corporation to dispose of its clear intent to participate in the management of the
Cannot be business affairs on the part of the investor. Parties
property (i.e. Through board
transferred who intend to participate or has actually
resolution or approval of
without the participated in the business affairs of the proposed
stockholders (Villarey v. Ferrer
approval of corporation would be considered as partners under
G.R. No. L-23893, October 29,
Congress a de facto partnership. On the other hand, parties
1968).
(Sundiang Sr. & who took no part notwithstanding their
Aquino, 2011) subscriptions do not become partners with other
It can be subject to levy and
sale on execution together with subscribers (Pioneer Insurance vs. CA, GR No. 84197,
corporate property (Sundiang July 28, 1989).
Sr. & Aquino, 2011).
Engagement into a contract of partnership or a
3. Right to succession joint venture

A corporation has a capacity of continuous existence
irrespective of the death, withdrawal, insolvency, or
incapacity of the individual stockholders or
members and regardless of the transfer of their
interest or shares of stock (De Leon, 2010).
A corporation may exist up to the period stated in
the articles of incorporation not exceeding 50 years
from the date of incorporation, unless sooner
dissolved or unless said period is extended (CC, Sec.
11). Note: The Revised Corporation Code now allows
corpotations to have perpetual existence.
4. Powers, attributes and properties of a
Corporation
The powers that a corporation can exercise are only
those which are granted by the law of its creation.
All powers which may be implied from those
expressly provided by law and those which are
incidental or essential to the corporation’s existence
may also be exercised (CC, Sec. 36).
GR: Corporations have no power to enter into
partnership.
XPN: The SEC allowed corporations to enter into
partnerships with other corporations and
individuals provided: (ENLiT)
1. The authority to enter into partnership relation
is expressly conferred by the Charter or the
Articles of Incorporation (AOI)
2. The nature of the business venture to be
undertaken by the partnership is in line with
the business authorized by the charter or the
AOI (SEC Opinions, Feb. 29, 1980, December 1,
1993, and February 23, 1994).
3. The partnership must be a limited partnership
and the corporation must be a limited partner.
4. If it is a foreign corporation, it must obtain a
license to transact business in the country.
Q: May a corporation enter into a joint venture?
(1996 Bar)

TEST: Whether the act of the corporation is in direct A: YES. A corporation may enter into a joint venture
and immediate furtherance of its business, fairly with another where the nature is in line with the
incidental to the express powers and reasonably business authorized by its charter. (Tuason v.
necessary to their exercise. Bolanos, G.R. L-4935, May 28, 1954).

The power to institute expropriation
proceedings is not granted to all corporations
Only quasi-public corporations or those affected
with public interest are given the power to institute
condemnation proceedings against owners of
private property. To grant the right of eminent
domain to purely private entities exercising
functions, which are not public in nature, would be
However, in as much as the term “joint venture” has
no precise legal definition, it may take various
forms. It could take the form of a simple pooling of
resources (not involving incorporation) between
two or more corporations for a specific project,
purpose or undertaking, or for a limited time. It may
involve the creation of a more formal structure, and,
hence, the formation of a corporation. What is
prohibited by law is the creation of partnership

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between corporations but not the creation of joint Existence of
venture. the
corporation
Advantages vs. Disadvantages of a Corporation commences
from the date
ADVANTAGES DISADVANTAGES of issuance of
More complicated in the Certificate
The capacity to act as a From the
formation and of
legal unit moment of
management Incorporation
meeting of
Limitation of, or by the
Higher cost of minds of the
exemption from Securities and
formation and partners
liability of Exchange
operation Commenceme
shareholders Commission
nt of juridical The term of a
Lack of personal (SEC).
Continuity of Existence personality partnership
element and term of may be
Transferability of Greater government Existence
existence established
shares control and regulation CANNOT be
for any
Management and for a term in
Centralized period of
control are separate excess of 50
management of BOD time
from ownership years. The
stipulated by
Standardized method Stockholders have term of a
the partners
of organization and little voice in the corporation
finance conduct of business may be
extended to
Joint Account vs. Partnership not more than
50 years at
JOINT ACCOUNT PARTNERSHIP any single
Has no firm name and is instance.
conducted in the name GR: Requires
Has a firm name. at least 5
of the ostensible
partner. incorporators
May be
Has no juridical but not more
Has juridical Number of organized by
personality and can sue than 15
personality and may incorporators at least 2
or be sued only in the persons
sue or be sued under XPN:
name of the ostensible
its firm name Corporation
partner.
sole
Has no common fund. Has a common fund.
GR: May
The ostensible partner All general partners
manages its business have the right of exercise any
power May exercise
operations. management.
authorized only such
Liquidation may, by
Liquidation thereof can by the powers as may
agreement, be
only be done by the partners. be granted by
entrusted to a partner
ostensible partner. law and its
or partners.
Powers XPN: Acts articles of
which are incorporation,
contrary to implied
Corporation vs. Partnership
law, morals, therefrom or
good incidental
BASIS PARTNERS CORPORATIO
customs, thereto.
HIP N
public order,
Created by public policy
Created by
mere
operation of When GR: Power to
agreement of
As to creation law and management do business
the parties
and governed by is not agreed and manage
and
governing law the Management upon, every its affairs is
governed by
Corporation partner is an vested in the
the Civil
Code agent of the Board of
Code
partnership Directors

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(BOD) / Board debts to third
of Trustees persons
(BOT)
XPN: Limited
XPNs: partner
1. Executive No right of
Committe succession
e (Sec. 35, (ie. a
Right of Has right of
CC) partnership
Succession succession
2. Managem dissolves
ent upon death
Contract of a partner)
(Sec. 44, Stockholder
CC) has the right
3. The AOI of Partner
to transfer his
a close cannot
shares
corporati transfer his
without prior
on may interest in
Transferabilit consent of the
provide the
y of other
partnership
that the Shareholder’s stockholders
business without the
interest unless the
of the consent of all
right of first
corporati the other
refusal is
on shall be existing
embodied in
managed partners.
the articles of
by the incorporation.
stockhold May be
ers of the dissolved
corporati Can only be
any time by
on rather dissolved with
the will of
than by a the consent of
any or all of
board of the State.
the partners.
directors.
(Sec. 97, Dissolution Death or
Death, civil
CC) insolvency of
interdiction
The suit shareholders
and
against a cannot
insolvency of
member of the dissolve the
a partner
BOD or BOT corporation.
dissolve the
who partnership.
A partner as mismanages
Effect of such can sue must be
mismanagem a co-partner brought in the CLASSES OF CORPORATION
ent who name of the
mismanages. corporation;
this is The following are the classes of corporation:
commonly 1. As to whether their membership is represented
known as by shares of stock or not:
“derivative a. Stock –one which has:
suit”. 1. Capital stock divided into shares;
GR: Partners and
are liable Stockholders 2. Are authorized to distribute to the
personally are liable only holders of such shares dividends
Extent of and to the extent of or allotments or the surplus profits
liability to subsidiarily the shares on the basis of the shares held (Sec.
third persons (sometimes subscribed by 3, CC).
solidarily) them whether
for paid or not.
partnership

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b. Non-Stock – is one which does - not
issue shares and is - created not for
profit but for public good and welfare
and where no part of its income is
distributable as dividends to its
members, trustees, or officers. (Sec. 87,
CC)
2. As to the number of persons who compose
them:
a. Corporation Aggregate
- corporation consisting of more
than one member or corporator.
The CC requires that these
corporations must be formed by
“not less than 5 persons” (Sec. 10,
CC).
b. Corporation Sole
‐ Religious corporation which
consists of one member which is
the head of the religious sect or
corporator only and his successor.
3. As to whether they are for religious purpose or
not:
a. Ecclesiastical Corporation ‐ one
organized for religious purpose.
b. Lay Corporation ‐ one organized
for a purpose other than for
religion.
4. As to whether they are for charitable purpose
or not:
a. Eleemosynary ‐ one established
for charitable purposes.
b. Civil ‐ one established for business
or profit.
5. As to state or country under or by whose laws
they have been created:
a. Domestic ‐ incorporated under the
laws of the Philippines.
b. Foreign ‐ formed, organized, or
existing under any laws other than
those of the Philippines and whose
laws allow Filipino citizens and
corporations to do business in its
own country or state (Sec. 123, CC).
6. As to their legal right to corporate existence:
a. De jure ‐existing both in fact and in law.
b. De facto ‐existing in fact but not in law.
7. As to whether they are open to the public or not:
a. Close ‐limited to selected persons
or members of the family (Sec. 96‐
105, CC).
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b. Open ‐open to any person who
may wish to become a stockholder
or member thereto.
8. As to their relation to another corporation:
a. Parent or Holding ‐ related to another
corporation that it has the power
either, directly or indirectly to, elect
the majority of the director of such
other corporation.
b. Subsidiary ‐ so related to another
corporation that the majority of its
directors can be elected either, directly
or indirectly, by such other corporation
9. As to whether they are corporations in a true
sense or only in a limited sense:
a. True ‐ exists by statutory authority
b. Quasi ‐ exist without formal legislative
grant:
i. Corporation by prescription ‐ has
exercised corporate powers for an
indefinite period without interference
on the part of the sovereign power and
which by fiction of law, is given the
status of a corporation;
ii. Corporation by estoppel ‐ in reality is
not a corporation, either de jure or de
facto, because it is so defectively
formed, but is considered a corporation
in relation to those only who, by reason
of theirs acts or admissions, are
precluded from asserting that it is not a
corporation (Sec. 21, CC).
10. As to whether they are for public (government)
or private purpose: (2001, 2004 Bar)
a) Public - formed or organized for the
government of a portion of the State (like
cities and municipalities) for the purpose of
serving the general good and welfare.
(Aquino, 2014)
b) Private - one formed for some private
purpose, benefit or end. It may either be a
stock or non-stock (Aquino, 2014).
The fact that a certain juridical entity is impressed
with public interest does not, by that circumstance
alone, make the entity a public corporation,
inasmuch as a corporation may be private although
its charter contains provisions of a public character,
incorporated solely for the public good. This class of
corporations may be considered quasi-public
corporations, which are private corporations that
render public service, supply public wants, or
pursue other eleemosynary objectives. While
purposely organized for the gain or benefit of its
members, they are required by law to discharge
functions for the public benefit. Examples of these
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corporations are utility, railroad, warehouse, 3. Name of the corporation closely resembles that
telegraph, telephone, water supply corporations of a pre-existing corporation that will tend to
and transportation companies. It must be stressed deceive the public;
that a quasi-public corporation is a species of 4. Incorporators or a certain number of them are
private corporations, but the qualifying factor is not residents of the Philippines;
the type of service the former renders to the public: 5. Acknowledgment of the articles of
if it performs a public service, then it becomes a incorporation or certificate of incorporation is
quasi-public corporation (Philippine Society for the insufficient or defective in form, or it was
Prevention of Cruelty to Animals v. COA, G.R. No. acknowledged before the wrong officer;
169752, September 25, 2007). 6. Percentage of Filipino ownership of the capital
stock required for the business is less than that
Requisites for the formation of a stock prescribed by law; or
corporation 7. Failure to submit by-laws on time.

For a stock corporation to exist, two requisites must Defects precluding creation of corporation
be complied with, to wit:
1. A capital stock divided into shares and 1. Absence of articles of incorporation;
2. An authority to distribute to the holders of such 2. Failure to file articles of incorporation with SEC;
shares, dividends or allotments of the surplus 3. Lack of certificate of incorporation from SEC.
profits on the basis of the shares held (Sec. 3, CC;
CIR v. Club Filipino de Ceb, G.R. No. L-12719, May NOTE: In this case, neither a de jure nor a de facto
31, 1962). corporation is created.

DE FACTO CORPORATION Q: University Publishing Company (UPC),

A de facto corporation is one which actually exists
for all practical purposes as a corporation but which
has no legal right to corporate existence as against
the State (8 Fletcher, pp. 62-63).
Requisites of a de facto corporation (LAP)
1. Organized under a valid Law.
2. Colorable Compliance - Attempt in good faith to
form a corporation according to the
requirements of the law.
NOTE: Issuance of Certificate of Incorporation
by SEC is a minimum requirement for the
formation of the corporation in good
faith.(Sundiang Sr. & Aquino, 2009)
3. Actual User - Use of corporate Powers; The
corporation must have performed the acts
which are peculiar to a corporation like
entering into a subscription agreement,
adopting by-laws, and electing directors.
Defects resulting in creation of de facto
corporation: (IM-CRAPS)
1. Articles of incorporation fails to state all the
matters required by the Code to be stated, or
state some of them incorrectly;
2. Minimum paid-up capital stock has not been
paid to and received by the corporate treasurer
contrary to his affidavit;
through its president, entered into a contract
with Albert to publish the commentaries on the
Revised Penal Code. UPC published the
commentaries but it did not remit the amount
due to Albert. This prompted Albert to file a
collection suit. The RTC ruled against UPC. When
the Sheriff were about to implement the writ of
execution against the company, he discovered
that UPC is not a registered corporation.
Consequently, the president of UPC was
substituted in the writ of execution. The
president invoked the separate legal
personality of the corporation as his defense.
a. Is UPC a de facto corporation?
b. Can the defense that UPC is a corporation by
estoppel be invoked by the president?
c. Who is liable for the debts of the
corporation?
A:
a. NO. UPC cannot be a considered a de facto
corporation because it was not registered with
the SEC.
b. NO. 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.
c. The president who negotiated with Albert is
liable. A person acting or purporting to act on
behalf of a corporation which has no valid
existence assumes such privileges and
obligations and becomes personally liable for
contracts entered into or for other acts

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performed as such agent (Albert v. University corporate existence as requirements for
Publishing Co., G.R. No. L-19118, January 30, against the State. incorporation.
1965). There is a colorable There is substantial
compliance with the compliance with the
Liabilities of officers and directors/trustees of a requirements of the requirements of the
de facto corporation law creating the law creating the
corporation. corporation.
The liabilities and penalties attending to officers Its right to exist as a
and directors/ trustees of a de jure corporation shall corporation cannot be
be the same as those of a de facto corporation. This successfully attacked
includes the liability under the criminal law. Can be attacked
or questioned by any
directly but not
party even in direct
Members of a de facto corporation cannot be collaterally.
proceeding for that
held liable as partners by third persons purpose by the State.
(De Leon, 2010)
The members of a de facto corporation cannot be Stockholders enjoy exemption from personal
held liable as partners by third persons who deal liability for corporate obligations
with them in their supposed corporate capacity,
merely on account of a technical defect in the CORPORATION BY ESTOPPEL
formation of the corporation.
A corporation by estoppel has no real existence in
On the other hand, where an attempt to organize a law. It is neither a de jure nor de facto corporation,
corporation fails by omission of some substantial but is a “mere fiction existing for the particular case,
step or proceeding required by the law, its members and vanishing where the element of estoppels is
or stockholders are liable as partners (De Leon, absent” (8 Fletcher, p. 219).
2010).
Rules governing a corporation by estoppel
The existence of a de facto corporation cannot be
collaterally attacked 1. All persons who assume to act as a corporation
knowing it to be without authority to do so shall
GR: The existence of a de facto corporation shall not be liable as general partners for all debts,
be inquired into collaterally in any private suit to liabilities and damages incurred or arising as a
which such corporation may be a party. Such result.
inquiry may be made by the Solicitor General in a 2. When any such ostensible corporation is sued
quo warranto proceeding (Sec. 20, CC). on any transaction entered by it as a
corporation or on any tort committed by it as
XPN: Collateral attack can be permitted when the such, it shall not be allowed to use as a defense
lack of right or the wrong doing of the corporation its lack of corporate personality.
is in issue because it is in violation of public policy 3. One who assumes an obligation to an ostensible
or of express or implied statutory requirement, such corporation as such, cannot resist performance
as denial of its right to enforce contracts entered thereof on the ground that there was in fact no
into without compliance with prohibitions of corporation (CC, Sec. 21).
express or implied statutory or public policy.
NOTE: Where there is no third person involved and
Thus, the defendant may question the personality of the conflict arises only among those assuming the
a foreign corporation transacting business in the form of a corporation who know that the
Philippines to maintain a suit on the ground that it corporation has not been registered, there is NO
is not duly licensed to do business in our country corporation by estoppel (Lozano v. Santos, G. R. No.
(De Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 133 125221, June 19, 1997).
of the CC).
Q: On behalf of Ocean Quest Fishing Corporation,
De facto Corporation vs. De jure Corporation Antonio Chua and Peter Yao entered into a
contract for the purchase of fishing nets of
DE FACTO DE JURE various sizes from the Philippine Fishing Gear
One which actually Industries, Inc. They claimed that they were
One created in strict or
exists for all practical engaged in a business venture with Lim Tong
substantial conformity
purposes as a Lim, who however was not a signatory to the
with the mandatory
corporation but which agreement. The buyers failed to pay for the
statutory
has no legal right to fishing nets and the floats; hence, Philippine

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Fishing Gear filed a collection suit against Chua, Abante Tonite as a party defendant despite its
Yao and Lim Tong Lim. The suit was brought lack of juridical personality?
against the three in their capacities as general
partners, on the allegation that Ocean Quest A: YES. In rejecting the contention, the CA
Fishing Corporation was a nonexistent categorized Abante Tonite as a corporation by
corporation. The trial court ruled in favor of estoppel as the result of its having represented itself
Philippine Fishing Gear and that Chua, Yao and to the reading public as a corporation despite its not
Lim are liable as general partners. Lim contends being incorporated. The non-incorporation of
that the doctrine of corporation by estoppel Abante Tonite with the SEC was of no consequence,
applies only to Yao and Chua. Lim insists that for, otherwise, whoever of the public who would
only those who dealt in the name of the suffer any damage from the publication of articles in
ostensible corporation should be held the pages of its tabloids would be left without
liable. Since his name does not appear on any of recourse. The SC cannot disagree with the CA,
the contracts and since he never directly considering that the editorial box of the daily tabloid
transacted with the Ocean Quest Fishing disclosed that although Monica Publishing
Corporation, he cannot be held liable. Is Lim Corporation had published the tabloid on a daily
jointly liable with Chua and Yao? basis, nothing in the box indicated that Monica
Publishing Corporation had owned Abante Tonite
A: YES. Lim should be held liable jointly with Chua (Macasaet, et al.v. Co, G.R. No. 156759, June 5, 2013).
and Yao. Unquestionably, Lim benefited from the
use of the nets found inside F/B Lourdes, the boat De facto corporation vs. Corporation by estoppel
which has earlier been proven to be an asset of the
partnership. Lim, Chua and Yao decided to form a CORPORATION BY
DE FACTO
corporation. Although it was never legally formed ESTOPPEL (2004
CORPORATION
for unknown reasons, this fact alone does not Bar)
preclude the liabilities of the three as contracting There is existence in There is no existence in
parties in representation of it. Clearly, under the law law
law on estoppel, those acting on behalf of a The dealings among The dealings among
corporation and those benefited by it, knowing it to the parties on a the parties on a
be without valid existence, are held liable as general corporate basis is not corporate basis is
partners. Technically, it is true that Lim did required required
not directly act on behalf of the The State reserves the
corporation. However, having reaped the benefits right to question its Quo warranto
of the contract entered into by persons with whom existence through a proceeding is not
he previously had an existing relationship, he is quo warranto applicable
deemed to be part of said association and is covered proceeding
by the scope of the doctrine of corporation by Stockholders in a de
estoppel (Lim Tong Lim v. Philippine Fishing Gear Stockholders are liable
facto corporation are
Industries, Inc., G.R. No. 136448, November 3, 1999). as general partners for
liable as a de jure
all debts, liabilities and
corporation
Q: Francisco Co, Jr. sued Abante Tonite, a daily damages incurred
tabloid of general circulation, and its publisher
and staffs - claiming damages because of an SPECIAL CORPORATIONS
allegedly libelous article they published in an
issue. Macasaet, et al moved, among others, to A religious group is not required to be registered
drop Abante Tonite as a defendant by virtue of as a corporation
its being neither a natural nor a juridical person
that could be impleaded as a party in a civil The Corporation Code does not require any religious
action. groups to be registered as a corporation but if it
wants to acquire legal personality, its members
The RTC denied the staffs’motion, holding that should incorporate under the Code.
assuming “Abante Tonite” is not registered with
the SEC, it is deemed a corporation by estoppel Organization of a corporation sole
considering that it possesses attributes of a
juridical person, otherwise it cannot be held A corporation sole is organized by the mere filing of
liable for damages and injuries it may inflict to the verified articles of incorporation by the head of
other persons. The CA affirmed the RTC ruling. any religious denomination, sect or church with the
Was the CA correct in upholding the inclusion of SEC without the need of an issuance of a certificate of
incorporation. Once filed, a separate juridical

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character is acquired which is separate and distinct
from his natural character.
NOTE: A corporation sole is not required to file by-
laws. It is governed by the rules, regulations and
discipline of its religious denomination, sect or
church.
Nationality of a corporation sole
A corporation sole does not have any nationality but
for purposes of applying nationalization laws,
nationality is determined not by the nationality of
its presiding elder but by the nationality of its
members, constituting the sect in the Philippines.
Thus, the Roman Catholic Church can acquire lands
in the Philippines even if it is headed by the Pope
(Roman Catholic Apostolic Church v. Land
Registration Commission, G.R. No. L-8451, December
20, 1957).
Acquisition of property by a corporation sole
A corporation sole may acquire property even
without court intervention by purchase, donation
and other lawful means (Ibid).
The minority of Filipinos Catholic congregation who
separated and refused to recognize the authority of
the Roman Catholic Church has no right to claim the
property, because they committed schism. (Canelo
vs. CA 171 SCRA 13)
Q: Father X, an American priest who came from
New York, registered the Diocese of Bacolod of
the Roman Catholic Church which was
incorporated as a corporation sole. There were
years when the head of the Diocese was a
Filipino, but there were more years when the
heads were foreigners. Today, the head is an
American again. Y donated a piece of land
located in Bacolod City for use as a school. Which
statement is most accurate? (2012 Bar)
A: C. “Any corporation sole may purchase and hold
real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes”
(Sec. 113, CC).
Being a mere administrator of the temporalities or
properties titled in his name, the constitutional
provisions requiring 60% (or 100%) Filipino
ownership are not applicable to the corporation
sole. The ownership thereof devolves upon the
church or congregation acquiring the same. To own
the property, compliance with the constitutionally
required 60% (or 100%) Filipino capital is
determined by the nationality of the constituents of
the diocese (church or congregation), and not the
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nationality of the actual incumbent of the parish
(the Corporation Sole or the head of the church or
congregation) (De Leon, 2010, citing SEC Opinions,
Nov. 6, 1990 and Sept. 21, 1993).
Alienation of properties by a corporation sole
A corporation sole may alienate properties by:
1. Obtaining an order from the RTC of the
province where the property is situated after
notice of the application for leave to sell or
mortgage has been given by publication or
otherwise and by showing that it is for the
interest of the corporation that leave to sell or
mortgage should be granted;
2. In cases where the rules, regulations and
discipline of the religious denomination, sect or
church, religious society or order concerned
represented by such corporation sole regulate
the method of acquiring, holding, selling and
mortgaging real estate and personal property,
such rules, regulations and discipline shall
control, and the intervention of the courts shall
not be necessary (Sec. 113, CC).
In a case, the Canons of the Iglesia Filipino
Independiente provide that all real properties of the
church can be disposed of only with the approval
and conformity of the laymen’s committee, the
parish priest, the Diocesan Bishop, with sanction of
the Supreme Council, and finally with the approval
of the Supreme Bishop, as administrator of all the
temporalities of the Church, yet the Supreme Bishop
sold motu propio a parcel of land of the IFI despite
the objection of the laymen, the sale is void and the
land must be reconveyed to IFI (Iglesia Filipina
Independiente v. Heirs of Bernardino Tazea, G.R. No.
179597, February 3, 2014).
Dissolution of a corporation sole is not
necessary for it to become a corporation
aggregate
There is no point in dissolving the corporation sole
of one member to enable the corporation aggregate
to emerge from it. The Corporation Code provides
no specific mechanism for amending the articles of
incorporation of a corporation sole but Section 109
of the Corporation Code allows the application to
religious corporations of the general provisions
governing non-stock corporations.
In non-stock corporations, the amendment needs
the concurrence of at least two-thirds of its
membership. If such approval mechanism is made
to operate in a corporation sole, its one member in
whom all the powers of the corporation technically
belongs, needs to get the concurrence of two-thirds
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of its membership (Iglesia Evangelica Metodista v.
Bishop Lazaro, GR. 184088, July 6, 2010).
NATIONALITY OF CORPORATIONS
Tests in determining the nationality of
corporations
1. Place of Incorporation test
2. Control test
3. Grandfather rule – Nationality is attributed to
the percentage of equity in the corporation used
in nationalized or partly nationalized area. This
test is an exception to the Control Test and was
applied by the SEC in several cases.
4. Domiciliary test – Determined by the principal
place of business of the corporation.
PLACE OF INCORPORATION TEST
In using the Place of Incorporation test, the
nationality of a corporation is determined by the
state of incorporation, regardless of the nationality
of the stockholders.
CONTROL TEST
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
A corporation organized/incorporated abroad and
registered as doing business in the Philippines
under the Corporation Code, of which 100% of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3,
2004; De Leon, 2010). This test was adopted by the
said law as a general guideline in determining the
nationality of corporations engaged in a
nationalized activity (Sec Opinion No. 07-20,
November 20, 2007).
Who are considered as Philippine Nationals
Under RA 7042 (Foreign Investment Act of 1991),
the following are considered Philippine Nationals:
1. Corporations organized under Philippine laws
of which 60% of the capital stock outstanding
and entitled to vote is owned and held by
Filipino citizens.
NOTE: RA 7042 provides that where a
corporation and its non-Filipino stockholders
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own stocks in a SEC-registered enterprise, at
least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least
60% of the members of the board of directors of
both corporations must be Filipino citizens
(DOUBLE 60% RULE).
2. Corporations organized abroad and registered
as doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos.
Q: What is the nationality of a corporation
organized and incorporated under the laws of a
foreign country, but owned 100% by Filipinos?
(1998 Bar)
A: Under the control test of corporate nationality, a
corporation organized and incorporated under the
laws of a foreign country, but owned 100% by
Filipinos is classified as a Philippine National.
Where the grounds for piercing the veil of corporate
entity are present, the corporation will follow the
nationality of the controlling members or
stockholders, since the corporation will then be
considered as one and the same.
NOTE: The fact that the religious organization has
no capital stock does not suffice to escape the
constitutional inhibition, since it is admitted that its
members are of foreign nationality. The purpose of
the 60% requirement is obviously to ensure that
corporations or associations allowed to acquire
agricultural land or to exploit natural resources
shall be controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of capital
stock, the controlling membership should be
composed of Filipino citizens (Register of Deeds vs.
Ung Sui Si Temple, G.R. No. L-6776, May 21, 1955).
GRANDFATHER RULE
To ensure compliance with the constitutional
limitation(s) of corporations engaging in
nationalized activities, the nationality of a
corporation must be determined by ascertaining if
60% of the investing corporation’s outstanding
capital stock is owned by “Filipino citizens”, or as
interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn
owned to some extent by another investing
corporation, the same process must be observed.
Reason: One must not stop until the citizenships of
the individual or natural stockholders of layer after
layer of investing corporations have been
established, for this is the very essence of the
Grandfather Rule (Redmont Consolidated Mines
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Corp. vs. McArthur Mining Corp., SEC En Banc Case
No. 09-09-177, March 25, 2010).
Rules governing the application of the
Grandfather Rule
1. The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity. This
applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of the
capital stock of the corporation (SEC-OGC
Opinion No. 10-31, December 9, 2010).
2. The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity
ownership in a particular natural resource
corporation is not in doubt. If the stockholder
corporation is 60% or more owned by Filipinos,
all the stock held by the stockholder
corporation is deemed to be held by Filipinos
(DOJ Opinion No. 19, s. 1989).
3. When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the
Grandfather Rule (SEC-OGC Opinion No. 22-07
dated December 7, 2007).
As further defined by Dean Cesar Villanueva, the
Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized
areas of activities, provided for under the
Constitution and other nationalization laws, is
computed, in cases where corporate shareholders
are present, by attributing the nationality of the
second or even subsequent tier of ownership to
determine the nationality of the corporate
shareholder." (Villanueva, Cesar Lapuz, Philippine
Corporate Law (2001), p. 54.)
Note: To arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.
Q: Redmont, a mining company, sought to
invalidate the Mining Production and Sharing
Agreement applications of three domestic
mining companies, namely: Narra, Tesoro and
McArthur, on the ground that at least 60% of the
capital stock of Narra, et al. are owned and
controlled by MBMI, a 100% Canadian
corporation; thus they were disqualified to
engage in mining activities though MPSAs, which
are reserved only for Filipino Citizens.
Narra, et al. claimed that the issue on nationality
should not be raised since they are in fact
Philippine Nationals as 60% of their capital is
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owned by citizens of the Philippines. They
asserted that though MBMI owns 40% of the
shares of PLMDC (which owns majority shares of
Narra), 40% of the shares of MMC (which owns
majority shares of McArthur) and 40% of the
shares of SMMC (which, in turn, owns majority
shares of Tesoro), the shares of MBMI will not
make it the owner of at least 60% of the capital
stock of each of petitioners. They added that the
best tool used in determining the nationality of
a corporation is the “control test,” embodied in
Sec. 3 of RA 7042 or the Foreign Investments Act
of 1991.
The controversy reached the CA, which used the
grandfather rule to hold that MBMI in effect
owned majority of the common stocks of Narra,
et al., and thus the latter were foreign
corporations.
a. Was the CA wrong in applying the
Grandfather Rule instead of the Control
Test?
b. Will the Grandfather Rule apply only when
less than 60% of the capital stock are
Filipino-owned? (2016 Bar)
A:
a. NO. Basically, there are two acknowledged tests
in determining the nationality of a corporation:
the control test and the grandfather rule. The
"control test" is still the prevailing mode of
determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2,
Art. XII of the 1987 Constitution, entitled to
undertake the exploration, development and
utilization of the natural resources of the
Philippines. When in the mind of the Court
there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-
equity ownership in the corporation, then it
may apply the "grandfather rule".
b. NO. The assertion of Narra, et al. that “doubt”
only exists when the stockholdings are less than
60% fails to convince this Court. It would be
ludicrous to limit the application of the said
word only to the instances where the
stockholdings of non-Filipino stockholders are
more than 40% of the total stockholdings in a
corporation. The corporations interested in
circumventing our laws would clearly strive to
have “60% Filipino Ownership” at face value. It
would be senseless for these applying
corporations to state in their respective articles
of incorporation that they have less than 60%
Filipino stockholders since the applications will
be denied instantly. Thus, various corporate
schemes and layerings are utilized to
circumvent the application of the Constitution.
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A corporation that complies with the 60-40 Filipino 100% Filipino Owned
to foreign equity requirement can be considered a (Zero percent (0%) foreign equity)
Filipino corporation if there is no doubt as to who Code: CoFi AMMaN Co. – MiSe- US$2.5M
has the “beneficial ownership” and “control” of the
corporation. In this case, a further investigation as 1. COoperatives(Art. 26, Ch. III, R.A. 6938)
to the nationality of the personalities with the 2. Manufacture of FIrecrackers and other
beneficial ownership and control of the corporate pyrotechnic devices. (Sec. 5, R.A. 7183)
shareholders in both the investing and investee 3. Manufacture, repair, stockpiling and/or
corporations is necessary. “Doubt” refers to various distribution of biological, chemical and
indicia that the “beneficial ownership” and “control” radiological weapons and Anti-personnel
of the corporation do not in fact reside in Filipino mines (Various treaties to which the
shareholders but in foreign stakeholders. Even if at Philippines is a signatory and conventions
first glance the petitioners comply with the 60-40 supported by the Philippines)
Filipino to foreign equity ratio, doubt exists in the 4. Mass media except recording
present case that gives rise to a reasonable 5. Utilization of MArine resources (Sec. 2, Art. XII,
suspicion that the Filipino shareholders do not Constitution)
actually have the requisite number of control and 6. Manufacture, repair, stockpiling and/or
beneficial ownership in petitioners Narra, Tesoro, distribution of Nuclear weapons (Sec. 8, Art. II,
and McArthur. Constitution)
7. COckpits (Sec. 5, P.D. 449)
Moreover, the ultimate Filipino ownership of the 8. Small-scale MIning (Sec. 3, R.A. 7076)
shares must first be traced to the level of the 9. Private SEcurity agencies (Sec. 4, R.A. 5487)
Investing Corporation and added to the shares 10. Retail trade enterprises with paid-up capital of
directly owned in the Investee Corporation x x x. less than US$2.5 M(Sec. 5, R.A. 8762)
Concluding from the above-stated facts, it is quite
safe to say that petitioners McArthur, Tesoro and 80 % Filipino Owned
Narra are not Filipino since MBMI, a 100% Canadian (Up to twenty percent (20%) foreign equity)
corporation, owns 60% or more of their equity Code: Prc
interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, 1. Private Radio Communications network (R.A.
namely: MMI, SMMI and PLMDC. Going further and 3846)
adding to the picture, Noticeably, the ownership of
the "layered" corporations boils down to MBMI, 75 % Filipino Owned
Olympic or corporations under the "Alpha" group (Up to twenty percent (25%) foreign equity)
wherein MBMI has joint venture agreements with, Code: LoRD F
practically exercising majority control over the
corporations mentioned. In effect, whether looking 1. Contracts for the construction and repair of
at the capital structure or the underlying LOcally-funded public works (Sec. 1, CA 541, LOI
relationships between and among the corporations, 630) except:
petitioners are NOT Filipino nationals and must be a) infrastructure/development projects
considered foreign since 60% or more of their covered in R.A. 7718; and
capital stocks or equity interests are owned by b) projects which are foreign funded or
MBMI assisted and required to undergo
international competitive bidding (Sec.
Hence, the Court is correct in using the Grandfather 2[a], R.A. 7718)
Rule in determining the nationality of the
petitioners (Narra Nickel Mining and Development 2. Private Recruitment, whether for local or
Corp., et al. v. Redmont Consolidated Mines, G.R. No. overseas employment (Art. 27, P.D. 442)
195580, January 28, 2015). 3. Contracts for the construction of Defense-
related structures; (Sec. 1, CA 541)
Note: "Corporate layering" is admittedly allowed 4. Under the Flag Law, in the purchase of articles
by the FIA; but if it is used to circumvent the for the Government, preference shall be given
Constitution and pertinent laws, then it becomes to materials and supplies produced, made, or
illegal. manufactured in the Philippines, and to
domestic entities. Domestic entities means any
NATIONALIZED ACTIVITIES RESERVED FOR citizen of the Philippines or commercial
FILIPINOS UNDER THE CONSTITUTION company at least 75% of the capital of which is
AND SPECIAL LAWS owned by citizens of the Philippines (Sec. 1, CA
138)

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70 % Filipino Owned
(Up to twenty percent (30%) foreign equity)
Code: AdPawn
1. Advertising (Art. XVI, Constitution)
2. Corporations engaged in pawnshop business
(Sec. 8, P.D. 114)
60 % Filipino Owned
(Up to twenty percent (40%) foreign equity)
Code: Go LEARN CUPIDCo
1. Contracts for the supply of materials, goods and
commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183)
2. Ownership of private Lands (Sec. 7, Art. XII,
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A.
9182)
3. Ownership/establishment and administration
of Educational institutions (Sec. 4, Art. XIV,
Constitution)
4. Adjustment Companies (Sec. 323, P.D. 613)
5. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise,
Rice and corn and the by-products thereof (Sec.
5, P.D. 194)
6. Exploration, development and utilization of
Natural resources (Sec. 2, Art. XII, Constitution)
7. Ownership of Condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units
or owned by a corporation (Sec. 5, R.A. 4726)
8. Operation and management of public Utilities
(Sec. 11, Art. XII, Constitution; Sec. 16, CA 146)
9. Project Proponent and Facility Operator of a
BOT project requiring a public utilities
franchise (Sec. 11, Art. XII, Constitution; Sec. 2a,
R.A. 7718)
10. Manufacture, repair, storage and/ or
distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A.
8179)
11. Operation of Deep sea commercial fishing
vessel (Sec. 27, R.A. 8550)
12. Corporations engaged in Coastwise shipping
(Sec. 806, P.D. 1464)
40 % Filipino Owned
(Up to twenty percent (60%) foreign equity)
Code: FI [SEC]
1. Financing companies regulated by the SEC (Sec.
6, R.A. 5980 as amended by R.A. 8556)
2. Investment houses regulated by the SEC (Sec. 5,
P.D. 129 as amended by R.A. 8366)
Q: Bell Philippines, Inc. (BellPhil.) is a public
utility company, duly incorporated and
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registered with the SEC. Its authorized capital
stock consists of voting common shares and
non-voting preferred shares, with equal par
values of P100.00/share. Currently, the issued
and outstanding capital stock of BellPhil
consists only of common shares shared between
Bayani Cruz, a Filipino with 60% of the issued
common shares, and Bernard Fleet, a Canadian,
with 40%.
To secure additional working fund, BellPhil
issued preferred shares to Bernard Fleet
equivalent to the currently outstanding
common shares. A suit was filed questioning the
corporation action on the ground that the
foreign equity holdings in the company would
now exceed 40% foreign equity limit allowed
under the Constitution for public utilities.
Rule on the legality of Bernard Fleet’s current
holdings. (2013 Bar)
A: The holding of Bernard Fleet equivalent to the
outstanding common shares is illegal. His holdings
of preferred shares could not exceed 40%. Since the
constitutional requirement of 60% Filipino
ownership of the capital of public utilities applies
not only to voting control but also to beneficial
ownership of the corporation, it should also apply to
the preferred shares. Preferred shares are also
entitled to vote in certain corporate matters. The
state shall develop a self-reliant and independent
national economy effectively controlled by Filipinos
The effective control here should be mirrored
across the board on all kinds of shares (Gamboa v.
Teves, G.R. No. 176579, June 28, 2011; 1987
Constitution, Art. II, Sec. 19).
CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY
The doctrine of corporate juridical personality
states that a corporation is a juridical entity with
legal personality separate and distinct from those
acting for and in its behalf and, in general, from the
people comprising it (Francisco v. Mallen Jr. G.R. No.
173169, September 22, 2010).
Q: The Olongapo City filed a complaint for sum
of money and damages against Olongapo City
Water District (OCWD). It alleged that OCWD
failed to pay its electricity bills to Olongapo City
and remit its payment under the contract to pay,
pursuant to OCWD’s acquisition of Olongapo
City’s water system. In the interim, OCWD
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entered into a Joint Venture Agreement with
SBMA, Biwater and DMCI. Pursuant to this
agreement, Subic Water – a new corporate entity
– was incorporated, with the following equity
participation from its shareholders: SBMA
19.99% or 20%; OCWD 9.99% or 10%; Biwater
29.99% or 30%; and DMCI 39.99% or 40%.
Subic Water was granted the franchise to
operate and to carry on the business of
providing water and sewerage services in the
Subic Bay Free Port Zone, as well as in Olongapo
City. Hence, Subic Water took over OCWD’s
water operations in Olongapo City. To finally
settle their money claims against each other,
Olongapo City and OCWD entered into a
compromise agreement.
To enforce the compromise agreement,
Olongapo City filed a motion for the issuance of
a writ of execution with the RTC. OCWD’s former
counsel filed a manifestation alleging that
OCWD had already been dissolved and that
Subic Water is now the former OCWD. Because
of this assertion, Subic Water also filed a
manifestation informing the RTC that as borne
out by the articles of incorporation and general
information sheet of Subic Water, OCWD is not
Subic Water. The manifestation also indicated
that OCWD was only a ten percent (10%)
shareholder of Subic Water; and that its 10%
share was already in the process of being
transferred to Olongapo City pursuant to a Deed
of Assignment.
Can Subic Water be made liable under the writ
of execution issued by RTC in favor of Olongapo
City?
A: NO. OCWD and Subic Water are two separate and
different entities. Subic Water clearly demonstrated
that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of
Subic Water. As a mere shareholder, OCWD’s
juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in
Corporation Law that a corporation is a juridical
entity vested with a legal personality separate and
distinct from those acting for and in its behalf and,
in general, from the people comprising it. Under this
corporate reality, Subic Water cannot be held liable
for OCWD’s corporate obligations in the same
manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate
entity (Olongapo City v. Subic Water and Sewerage
Co., Inc., G.R. No. 171626, August 6, 2014).
Q: Puyat granted a loan to NS International, Inc.
(NSI). The loan was made pursuant to the
Memorandum of Agreement and Promissory
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Note between Puyat and NSI, represented by
Nuccio. It was agreed that Puyat would extend a
credit line with a limit of P500,000.00 to NSI, to
be paid within 30 days from the time of the
signing of the document. The loan carried an
interest rate of 17% per annum, or at an
adjusted rate of 25% per annum if payment is
beyond the stipulated period. NSI and Nuccio
received a total amount of P300,000.00 and
certain machineries intended for their business.
The proposed business, however, failed to
materialize. When the petitioners defaulted in
the payment of the loan, Puyat filed a collection
suit alleging mainly that the NSI and Nuccio still
owe him the value of the machineries.The RTC
ordered them, jointly and severally, to pay the
balance. CA also affirmed the RTC ruling that
they are one and the same. Did CA commit a
reversible error in affirming the RTC’s decision
holding them jointly and severally liable for the
amount claimed?
A: YES. Piercing the veil of corporate fiction is not
justified. The NSI and Nuccio are not one and the
same. The records of the case, however, do not show
that Nuccio had control or domination over NSI’s
finances. The mere fact that it was Nuccio who, in
behalf of the corporation, signed the MOA is not
sufficient to prove that he exercised control over the
corporation’s finances. Neither the absence of a
board resolution authorizing him to contract the
loan nor NSI’s failure to object thereto supports this
conclusion. These may be indicators that, among
others, may point the proof required to justify the
piercing the veil of corporate fiction, but by
themselves, they do not rise to the level of proof
required to support the desired conclusion. It
should be noted in this regard that while Nuccio was
the signatory of the loan and the money was
delivered to him, the proceeds of the loan were
unquestionably intended for NSI’s proposed
business plan. That the business did not materialize
is not also sufficient proof to justify a piercing, in the
absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the
respondent for the petitioners’ undisclosed goals.
NSI’s liability should not attach to Nuccio (Saverio v.
Puyat, G.R. No. 186433, November 27, 2013).
Q: Richard owns 90% of the shares of the capital
stock of GOM Co. On one occasion, GOM
represented by Richard as President and
General Manager executed a contract to sell a
subdivision lot in favor of Tomas. For failure of
GOM to develop a subdivision, Tomas filed an
action for rescission and damages against GOM
and Richard. Will the action prosper? Explain
(1996 Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
A: The action will prosper against GOM Corporation
but it shall not be the same with regard to the action
against Richard. Such is the case because Richard
has a separate and distinct personality from the
corporation. His mere ownership of 90% of the
shares of the capital stock of GOM does not make
him as one with the corporation. Mere ownership by
a single stockholder, or by another corporation, of
all or nearly all of the capital stock of a corporation
is not itself a sufficient ground for disregarding the
separate corporate personality (Secosa v. Heirs of
Erwin Suarez Francisco, G.R. No. 160039, June 29,
2004).
Significance of the doctrine of separate
personality
1. Liability for acts or contracts – As a general rule,
the obligation of the corporation is not the
liability of the stockholders, officers or
directors (1992, 1996, 2010 Bar).
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders
or those of the legal entities to which it may be
connected, and vice versa (Cease vs. CA, G.R. No.
L-33172, October 18, 1979). Note: XPN to this is
the reverse piercing of the corporate veil.
2. Right to bring actions – may bring civil and
criminal actions in its own name in the same
manner as natural persons (Art. 46, Civil Code).
NOTE: Rights belonging to the corporation
cannot be invoked by the stockholders (or
directors and officers) even if the latter owns
substantial majority of the shares of the shares
in that corporation and rights of the
stockholders, directors and officers cannot be
invoked by the corporation (Stonehill vs.
Diokno, G.R. 19550, June 19, 1967).
3. Right to acquire and possess property – property
conveyed to or acquired by the corporation is in
law the property of the corporation itself as a
distinct legal entity and not that of the
stockholders or members (Art. 44[3], Civil
Code).
NOTE: The interest of the stockholders over the
properties are merely inchoate (Saw vs. CA, G.R.
No. 90580, April 8, 1991; 1996, 2000 Bar).
4. Acquisition of jurisdiction – service of summons
may be made only on the president, general
manager, corporate secretary, treasurer or in-
house counsel (Rules of Court, Rule 14, Sec. 11).
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5. Changes in individual membership – corporation
remains unchanged and unaffected in its
identity by changes in its individual
membership or ownership of its stocks.
Q: As a result of perennial business losses, a
corporation's net worth has been wiped out. In
fact, it is now in negative territory. Nonetheless,
the stockholders did not like to give up.
Creditor-banks, however, do not share the
confidence of the stockholders and refuse to
grant more loans.
a. What tools are available to the stockholders
to replenish capital?
b. Assuming that the corporation continues to
operate even with depleted capital, would
the stockholders or the managers be
solidarily liable for the obligations incurred
by the corporations? (1999 Bar)
A:
a. In the case where the creditor-banks refused to
grant more loans to the stockholders, the
stockholders can publicly sell their shares and
assets. They can also demand payment from
stockholders of their unpaid subscriptions
where there is no due date inscribed in the
subscription contract.
b. No, the stockholders or managers cannot be
held solidarily liable for the obligations
incurred by the corporation. They cannot be
held personally liable for as long as their acts
are for and in behalf of the corporation, within
the scope of their authority and in good faith.
Also, a corporation has a personality separate
and distinct from its individual stockholders
(Consolidated Bank and Trust Corp. v. CA, G.R.
No. 114286, April 19, 2001).
Stockholders are not the owners of corporate
properties and assets
The interest of the shareholder in the properties of
the corporation is inchoate only. The interest of the
shareholder on a particular property becomes
actual, direct and existing only upon the liquidation
of the assets of the corporation and provided that
the same property is assigned to the shareholder
concerned.
Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are
regarded as equity in trust for the payment of
corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.
The distribution of corporate assets and property
cannot be made to depend on the whims and
caprices of the stockholders, officers, or directors of
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the corporation unless the indispensable conditions
and procedures for the protection of corporate
creditors are followed (Yamamoto v. Nishino
Leather Industries, Inc., G.R. No. 150283, April 16,
2008).
Q: RISCO ceased operation due to business
reverses. Due Aznar et. al’s desire to rehabilitate
RISCO, they contributed a total amount of
P212,720.00 which was used in the purchase of
the three (3) parcels of land located in various
areas in the Cebu Province. Pursuant to the
Minutes of the Special Meeting of the Board of
Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the
aforementioned properties as annotated in the
titles of the said lots. Such annotation was made.
Thereafter, various subsequent annotations
were made on the same titles in favor of PNB. As
a result, a Certificate of Sale was issued in favor
of PNB, being the lone and highest bidder of the
three (3) parcels of land and was also issued
Transfer Certificate of Title over the said parcels
of land. Aznar, et. al filed a complaint seeking the
quieting of their supposed title to the subject
properties. They alleged that the subsequent
annotations on the titles are subject to the prior
annotation of their liens and encumbrances. On
the other hand, PNB assert that, as mere
stockholders of RISCO, they do not have any
legal or equitable right over the properties of
the corporation. Do the defendants herein
(Aznar et. al.) have the legal or equitable rights
over the subject properties?
A: NO. Stockholders cannot claim ownership over
corporate properties by virtue of the Minutes of a
Stockholder’s Meeting which merely evidence a
loan agreement between the stockholders and the
corporation. As such, their interest over the
properties is merely inchoate (PNB v. Merelo B.
Aznar, et al, G.R. No. 171805, May 30, 2014).
Stockholders are not real parties in interest to
claim damages and recover compensation
The personality of a corporation is distinct and
separate from the personalities of its stockholders.
Hence, its stockholders are not themselves the real
parties in interest to claim and recover
compensation for the damages arising from the
wrongful attachment of corporate assets. Only the
corporation is the real party in interest for that
purpose (Stronghold Insurance Company, Inc. v.
Cuenca, G.R. No. 173297, March 6, 2013).
Q: Ronald Sham doing business under the name
of SHAMRON Machineries (Shamron) sold to
Turtle Mercantile (Turtle) a diesel farm tractor.
In payment, Turtle’s President and Manager
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Dick Seldon issued a check for P50,000 in favor
of Shamron. A week later, Turtle sold the tractor
to Briccio Industries (Briccio) for P 60,000.
Briccio discovered that the engine of the tractor
was reconditioned so he refused to pay Turtle.
As a result, Dick Seldon ordered “Stop Payment”
of the check issued to Shamron. Shamron sued
Turtle and Dick Seldon. Shamron obtained a
favourable judgment holding co-defendants
Turtle and Dick Seldon jointly and severally
liable. Comment on the decision of the trial
court. Discuss fully. (1995 Bar)
A: I disagree with the trial court’s ruling. Dick
Seldon should not be solidarily liable with Turtle
because of his position as President and Manager of
the corporation. Turtle Corporation has a separate
juridical personality from its officers. Corporate
officers cannot be personally liable for the
consequences of their acts, for as long as these are
for and behalf of the corporation, within the scope
of their authority and in good faith (Consolidated
Bank and Trust Corp. v. CA, G.R. No. 114286, April 19,
2001).
Entitlement of corporations to Constitutional
rights
Corporations are entitled to the following rights
under the constitution:
1. Right to Due Process (Sec. 1, Art. III,
Constitution)
2. Right against unreasonable searches and
seizures (Sec. 2, ibid)
NOTE: Corporations are not entitled to the right
against self-incrimination, being a mere creature of
law (Bataan Shipyard & Engineering v. PCGG, G.R. No.
75885, May 27, 1987).
It cannot refuse to produce the books and papers if
lawfully required by the appropriate government
agency. It is presumed that they are incorporated
for the benefit of the public thereby making its
power limited.
LIABILITY FOR TORTS AND CRIMES
A corporation may be held liable for torts
The corporation is liable for every tort which it
expressly directs or authorizes (PNB v. CA, G.R. No.
L-27155, May 18, 1978).
Reason for liability in cases of torts
A corporation is civilly liable in the same manner as
natural persons for torts, because generally
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
speaking, the rules governing the liability of a
principal or master for a tort committed by an agent
or servant are the same, whether the servant or
agent is a natural or artificial person (Ibid)
Corporations incapable of intent
Corporations are incapable of intent, hence they
cannot commit felonies that are punishable under
the Revised Penal Code. They cannot commit crimes
that are punishable under special laws because
crimes are personal in nature. In addition, the
penalty of imprisonment cannot be imposed.
However, the corporation may be dissolved for
violations of the Corporation Code (CC, Sec. 144).
Liability of a corporation in cases of crimes
GR: Since a corporation is a mere creation of legal
fiction, it cannot be held liable for crimes committed
by its officers; in such case the responsible officers
would be criminally liable (People v. Tan Boon Kong,
G.R. No. L-32066, March 15, 1930).
XPN: If the penalty of the crime is only fine or
forfeiture of license or franchise (Ching v Secretary
of Justice, supra).
RECOVERY OF MORAL DAMAGES
Recovery of moral damages
GR: A corporation is not entitled to moral damages
because it has no feelings, no emotions, no senses
(ABS-CBN Broadcasting Corp. v. CA, G.R. No. 128690
January 21, 1999).
XPNs:
1. The corporation may recover moral damages
under item 7 of Article 2219 of the New Civil
Code because said provision expressly
authorizes the recovery of moral damages in
cases of libel, slander, or any other form of
defamation.
NOTE: Article 2219(7) does not qualify
whether the injured party is a natural or
juridical person. Therefore, a corporation, as a
juridical person, can validly complain for libel
or any other form of defamation and claim for
moral damages (Filipinas Broadcasting
Network, Inc. v. AMEC-BCCM, G.R. No. 141994,
January 17, 2005).
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
realm (MERALCO v. T.E.A.M. Electronics Corp., et. al.,
G.R. No. 131723, December 13, 2007).
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NOTE: While the court may allow the grant of moral
damages to corporation, it is not automatically
granted; there must still be proof of the existence of
the factual basis of the damage and its causal
relation to the defendant’s acts. Moral damages is
designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the
wrongdoer (Crystal vs. BPI, G.R. No. 172428,
November 28, 2008)
Q: "Exposé" is a radio documentary program
hosted by Rima and Alegre. It is aired every
morning over DZRC-AM which is owned by FBNI.
One morning, Rima and Alegre exposed various
alleged complaints from students, teachers and
parents against AMEC and its administrators.
Claiming that the broadcasts were defamatory,
AMEC and Ago, as Dean of AMEC’s College of
Medicine, filed a complaint for damages against
FBNI, Rima and Alegre. As a defense, FBNI claims
that AMEC is not entitled to moral damages
because it is a corporation. Is AMEC is entitled to
moral damages?
A: YES. AMEC is entitled to moral damages. A
juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish
or moral shock. Nevertheless, AMEC’s claim for
moral damages falls under item 7 of Article 2219 of
the Civil Code. This provision expressly authorizes
the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain
for libel or any other form of defamation and claim
for moral damages (Filipinas Broadcasting Network,
Inc., v. AMEC-BCCM, supra).
Q: Meralco and T.E.A.M. Electronics Corporation
(TEC) were parties to two separate contracts for
the sale of electric energy. Meralco undertook to
supply TEC’s building known as DCIM with
electric power. One day, Meralco conducted a
surprise inspection of the electric meters
installed at the DCIM building. Two meters
were found to be allegedly tampered with and
did not register the actual power consumption
in the building. Meralco informed TEC of the
results of the inspection and demanded from the
latter the payment of its unregistered
consumption. TEC failed to pay the same.
For failure to pay, Meralco disconnected the
electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to
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do with the alleged tampering but the latter
refused to heed the demand. The ERB
immediately ordered the reconnection of the
service but Meralco did not immediately
comply. TEC filed a complaint for damages
against Meralco before the RTC. The RTC ruled
in favor of TEC and it awarded, among others,
moral damages. Is TEC entitled to moral
damages?
A: NO. TEC is not entitled to moral damages. TEC’s
claim was premised allegedly on the damage to its
goodwill and reputation. As a rule, a corporation is
not entitled to moral damages because, not being a
natural person, it cannot experience physical
suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral
shock. The only exception to this rule is when the
corporation has a reputation that is debased,
resulting in its humiliation in the business realm.
But in such a case, it is imperative for the claimant
to present proof to justify the award. It is essential
to prove the existence of the factual basis of the
damage and its causal relation to Meralco’s acts. In
the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC
has been debased as a result of Meralco’s acts
(MERALCO v. T.E.A.M. Electronics Corpet al., supra).
DOCTRINE OF PIERCING THE CORPORATE VEIL
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard, for
certain justifiable reasons, the notion that a
corporation has a personality separate and distinct
from the persons composing it.
Where it appears that business enterprises are
owned, conducted and controlled by the same
parties, law and equity will disregard the legal
fiction that these corporations are distinct entities
and shall treat them as one. This is in order to
protect the rights of third persons (Vicmar
Development Corporation v. Elarcos, et al., G.R. No.
202215, December 09, 2015, Del Castillo, J.).
In order to justify the piercing of the corporate veil,
allegation or proof of fraud or other public policy
considerations is needed (Hacienda Luisita
Incorporated vs. Presidential Agrarian Reform
Council, G.R. No. 171101, November 22, 2011).
NOTE: This is an exception to the Doctrine of
Separate Corporate Entity.
Effect of piercing the corporate veil
1. The corporation will be treated merely as an
association of persons -undertaking a business
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and the liability will attach directly to the
officers and stocholders.
2. Where there are two (2) corporations, they will
be merged into one, the one being merely
regarded as the instrumentality, agency,
conduit or adjunct of the other.
NOTE: Notwithstanding that the corporate veil has
been pierced, the corporation continues for other
legitimate objectives, the corporate character is not
necessarily abrogated (Reynoso IV vs. CA, G.R. Nos.
116124-25, November 22, 2000).
GROUNDS FOR APPLICATION OF DOCTRINE
It applies upon the following circumstances: (FACO)
a. if the fiction is used to perpetrate fraud (Fraud
Test)
b. if the complete control of one corporate entity
to another which perpetuated the wrong is the
proximate cause of the injury (Control Test)
c. if a certain corporation is only an adjunct or an
extension of the personality of the corporation
(Alter ego or Instrumentality Test)
d. if the fiction is pierced to make the stockholders
liable for the obligation of the corporation
(Objective Test)
Q: Rosario Lorezo received, upon inquiry, a
letter from the Social Security System, informing
her that she cannot avail of their retirement
benefits since per their record she has only paid
16 months. Aggrieved, Lorezo then filed her
Amended Petition before the SSC, alleging that
she was employed as laborer in. Cataywa
managed by Jose Marie Villanueva in 1970 but
was reported to the SSS only in 1978. She alleged
that SSS contributions were deducted from her
wages from 1970 to 1995, but not all were
remitted to the SSS which, subsequently, caused
the rejection of her claim. She also impleaded
Talisay Farms, Inc. by virtue of its Investment
Agreement with Mancy and Sons Enterprises.
She also prayed that the veil of corporate fiction
be pierced since she alleged that Mancy and
Sons Enterprises and Manuel and Jose Marie
Villanueva are one and the same. Should Mancy
and Sons Enterprises’ veil of corporate fiction be
pierced?
A: NO. The Court has expressed the language of
piercing doctrine when applied to alter ego cases, as
follows: Where the stock of a corporation is owned
by one person whereby the corporation functions
only for the benefit of such individual owner, the
corporation and the individual should be deemed
the same.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
This Court agrees with the petitioners that there is
no need to pierce the corporate veil. Lorezo failed to
substantiate her claim that Mancy and Sons
Enterprises, Inc. and Manuel and Jose Marie
Villanueva are one and the same. She based her
claim on the SSS form wherein Manuel Villanueva
appeared as employer. However, this does not
prove, in any way, that the corporation is used to
defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield
to confuse the legitimate issues, warranting that its
separate and distinct personality be set aside. Also,
it was not alleged nor proven that Mancy and Sons
Enterprises, Inc. functions only for the benefit of
Manuel Villanueva, thus, one cannot be an alter ego
of the other (Hacienda Cataywa/Manuel Villanueva,
et al. v. Rosario Lorezo, G.R. No. 179640, March 18,
2015).
Q: Mr. Pablo, a rich merchant in his early forties,
was a defendant in a lawful suit which could
subject him to substantial damages. A year
before the court rendered judgment, Pablo
sought his lawyer’s advice on how to plan his
estate to avoid taxes. He suggested that he
should form a corporation with himself, his wife,
and his children (all students and still
unemployed) as stockholders and then transfer
all his assets and liabilities to this corporation.
Mr. Pablo followed the recommendation of his
lawyer. 1 year later, the court rendered
judgment against Pablo and the plaintiff sought
to enforce this judgment. The sheriff, however,
could not locate any property in the name of
Pablo and therefore returned the writ of
execution unsatisfied. What remedy, if any, is
available to the plaintiff? (1994 Bar)
A: The plaintiff can avail himself of the doctrine of
piercing the veil of corporate fiction which can be
invoked when a corporation is formed or used in
avoiding a just obligation. While it is true that a
family corporation may be organized to pursue an
estate tax planning of which is not per se illegal or
unlawful (Delpher Trades Corp. v. IAC, G.R. No L-
69259, January 26, 1988). The factual settings,
however, indicate the existence of a lawful suit that
could subject Pablo to a substantial amount of
damages. It would thus be difficult for Pablo to
convincingly assert that the incorporation of the
family corporation was intended merely as a case of
“estate tax planning” (Tan Boon Bee v. Jarencio, G.R.
No. 41337, June 30, 1988).
Q: Romeo Morales was able to obtain a favorable
judgment for a sum of money against Kukan, Inc.
With the judgment attaining finality, the sheriff
levied on execution various personal properties
found at what was supposed to be Kukan’s office.
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Kukan International Corporation (KIC) filed a
third-party complaint, alleging that it was the
owner of the levied properties. Morales prayed
that the principle of piercing the veil of
corporate fiction be applied in order to satisfy
the judgment debt of Kukan. The RTC granted
the motion of Morales and declared KIC and
Kukan as one and the same corporation. The CA
affirmed the RTC. Did the RTC properly apply the
doctrine?
A: NO. The principle of piercing the veil of
corporate fiction, and the resulting treatment of
two related corporations as one and the same
juridical person with respect to a given transaction,
is basically applied only to determine established
liability; it is not available to confer on the court a
jurisdiction it has not acquired over a party not
impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the courts
process by piercing the veil of its corporate fiction.
In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its
property would infringe on its right to due process.
Aguedo Agbayani, a recognized authority on
Commercial Law, stated that piercing the veil of
corporate entity applies to determination of liability
not of jurisdiction because the doctrine of piercing
the veil of corporate fiction comes to play only
during the trial of the case after the court has
already acquired jurisdiction over the corporation.
Hence, before this doctrine can be applied, based
on the evidence presented, it is imperative that the
court must first have jurisdiction over the
corporation.
Two-fold Implication:
1. The court must first acquire jurisdiction over
the corporation or corporations involved
before its or their separate personalities are
disregarded; and
2. The doctrine of piercing the veil of corporate
entity can only be raised during a full-blown
trial over a cause of action duly commenced
involving parties duly brought under the
authority of the court by way of service of
summons or what passes as such service
(Kukan International Corp v. Reyes, G.R. No.
182729, September 29, 2010).
Q: Ma. Concepcion Lacsa was riding a Goldline
passenger bus owned and operated by Travel &
Tours Advisers, Inc. (TTAI) when the bus collided
with a passenger jeepney, which resulted to her
instant death. The Heirs of Concepcion instituted
a suit in the RTC for damages due to breach of
contract, with the complaint set against “Travel &
Tours Advisers, Inc. (Goldline)” and the bus driver.
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The RTC ruled in favor of the Heirs, holding TTAI
liable to pay the heirs damages and expenses. A
writ of execution was served upon TTAI and
Cheng, operator of the Goldline bus. Cheng failed
to settle the judgment, thus a tourist bus was
levied.
Gold Line filed a third-party claim, claiming that
the levied tourist bus be returned to it because it
was its owner and that it had not been made a
party to the case, and it was a corporation
entirely different from TTAI. Is Gold Line’s
contention correct?
A: NO. There is sufficient factual basis to find that
Goldline and TTAI were one and the same entity,
specifically: (a) documents submitted showing that
Cheng, who claimed to be the operator of TTAI,is also
the President/Manager and an incorporator of Gold
Line; and (b) Travel and Tours Advisers, Inc. had
been known in Sorsogon as Goldline (Gold Line Tours,
Inc. v. Heirs of Maria Concepcion Lacsa, G.R. No.
159108, June 18, 2012).
Q: Eric Livesey filed a complaint for illegal
dismissal with money claims against CBB
Philippines Strategic Property Services, Inc.
(CBB) and Paul Dwyer, its president. Livesey and
CBB entered into a compromise agreement
Unless and until the agreement is fully satisfied,
CBB shall not sell, alienate, or otherwise dispose
of all or substantially all of its assets or business;
suspend its business operations; substantially
change the nature of its business; and declare
bankruptcy or insolvency.
CBB failed to pay the rest of the amount as the
company ceased operations. Livesey moved for
the issuance of an alias writ of execution,
alleging that CBB and Keith Elliot have
organized another corporation, “Binswanger
Philippines, Inc.” He claimed that there was
evidence showing that CBB and Binswanger
Philippines, Inc. are one and the same
corporation, pointing out that CBB stands for
Chesterton Blumenauer Binswanger.
Is the doctrine of piercing the veil of corporate
fiction applicable?
A: YES. Shortly after Elliot forged the compromise
agreement with Livesey, CBB ceased operations.
There was an indubitable link between CBB’s
closure and Binswanger’s incorporation. CBB
ceased to exist only in name; it re–emerged — to
avoid payment by CBB of the last two installments
of its monetary obligation to Livesey, as well as its
other financial liabilities. A reasonable mind would
arrive at the conclusion that Binswanger is CBB’s
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alter ego or that CBB and Binswanger are one and
the same corporation. There are also indications of
badges of fraud in Binswanger’s incorporation. It
was a business strategy to evade CBB’s financial
liabilities, including its outstanding obligation to
Livesey (Livesey v. Binswanger Philippines, Inc. and
Keith Elliot, G.R. No. 177493, March 19, 2014).
NOTE: There appears to be a lack of conclusive
yardstick as to when the court may pierce the veil
of corporate fiction of a corporation which has not
been brought to its jurisdiction by summons,
voluntary appearance, or other recognized modes
of acquiring jurisdiction. To be safe, any bar
question should be answered based on similarity
with the facts of each case (Divina, 2014).
Circumstances which do not warrant the
piercing of the corporate veil
The mere fact that: (FiCoS)
1. A corporation owns Fifty (50%) of the capital
stock of another corporation, or the majority
ownership of the stocks of a corporation is not
per se a cause for piercing the veil.
2. Two corporations have Common directors or
same or single stockholder who has all or nearly
all of the capital stock of both corporations is
not in itself sufficient ground to disregard
separate corporate entities.
3. There is a Substantial identity of the
incorporators of the 2 corporations does not
necessarily imply fraud and does not warrant
piercing the corporate veil.
Q: Land Bank of the Philippines (LBP) extended
a series of credit accommodations to ECO using
the trust funds of PVTA. The proceeds of the
credit accommodations were received on behalf
of ECO by Emmanuel Oñate. Upon maturity of
the loans, ECO failed to pay the same. ECO then
submitted a Plan of Payment to LBP, however,
the latter rejected the same. LBP filed a
complaint for collection of sum of money against
ECO and Oñate. LBP contends that the
personalities of Oñate and of ECO should be
treated as one holding Oñate liable for the loans
incurred by ECO from Land Bank. Is Oñate
jointly and severally liable with ECO for the
loans incurred from LBP?
A: NO. Oñate should not be held jointly and
severally liable with ECO. A corporation, upon
coming into existence, is invested by law with a
personality separate and distinct from those
persons composing it as well as from any other legal
entity to which it may be related. By this attribute, a
stockholder may not, generally, be made to answer
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for acts or liabilities of the said corporation, and vice
versa. The mere fact that Oñate owned the majority
of the shares of ECO is not a ground to conclude that
Oñate and ECO are one and the same. Mere
ownership by a single stockholder of all or nearly all
of the capital stock of a corporation is not by itself
sufficient reason for disregarding the fiction of
separate corporate personalities. Neither is the fact
that the name “ECO” represents the first three
letters of Oñate’s name sufficient reason to pierce
the veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oñate. A
corporation may assume any name provided it is
lawful. There is nothing illegal in a corporation
acquiring the name or as in this case, the initials of
one of its shareholders (Land Bank ofthe Philippines
v. CA, et al., G.R. No. 127181, September 4, 2001).
TEST IN DETERMINING APPLICABILITY
The following are the tests in determining the
applicability of the doctrine of piercing the
corporate veil (ECAO)
1. When the corporation is used to defeat public
convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing
obligation (Equity Cases)
2. In fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend
a crime (Control Test)
3. In Alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or
business conduit of a person, or where the
corporation is so organized and controlled and
its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct
of another corporation (Sarona vs. NLRC, Royale
Security Agency, et al., G.R. No. 185280, January
18, 2012).
4. The Objective test where the end result in
piercing the veil of corporate fiction is to make
the stockholders liable for debts and
obligations of the Corporation not to make the
Corporation liable for the debts and obligations
of the stockholders (Umali v CA, G.R. No. 89561,
September 13, 1990).
Three-pronged test to determine the
application of the alter ego/ instrumentality
theory:
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 (Instrumentality or Control test);
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2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act
in contravention of plaintiff’s legal right (Fraud
test); and
3. The aforesaid control and breach of duty must
have proximately caused the injury or unjust
loss complained of (Harm test).
1. Instrumentality or Control Test
This test requires that the subsidiary be completely
under the control and domination of the parent. It
examines the parent corporation’s relationship with
the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its
affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation
such that its separate existence as a distinct
corporate entity will be ignored. It seeks to establish
whether the subsidiary corporation has no
autonomy and the parent corporation, though
acting through the subsidiary in form and
appearance, “is operating the business directly for
itself.
2. Fraud Test
This test requires that the parent corporation’s
conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that
harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental
unfairness.”
3. Harm Test
This test requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent, illegal
or otherwise unfair manner toward it, caused the
harm suffered. A causal connection between the
fraudulent conduct committed through the
instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it would have
been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and,
thereby, suffer damages.
NOTE: Piercing the corporate veil based on the alter
ego theory requires the concurrence of the three
elements – control(1), fraud or fundamental
unfairness(2), and harm or damage(3). The absence
of any of these elements prevents piercing the
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corporate veil (DBP v. Hydro Resources Contractors
Corp., G.R. Nos. 167603, 167561, & 167530, March 13,
2013).
Piercing the veil of corporate fiction on the basis
of equity
Equity cases applying the piercing doctrine are
what are termed the "dumping ground", where no
fraud or alter ego circumstances can be culled by the
Court to warrant piercing.
The main feature of equity cases is the need to
render justice in the situation at hand or to brush
aside merely technical defenses. Often, equity cases
of piercing appear in combination with other types
of piercing (Villanueva, 2010).
Specifically, the equity test can be applied when:
1. The corporate personality would be
inconsistent with the business purpose of the
legal fiction;
2. The piercing the corporate fiction is necessary
to achieve justice or equity for those who deal
in good faith with the corporation; or
3. When the use of the separate juridical
personality is used to confuse legitimate issues.
Indications that a subsidiary corporation is a
mere instrumentality of its parent corporation
1. The parent corporation owns all or most of the
capital stock of the subsidiary.
2. The parent and subsidiary corporations have
common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary.
7. The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation.
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is
described as a department or division of the
parent corporation, or its business or financial
responsibility is referred to as the parent
corporation’s own.
9. The parent corporation uses the property of the
subsidiary as its own.
10. The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation.
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11. The formal legal requirements of the subsidiary
are not observed (PNB v. Ritratto Group, G.R. No.
142616, July 31, 2001).
Piercing the Corporate Veil may Apply to
Natural Persons
1. When the Corporation is the Alter Ego of a
Natural Person. The piercing of the corporate veil
may apply to corporations as well as natural
persons involved with corporations. The "corporate
mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego
of a person or of another corporation."
2. Reverse Piercing of the Corporate Veil. From
American parlance of what is called reverse piercing
or reverse corporate piercing or piercing the
corporate veil "in reverse." As held in the U.S. Case,
C.F. Trust, Inc., v. First Flight Limited Partnership,
50 "in a traditional veil-piercing action, a court
disregards the existence of the corporate entity so a
claimant can reach the assets of a corporate insider.
In a reverse piercing action, however, the plaintiff
seeks to reach the assets of a corporation to satisfy
claims against a corporate insider." "Reverse-
piercing flows in the opposite direction (of
traditional corporate veil-piercing) and makes the
corporation liable for the debt of the shareholders."
It has two (2) types:
a. Outsider reverse piercing occurs when a party with
a claim against an individual or corporation
attempts to be repaid with assets of a corporation
owned or substantially controlled by the defendant.
b. Insider reverse piercing, the controlling members
will attempt to ignore the corporate fiction in order
to take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or
protection of personal assets. (IAM/Es vs. Litton and
Company Inc. December 13, 2017, G.R. No. 191525)
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's
decision, X Corporation was found to be without
assets. Thereafter, the plaintiffs filed an action
against its present and past stockholder, Y
Corporation, which owned substantially all of
the stocks of X corporation. The two
corporations have the same board of directors
and Y Corporation financed the operations of X
corporation. May Y Corporation be held liable
for the debts of X Corporation? Why? (2001 Bar)
A: YES. Y Corporation may be held liable for the
debts of X Corporation. The doctrine of piercing the
veil of corporation fiction applies to this case. The
two corporations have the same board of directors
and Y Corporation owned substantially all of the
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stocks of X Corporation, which facts justify the
conclusion that the latter is merely an extension of
the personality of the former, and that the former
controls the policies of the latter. Added to this is the
fact that Y Corporation controls the finances of X
Corporation which is merely an adjunct, business
conduit or alter ego of Y Corporation (CIR v. Norton
& Harrison Company, G.R. No. L‐17618, August 31,
1964).
INCORPORATION
AND ORGANIZATION
Incorporation
It is the performance of conditions, acts, deeds, and
writings by incorporators, and the official acts,
certification or records, which give the corporation
its existence.
Steps in the creation of a corporation
1. Promotion
2. Incorporation (Sec. 10, CC)
3. Formal organization and commencement of
business operations (Sec. 22, CC)
Components of a corporation (DUMP-ISCO)
1. Corporators – Those who compose a
corporation, whether as stockholders or
members
2. Incorporators –Those mentioned in the Articles
of Incorporation as originally forming and
composing the corporation and who are
signatories thereof.
3. Directors and trustees – The Board of Directors
is the governing body in a stock corporation
while the Board of Trustees is the governing
body in a non-stock corporation.
4. Corporate Officers – Officers who are identified
as such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the
corporation.
5. Stockholders – Owners of shares of stock in a
stock corporation.
6. Members – Corporators of a non-stock
corporation. They are not owners of shares of
stocks, and their membership depends on
terms provided in the articles of incorporation
or by-laws (CC, Sec. 91,CC).
7. Promoter – A person who, acting alone or with
others, takes initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor
(Securites and Regulation Code [SRC], Sec. 3.10).
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8. Subscribers – persons who have agreed to take
and pay for original, unissued shares of a
corporation formed or to be formed.
9. Underwriter – a person who guarantees on a
firm commitment and/or declared best effort
basis the distribution and sale of securities of
any kind by another (Securities and Regulation
Code [SRC], Sec. 3.15).
Kinds of Underwriting Agreement
a. English – the underwriter sells what the
corporation cannot sell.
b. Firm Commitment – the underwriter purchases
outright the securities and then resells the
same.
Best Efforts – the underwriter merely sells for
commission.
NUMBER AND QUALIFICATIONS OF
INCORPORATORS
Number and the qualifications of incorporators
in a stock corporation (NILaRO)
1. GR: Natural person
XPN: Under the Rural Banks Act of 1992,
incorporated cooperatives are allowed to be
incorporators of rural banks.
Note: Under the Revised Corporation Code,
partnership, association or corporation, singly or
jointly with others may now form a corporation
2. GR: Incorporators must not be less than 5 but
not more than 15
XPNS: (SEC)
1. Corporation sole
2. Educational institutions
3. Close corporations
Note: The Revised Corporation Code is silent as to
the minimum number of incorporators. However, it
retained the maximum number of incorporators
which must not be more than 15.
3. An incorporator must be of Legal age
4. Majority of the incorporators must be
Residents of the Philippines (2006 Bar)
5. Each must own or subscribe to at least one
share (Sec.10, CC)
Note:
Q: What is the minimum and maximum number
of incorporators required to incorporate a stock
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corporation? Is this also the same minimum and
maximum number of directors required in a
stock corporation? (2006, 2010 Bar)
A: Any number of natural persons not less than five
(5) but not more than fifteen (15) may form a
private corporation (CC, Section 10). Likewise, the
number of directors must not be less than five (5)
nor more than fifteen (15) as indicated in the AOI
(CC, Sec. 14).
number of directors shall not be more than 15 while
the number of trustees may be more than 15
Q: Must all incorporators and directors be
residents of the Philippines? (2006 Bar)
A: NO. The Corporation Code only provides that
majority of incorporators and directors of a
corporation must be residents of the Philippines
(CC, Secs. 10 and 23).

Note: No required minimum number of

incorporators under the RCC. Under the RCC, the

Corporator vs. Incorporator

BASIS INCORPORATOR CORPORATOR

Those stockholders or members
Those who compose a corporation,
mentioned in the AOI as originally
Who are they whether as stockholders or as
forming and composing the corporation
members.
and who are signatories thereof.
Signatory of the AOI A signatory of the AOI May or may not be signatory of the AOI
Ceases to be a corporator by sale of his
shares in case of stock corporation.
Effect upon the sale of Does not cease to be an incorporator
his shares upon sale of his shares
In case of non-stock corporation, the
corporator ceases to be a member.
GR: 5 to 15 GR: No limit

XPN: Corporation sole – only 1 XPN: Close corporations – not more

Number
incorporator than a specified number of persons,
ofincorporators/
usually not exceeding 20 (CC, Sec. 96)
corproator
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks. corporator.
GR: Filipino citizenship is not a requirement.
Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be citizens.

Incorporator vs. Subscriber (2012 Bar)

BASIS INCORPORATORS SUBSCRIBER

Those stockholders or members They are persons who have agreed to
mentioned in the AOI as originally take and pay for original, unissued
Who are they
forming and composing the shares of a corporation formed or to be
corporation. formed.
Signatory of the AOI A signatory of the AOI May or may not be signatory of the AOI
GR: 5 to 15 GR: No limit

XPN: Corporation sole – only 1 XPN: Close corporations – not more

Number of
incorporator than a specified number of persons,
incorporators/
usually not exceeding 20 (CC, Sec. 96)
subscriber
NOTE: An incorporator must be a
natural person, except in case of rural NOTE: A juridical person may be a
banks. corporator

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GR: Filipino citizenship is not a requirement.
Filipino Citizenship
XPN: When engaged in a business which is partly or wholly nationalized where
majority must be Filipino citizens.
Residence Majority of the incorporators must be Residency
requirement residents of the Philippines.
NOTE: Non-residents may be incorporators
because the law only requires that the majority of
incorporators be residents of the Philippines.
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing in
Quezon City, Philippines. Z is a resident alien
residing in Makati City. GGG Corporation is a
domestic corporation – 40% owned by
foreigners and 60% owned by Filipinos, with T
as authorized representative. CCC Corporation
is a foreign corporation registered with the
Philippine Securities and Exchange
Commission. KKK Corporation is a domestic
corporation (100%) Filipino owned. S is a
Filipino, 16 years of age, and the daughter of Y.
Who can be incorporators? Who can be
subscribers?
A: X, Y, and Z can be incorporators. Sec. 10 of the CC
merely requires majority of the incorporators to be
residents (not necessarily citizens) of the
Philippines. Further, said incorporators must be
natural persons, of legal age and must own or
subscribe to at least 1 share.
Meanwhile, X, Y, Z, GGG, CCC, KKK can be
subscribers. Residency requirement is immaterial in
subscription contracts. However, the citizenship
requirement is material in subscription contracts
if the corporation is engaged in nationalized
activities requiring at least majority Filipino
citizenship as a requirement.
CORPORATE NAME; LIMITATION ON USE OF
CORPORATE NAME
1. No corporate name may be allowed by the SEC
if the proposed name is identical or deceptively
or confusingly similar to that of any existing
corporation or to any other name already
protected by law (CC, Sec. 18).
2. The proposed name is patently deceptive,
confusing or contrary to existing laws (Sec. 18,
CC).
Note: Sec. 17 of the Revised Corporation Code
provides that no corporate name shall be allowed by
the Commission if it is not distinguishable from
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requirement is not
applicable.
that already reserved or registered for the use of
another corporation, or if such name is already
protected by law, or when its use is contrary to
existing law, rules and regulations.
A name is not distinguishable even if it contains
one or more of the following:
(a) The word “corporation”, “company”,
“incorporated”,“limited”, “limited liability”,
or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions,
contractions, prepositions, abbreviations,
different tenses, spacing, or number of the
same word or phrase.
3. If the name applied for is similar to the name of
a registered firm, the applicant shall at least
contain one or more distinctive words to the
proposed name to remove the similarity or
differentiate it from the registered name.
However, the addition of these distinctive
words shall not be allowed if the registered
name is coined or unique unless the board of
directors of the subject corporation gives its
consent to the applied name (De Leon, 2010,
citing SEC Memo, Cir. No. 5, Series of 2008).
4. The corporate name shall contain the word
“Corporation” or its abbreviation “Corp.” or
Incorporated”, or “Inc.”.“The corporate name of
a foundation shall use the word “Foundation”.
This is to distinguish the corporation from a
partnership and other business organizations
(SEC Memo. Circ. No. 5, Series of 2008).
5. A person’s full name or surname may be used in
a corporate name:
a. If he is a stockholder of the corporation and
has consented to such use;
b. If the person is already deceased, the
consent shall be given by his estate;
c. The Commission may require a registrant
to explain to its satisfaction the reason for
the use of a person’s name;
d. The meaning of initials used in a name shall
be stated by the registration the articles of
incorporation in a separate document
signed by an incorporator or director (SEC
Memo. Circ. No. 5, Series of 2008).
6. The name of a dissolved firm shall not be
allowed to be used by other firms within 3 years
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after the approval of the dissolution of the
corporation by SEC, unless allowed by the last
stockholders representing at least majority of
the outstanding capital stock of the dissolved
firm (SEC Memo. Circ. 14, Series of 2000).
7. For as long as a corporation is existing
regardless of whether or not it is in operation,
its corporate name cannot be used by any other
group or corporation (SEC Opinion, Sept. 2,
1993).
8. The practice of a profession regulated by
special law which among others provides for
the permissible use of the profession’s name in
a firm, partnership or association shall govern
the use of the name e.g. “Engineer” or
“Engineering”. (RA 1582)
9. Unless otherwise authorized by the Commision,
the following words and phrases can only be
used by the entities mentioned:
a. “Investment or Capital” –
investment houses, investment or
holding company
b. “Asset/Fund/Financial/Financial
Management or Adviser” –
licensed by BSP to hold investment
management activities
c. “National, Bureau, Commision,
State and other words acronyms
that have gained wide acceptance
in the Philippines” – by entities
performing governmental
functions.
Note: These names are already
preserved for governmental use.
XPNs: IF there is a Vested Right,
(i.e. National Bookstore) or IF
Authorized by the Commission.
d. Association, Organization – non
stock corporations.
e. “Stock/Futures/Derivatives
Exchange or Broker, Plans,
Securities/Stock Clearing Agency
or any similar words or phrases –
by entities organized as an
exchange, broker dealer,
commodity futures broker,
clearing agency, or pre-need
company under RA 8799 or
Securities and Regulation Code.
(SEC Memo Circ. No. 21, Dec. 4,
2013)
NOTE: Priority of adoption determines the right to
the exclusive use of a corporate name with freedom
from infringement. Further, to determine whether a
given corporate name is “identical” or “confusingly
or deceptively similar” with another entity’s
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corporate name, the corporate names must be
evaluated in their entirety (Lyceum of the
Philippines v. CA, G.R. No. 101897, March 5, 1993).
Q: Refractories Corporation of the Philippines
(RCP) is a corporation engaged in the business
of manufacturing, producing, selling, exporting
and otherwise dealing in any and all refractory
bricks, its by-products and derivatives. On June
22, 1977, it registered its corporate and
business name with the Bureau of Domestic
Trade. On the other hand, Synclaire
Manufacturing Corporation amended its AOI on
August 23, 1985 to change its corporate name to
Industrial Refractories Corp. of the Philippines
(IRCP). Both companies are the only local
suppliers of monolithic gunning mix.
Discovering that IRCP was using such corporate
name, RCP filed with SEC a petition to compel
IRCP to change its corporate name on the
ground that its corporate name is confusingly
similar with that of RCP’s such that the public
may be confused or deceived into believing that
they are one and the same corporation. Is
Industrial Refractories Corporation of the
Philippines confusingly similar with
Refractories Corporation of the Philippines?
A: YES. To fall within the prohibition of the law, two
requisites must be proven, to wit: (1) that the
complainant corporation acquired a prior right over
the use of such corporate name; and (2) the
proposed name is either: (a) identical, or (b)
deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law; or (c) patently deceptive,
confusing or contrary to existing law. In this case,
RCP was incorporated on October 13, 1976 and
since then has been using the corporate name
“Refractories Corp. of the Philippines”. Meanwhile,
IRCP was incorporated on August 23, 1979
originally under the name “Synclaire Manufacturing
Corporation”. It only started using the name
“Industrial Refractories Corp. of the Philippines”
when it amended its Articles of Incorporation on
August 23, 1985, or nine (9) years after respondent
RCP started using its name. Thus, being the prior
registrant, respondent RCP has acquired the right to
use the word “Refractories” as part of its corporate
name (Industrial Refractories Corporation of the
Philippines v. CA, et al., G.R. No. 122174, October 3,
2002).
Doctrine of Secondary Meaning
It is the doctrine which states that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
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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 (Philippine
Nut Industry, Inc. vs. Standard Brands. Inc. G.R. No.L-
23035, July 31, 1975).
The doctrine of secondary meaning requires that
the word or phrase used in the corporate name has
been for such length of time with such exclusivity as
to have associated or identified the corporation in
the mind of the general public (or at least that
portion of the general public to do with the
corporation’s market) (Lyceum of the Philippines vs.
CA, supra).
NOTE: The application of this Trademark Law
doctrine has been extended to corporate names
since the right to use a corporate name to the
exclusion of others is based upon the same principle
which underlies the right to use a particular
trademark or trade name (De Leon, 2010).
A corporation that changes its corporate name is
not considered as a new corporation
A corporation that changes its corporate name is
not considered as a new corporation. It is the same
corporation with a different name, and its character
is in no respect changed (Republic Planters Bank v.
CA, G.R. No. 93073, December 21, 1992).
Q: San Miguel brought a complaint for unfair
labor practice, illegal dismissal, non-payment of
salaries and moral damages against Zuellig
Freight and Cargo Systems, formerly known as
Zeta. He alleged that he had been a
checker/customs representative of Zeta since
December 16, 1985; that in January 1994, he and
other employees of Zeta were informed that
Zeta would cease operations, and that all
affected employees, including him, would be
separated.
San Miguel contended that the amendments of
the articles of incorporation of Zeta were for the
purpose of changing the corporate name,
broadening the primary functions, and
increasing the capital stock; and that such
amendments could not mean that Zeta had been
thereby dissolved. Did the change of corporate
name result in the dissolution of the
corporation?
A: NO. The amendments of the articles of
incorporation of Zeta to change the corporate name
to Zuellig Freight and Cargo Systems, Inc. did not
produce the dissolution of the former as a
corporation. For sure, the Corporation Code defined
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and delineated the different modes of dissolving a
corporation, and amendment of the articles of
incorporation was not one of such modes. The effect
of the change of name was not a change of the
corporate being. In short, Zeta and Zuellig remained
one and the same corporation. The change of name
did not give Zuelligthe license to terminate
employees of Zeta like San Miguel without just or
authorized cause. The situation was not similar to
that of an enterprise buying the business of another
company where the purchasing company had no
obligation to rehire terminated employees of the
latter. Zuellig, despite its new name, was the mere
continuation of Zeta's corporate being, and still held
the obligation to honor all of Zeta's obligations, one
of which was to respect San Miguel's security of
tenure. The dismissal of San Miguel from
employment on the pretext that Zuellig, being a
different corporation, had no obligation to accept
him as its employee was illegal and ineffectual
(Zuellig Freight and Cargo Systems vs. NLRC, et al.,
G.R. No. 157900, July 22, 2013).
Q: P.C. Javier and Sons Services, Inc., (PC) applied
with First Summa Savings and Mortgage Bank,
later on renamed as PAIC Savings and Mortgage
Bank (The Bank) for a loan accommodation
under the Industrial Guarantee Loan Fund
(IGLF). Upon maturity, PC failed to pay, hence,
the Bank initiated an extrajudicial foreclosure
of the real estate mortgage. The instant
complaint was filed to forestall the extrajudicial
foreclosure sale of a piece of land mortgaged by
PC in favor of PAIC Savings and Mortgage Bank,
Inc. PC argues that they are legally justified to
withhold their amortized payments to the bank
until such time they would have been properly
notified of the change in the corporate
name. They claim that they have never received
any formal notice of the alleged change of
corporate name of First Summa Savings and
Mortgage Bank to PAIC Savings & Mortgage
Bank, Inc. Is the Bank required to notify PC
Javier & Sons, Inc., of the change in its corporate
name?
A: NO. Supreme Court held that the bank is not
required to notify PC of its change of name as it is
not required under the Corporation Code and
Banking Laws. Therefore, the Court cannot impose
on a bank that changes its corporate name to notify
a debtor of such change absent any law, circular or
regulation requiring it. Such act would be judicial
legislation. The formal notification is, therefore,
discretionary on the bank and remains to be a mere
internal policy that banks may or may not adopt.
The corporation, upon such change in its name, is in
no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with
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a different name, and its character is in no respect
changed (P.C. Javier & Sons, Inc., v. CA et al., G.R. No.
129552, June 29, 2005).
CORPORATE TERM
Term of corporate existence
GR: The period stated in the AOI, provided it does
not exceed 50 years.
XPN: Unless sooner dissolved or unless said period
is extended (CC, Sec. 11)
NOTE: Extension may be made for periods not
exceeding 50 years in any single instance by an
amendment of the articles of incorporation.
However, extension must be made within 5 years
before the expiry date of the corporate term, unless
there are justifiable reasons for an earlier extension
as may be determined by the SEC (CC, Sec. 11).
NOTE: The Revised Corporation Code introduced
substantial changes with respect to the term of
corporate existence. Sec. 11 provides that a
corporation shall have perpetual existence unless
its Articles of Incorporation provides otherwise.
Also, the Code mandates that corporations with
certificates of incorporation issued prior to this
code and which continue to exist shall likewise have
perpetual existence unless the corporation elects to
retain its specific corporate term.
Under the RCC, if a corporation wishes to change its
corporate term, it may amend its AOI at least 3 years
prior to the expiration of its term. Previously, such
change should be made at least 5 years prior to the
expiration.
If the term has already expired, the corporation may
now ask the SEC to revive their corporate existence,
which option was not present in the old code. Upon
approval by the SEC, it will then issue a certificate of
revival giving it perpetual existence, unless it
requests for a limited term.
XPN: No revival is allowed for companies under the
supervision of other government agencies, such as
banks, insurance and trust companies.
XPN to XPN: Unless, Revival is first approved by the
appropriate government agency.
Extension must also comply with procedural
requirements for amendment of AOI.
Doctrine of Relation or Relating Back Doctrine
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GR: The filing and recording of a certificate of
extension after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the corporation.
XPNs: The doctrine of relation applies if the failure
to file the application for extension within the term
of the corporation is due to:
1. The neglect of the SEC officer with whom the
certificate is required to be filed; or
2. A wrongful refusal on his part to receive it.
(Aquino, 2006)
Q: The term of GGG Corporation in accordance
with its Articles of Incorporation ended last
January 30, 2012. The term was not extended.
What will happen to the corporation? (2012
Bar)
A: The corporation ceases to exist and is dissolved
ipso facto upon the expiration of the period fixed in
the original AOI, in the absence of compliance with
the legal requisites of extension of period (PNB vs.
CFI, G.R. No. 63201, May 27, 1992).
MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENTS
Capital stock requirements
GR: There is no minimum authorized capital stock
as long as the paid-up capital is not less than
P5,000.00.
XPN: As provided by special law
Minimum stock subscription and paid-up
capital requirements
At least 25% of the authorized capital stock as
stated in the AOI must be subscribed at the time of
incorporation, and at least 25% of the total
subscription must be paid upon subscription (Sec
13, CC).
NOTE: It is not required that each subscriber pay
25% of each subscribed share. It is only required
that at least 25% of the total subscribed capital
must be paid.
Note: Sec. 13 has no counterpart in the RCC
Paid-up capital
Paid-up capital forms part of the authorized capital
stock of the corporation, subscribed and then
actually paid for. The assets transferred and the
loans extended to a corporation should not be
considered in computing the paid-up capital of the
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corporation (MISCI-NACUSIP Local Chapter v. NWPC,
G.R. No. 125198, March 3, 1997).
NOTE: The term “capital” in Section 11, Article XII
of the Constitution refers only to shares of stock that
can vote in the election of directors. To construe
broadly the term “capital” as the total outstanding
capital stock, including both common and non-
voting preferred shares, grossly contravenes the
intent and letter of the Constitution. A broad
definition unjustifiably disregards who owns the all-
important voting stock, which necessarily equates
to control of the public utility (Wilson Gamboa vs.
Finance Secretary Margarito Teves, et. al., G.R. No.
176579, October 9, 2012).
Time when the unpaid subscription is payable
The balance or the unpaid subscription shall be
payable:
1. On a date or dates fixed in the contract of
subscription without need of call; or
2. In the absence of a fixed date or dates, upon call
for payment by the BOD (Sec. 13, CC).
ARTICLES OF INCORPORATION (AOI)
NATURE AND FUNCTION OF ARTICLES
Articles of Incorporation
The Articles of Incorporation (AOI) is one that
defines the charter of the corporation and the
contractual relationships between the State and the
corporation, the stockholders and the State, and
between the corporation and its stockholders
(Government of the Philippine Islands v. Manila
Railroad Co., G.R. No. L-30646, January 30, 1929).
Three-fold nature of AOI
An AOI, which stands as the corporate charter, is a
contract of three-fold nature because it is a contract
between:
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.
CONTENTS
All corporations organized under the Code shall file
with the SEC an AOI in any of the official languages
duly signed and acknowledged by all of the
incorporators, containing substantially the
following matters, except as otherwise prescribed
by the Code or by special law: (NaP- PlaTINum-
ASONO)
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1. NAme of corporation;
2. Purpose/s, indicating the primary and
secondary purposes (Purpose Clause);
3. PLAce of principal office;
4. Term of existence;
5. Names, nationalities and residences of
Incorporators;
6. NUMber of directors or trustees, which shall
not be less than 5 nor more than 15, except for
corporation sole;
Note: Under the Revised Corporation Code, the
number of directors shall not be more than
fifteen (15) while the number of trustees which
may be more than fifteen (15) and the term of
existence is generally perpetual;
7. Names, nationalities, and residences of the
persons who shall Act as directors or trustees
until the first regular ones are elected and
qualified;
8. If a Stock corporation, the amount of its
authorized capital stock, number of shares and
in case the shares are par value shares, the par
value of each share;
9. Names, nationalities, number of shares, and the
amounts subscribed and paid by each of the
Original subscribers which shall not be less
than 25% of authorized capital stock;
10. If Non-stock, the amount of capital, the names,
residences, and amount paid by each
contributor, which shall not be less than 25% of
total subscription; name of treasurer elected by
subscribers; and
11. Other matters as are not inconsistent with law
and which the incorporators may deem
necessary and convenient (Sec. 14, CC).
Note: An arbitration agreement may be provided in
the articles of incorporation pursuant to Section
181 of the RCC.
Incorporator may delegate the signing of the AOI
An incorporator may delegate to an attorney-in-fact
the signing of the AOI in a special power of attorney
to such effect. However, the acknowledgment
required under Sec. 15 of the CC must reflect this
fact (De Leon, 2010, citing SEC Opinion, Dec. 26,
1972).
Reason for the statement of the purpose clause
in the AOI
The purpose clause determines whether the acts
performed by the corporation are authorized or
beyond its powers. Acts beyond the corporation’s
powers are called ultra vires acts.
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Rules in the statement of the purpose clause The SEC’s discretion can only be exercised on
matters of form and does not extend to the merits of
1. If there is more than one stated purpose, specify an application for incorporation.
which the is main or primary purpose and
which is or are the secondary or subsidiary NOTE: If the SEC refuses to file the AOI, which
purpose/s. substantially complied with the statute, the
remedy of the applicant is to file a petition for
NOTE: This specification is important in the mandamus.
application of the prohibition under Sec. 42 CC
which states that the corporation is prohibited XPN: However, SEC has authority to pass upon the
from investing corporate funds “for any lawfulness of the object or purpose of the
purpose other than the primary purpose for corporation as expressed in the AOI. Such
which it was organized” unless such investment determination is an exercise of judgment, that is,
is approved by both majority of the BOD or BOT judicial function on a question of law.
and ratified by the stockholders representing at
least 2/3 of the outstanding capital stock or by NOTE: If the SEC errs in the determination of
at least 2/3 of the members in the case of a non- the lawfulness of the purpose of the corporation
stock corporation. stated in the AOI and refuses to file the said AOI,
its decision is subject to review and correction
2. The purposes must be capable of being lawfully by the court (Asuncion vs. De Yriarte, GR No.
combined. 9321, Sepember 24, 1914).
3. A non-stock corporation may not include a
purpose which would change or contradict its AMENDMENT
nature as such (Sec. 14[2], CC).
Limitations in the amendment of AOI (LAV-
Requirements of the SEC as regards the address ProCSA)
specification of the corporation in the AOI
1. The amendment must be for legitimate
SEC requires that the applicant corporation must purposes and must not be contrary to other
state in its AOI the: provisions of the CC and special laws
1. Specific address of their principal office, which 2. Approved by majority of BOD/BOT
shall include, if feasible, the street name, 3. Vote or written assent of stockholders
barangay, city or municipality; and representing 2/3 of the outstanding capital
2. Specific residence address of each incorporator, stock or 2/3 of members
stockholder, director, trustee, or partner. 4. The original and amended articles together
shall contain all provisions required by law to
NOTE: SEC likewise prohibits the use of be set out in the AOI. Such articles, as amended,
“Metro Manila” as address of the principal office. shall be indicated by underscoring the change/s
made
Residence of the corporation 5. Certification under oath by corporate secretary
and a majority of the BOD/BOT stating the fact
The corporation is “in a metaphysical sense a that said amendment/s have been duly
resident of the place where its principal office is approved by the required vote of the
located as stated in the AOI” (Golden Arches Dev’t stockholders or members, shall be submitted to
Corp. vs. St. Francis Square Holdings, Inc., GR 183843, the SEC
January 19, 2011). 6. Must be approved by SEC (Sec. 16, CC)
This ruling regarding the residence of the 7. Must be accompanied by a favorable
corporation holds true even though the corporation recommendation of the appropriate
has closed its office therein and relocated to another government agency in cases of:
place (Hyatt Elevators and Escalators Corp. vs. a. Banks
Goldstar Elevators Phils., Inc., GR 161026, Oct. 24, b. Banking and quasi-banking institutions
2005). c. Building and loan associations
d. Trust companies and other financial
Duty of the SEC to file the AOI and to issue a intermediaries
certificate of incorporation e. Insurance companies
f. Public utilities
GR: The duty of the SEC to file the AOI and to issue a g. Educational institutions
certificate of incorporation is ministerial provided h. Other corporations governed by special
that the AOI substantially comply with the statute. laws (Sec. 17 [2], CC)

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Time when the amendment of the AOI takes
effect
The amendment of the AOI takes effect either:
1. Upon approval by the SEC, that is, upon
issuance of amended certificate of
incorporation; or
2. From the date of filing with the SEC:
a. If not acted upon within 6 months from the
date of filing; and
b. For a cause not attributable to the
corporation.
NOTE: The provision on automatic approval in Sec.
16 does not apply to the dissolution of the
corporations in light of Sec. 120, CC (SEC Opinion,
March 30, 1982).
Conversion of a stock corporation into a non-
stock corporation (2001 Bar)
A stock corporation may be converted into a non-
stock corporation by mere amendment, provided all
the requirements are complied with. Its rights and
liabilities will remain (CC, Sec. 16).
NOTE: A non-stock corporation cannot be
converted into a stock corporation through mere
amendment of its Articles of Incorporation. This
would violate Section 87 CC, which prohibits
distribution of income as dividends to members.
Giving the members shares, is tantamount to
distribution of its assets or income (SEC Opinion,
March 20, 1995).
Under Section 122 of the Corporation Code, the non-
stock corporation must be dissolved first.
NON-AMENDABLE ITEMS
Non-amendable items in the AOI
Those matters referring to accomplished facts,
except to correct mistakes, such as:
1. Names of incorporators;
2. Names of original subscribers to the capital
stock of the corporation and their
subscribed and paid up capital;
3. Names of the original directors;
4. Treasurer elected by the original
subscribers;
5. Members who contributed to the initial
capital of the non‐stock corporation; or
6. Witnesses to and acknowledgment with
AOI.
Grounds for the rejection or disapproval of the
AOI or amendment thereto
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1. If such is not substantially in accordance with
the form prescribed by the CC.
2. The purpose/s of the corporation is/are
patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations.
3. The treasurer’s affidavit concerning the amount
of capital stock subscribed and/or paid is false.
4. The required percentage of ownership of the
capital stock to be owned by Filipino citizens
has not been complied with (CC, Sec. 17).
NOTE: The above grounds are not exclusive.
Other grounds as provided by PD No. 902‐A are:
1. Fraud in procuring its certificate of
incorporation;
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 with, or defiance or a
lawful order of the SEC restraining the
commission of acts which would amount to
a grave violation of its franchise;
4. Continuous inoperation for a period of at
least five (5) years after commencing the
transaction of its business (CC, Sec. 22);
5. Failure to file the by‐laws within the
required period; or
6. Failure to file required reports.
No automatic rejection of the AOI or any
amendment thereto
There is no automatic rejection of the AOI or any
amendment thereto. The SEC shall give the
incorporators a reasonable time within which to
correct or modify the objectionable portions of the
AOI or amendment (Sec. 17[1], CC).
Effect of non-use of corporate charter and
continuous inoperation of a corporation
1. Failure to organize and commence business
within 2 years from incorporation – its corporate
powers ceases and the corporation shall be
deemed dissolved.
Note: The 2 year period is now modified by the RCC
Under such law, the failure of a corporation to
organize and commence its business should be
within five (5) years from the date of its
incorporation. In effect, its certificate of
incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period.
2. Continuous inoperation for at least 5 years –
ground for the suspension or revocation of
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corporate franchise or certificate
incorporation (Sec. 22, CC).
Note: Sec. 21 of the Revised Corporation Code
provides that continuous inoperation for at least 5
years allows the Commission, after due notice and
hearing, to place the corporation under delinquent
status
NOTE: The above shall not be applicable if it is due
to causes beyond the control of the corporation as
determined by SEC.
Suspension or revocation of the certificate of
registration due to failure to operate or
continuous inoperation is not automatic
Under PD No. 902-A, SEC should afford due process
or proper notice and hearing before the suspension
or revocation of certificate of registration. The
suspension or revocation of the certificate of
registration due to failure to operate or continuous
inoperation is not automatic.
REGISTRATION AND ISSUANCE OF
CERTIFICATE OF INCORPORATION
Basic requirements for the registration and
issuance of a certificate of incorporation of a
stock corporation
1. Name verification slip
2. AOI and by-laws
3. Treasurer’s affidavit
Note; The articles of incorporation and applications
for amendments thereto may be filed with the
Commission in the form of an electronic document,
in accordance with the Commission’s rules and
regulations on electronic filing.
Contents of a treasurer’s affidavit
That at least 25% of the authorized capital stock of
the corporation has been subscribed, and at least
25% of the total subscription has been fully paid in
actual cash and/or property; such paid-up capital
being not less than P5,000 (Sec. 14, 15, CC).
Q: You are asked to incorporate a new company
to be called FSB Savings & Mortgage Bank, Inc.
List the documents that you must submit to the
Securities and Exchange Commission(SEC) to
obtain a Certificate of Incorporation for FSB
Savings & Mortgage Bank, Inc. (2002 Bar)
A: The documents to be submitted for the issuance
of a certificate of incorporation in favor of FSB
Savings & Mortgage Bank, Inc. are the following:
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of a. Articles of Incorporation
b. Treasurer’s Affidavit
c. Certificate of Authority by the Monetary Board
of BSP
d. Verification slip from the records of the SEC
whether or not the proposed name has already
been registered under a different entity
e. An undertaking stating the proposed name
shall be changed in case another entity has been
registered under the proposed name
f. Registration sheet
g. Bank certificate of deposit covering the paid-up
capital
h. Letter containing authorization to the SEC or
Monetary Board or any of its duly authorized
representative to inspect bank records
concerning the paid-up capital
i. Favorable endorsement from proper
government agency in case of special
corporations
Doctrine of corporate entity
GR: A corporation comes into existence upon the
issuance of the certificate of incorporation by the
SEC under its official seal. Then and only then will it
acquire a juridical personality (CC, Sec. 19).
XPN: In case of a corporation sole, the corporation
sole commences existence upon the filing of the
articles of incorporation.
ADOPTION OF BY-LAWS
By-laws are rules and regulations or private laws
enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and of
its stockholders or members and directors and
officers in relation thereto and among themselves in
their relation to it (Valley Golf & Country Club, Inc. vs.
Vda. De Caram, GR 158805, April 16, 2009).
By-laws are relatively permanent and continuing
rules of action adopted by the corporation for its for
its own government and that of individuals
composing of it and those having the direction,
management, and control of its affairs, in whole or
in part, in the management and control of its
affairs and activities (China Banking Corporation v.
CA, G.R. No. 117604, March 26, 1997).
NATURE AND FUNCTIONS OF BY-LAWS
The corporate power to adopt by-laws is inherent in
every corporation. To give emphasis to such
necessary corporate incident, said power is
expressed in Sec. 36(5) and Sec. 46 of the CC.
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The by-laws supplement the AOI. The function of
by-laws is to define the rights and duties of
corporate officers and directors or trustees, and of
stockholders or members towards the corporation
and among themselves with reference to the
management of corporate affairs and to regulate
transaction of the business of the corporation in a
particular way (De Leon, 2010).
A corporation sole is not governed by by-laws
A corporation sole is not governed by by-laws. It is
instead governed by Rules, Regulations and
Discipline of its religious denomination which
already contain the provisions embodied in the by-
laws of ordinary corporations.
REQUISITES OF VALID BY-LAWS
(2000, 2001 BAR)
The following are the requisites for the validity of
by-laws: (CoMorO-RAG)
1. Must be consistent with the COrporation Code,
other pertinent laws and regulations;
2. Must not be contrary to MORals and public
policy;
3. Must not impair Obligations and contracts or
property rights of stockholders;
4. Must be Reasonable;
5. Must be consistent with the charter or AOI; and
NOTE: In case of conflict between the by-laws
and the AOI, the AOI prevails because the by-
laws are intended merely to supplement the
former.
6. Must be of General application and not directed
against a particular individual.
Contents of by-laws
1. Time, place and manner of calling and
conducting regular or special meetings of
directors or trustees.
2. Time and manner of calling and conducting
regular or special meetings of the
stockholder or members.
3. The required quorum in meeting 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 qualification, duties and compensation
of directors or trustees, officers and
employees.
6. Time for holding the annual election of
directors or trustees and the mode or
manner of giving notice thereof.
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7. Manner of election or appointment and the
term of office of all officers other than
directors or trustees.
8. Penalties for violation of the by-laws.
9. In case of stock corporations, the manner of
issuing certificates.
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business and affairs for the
promotion of good governance and anti-
graft and corruption measures. (CC, Sec.
47).
Note: There are additional contents mentioned
under the Revised Corporation Code:
1. The modes by which a stockholder, member,
director, or trustee may attend meetings and cast
their votes;
2. The directors’ or trustees’ qualifications, duties
and responsibilities, the guidelines for setting the
compensation of directors or trustees and officers,
and the maximum number of other board
representations that an independent director or
trustee may have which shall, in no case, be more
than the number prescribed by the Commission;
Also, an arbitration agreement may be provided in
the bylaws pursuant to Section 181 of this Code.
Adoption of the Original By-laws
GR: It must be filed within one (1) month from
notice of issuance of certificate of incorporation.
XPN: By- laws may be adopted and filed prior to the
incorporation. Such shall be approved and signed by
all the incorporators and submitted to the SEC
together with the AOI.
Note: The one month period to adopt by-laws was
deleted in RCC.
Procedures in adopting by-laws
The by-laws may be adopted before or after
incorporation. In all cases, the by-laws shall be
effective only upon the issuance by the SEC of a
certification that the by-laws are not inconsistent
with the AOI.
1. Pre - incorporation – It shall be approved
and signed by all the incorporators and
submitted to the SEC, together with AOI.
2. Post – incorporation:
a. Vote of the majority of the stockholders
representing the outstanding capital stock
or members;
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b. By-laws shall be signed by the succeeding rendition of services. Despite
stockholders or members voting for them repeated demands, PMI failed to pay and hence,
c. It shall be kept in the principal office of the Galvan filed a complaint seeking payment for
corporation and subject to the inspection of salaries earned. PMI sought to avoid liability on
the stockholders or members during office the ground that under PMI’s by-laws only the
hours. Chairman is authorized to sign any contract.
d. Copy thereof, duly certified by the BOD or Hence, according to PMI, the employment
BOT countersigned by the secretary of the contract of Galman, which was not signed by the
corporation, shall be filed with the SEC and Chairman, is not binding upon PMI.
shall be attached with the original AOI (Sec.
46, CC). Is the employment contract invalid because it
violated PMI’s by-laws stating that the Chairman
BINDING EFFECTS of the BOD should be the signatory thereon?

The following are the binding effects of by-laws: A: NO. The employment contract is not invalidated
by the failure of the Chairman to sign such. Since by-
1. As to members/ stockholders, officers, laws operate merely as internal rules among the
trustees/ directors and corporation stockholders, they cannot affect or prejudice third
They are bound by and must comply with it. persons who deal with the corporation, unless they
They are presumed to know the provisions of have knowledge of the same. No proof appears on
the by-laws. record that Galvan ever knew anything about the
provisions of said by-laws (PMI Colleges v. NLRC, et
2. As to third persons al., supra)
GR: They are not bound.
Effect of non-filing of the by-laws within the
XPN: They have knowledge or notice of the by- required period
laws at the time the contract was executed
(China Banking Corp. v. CA, G.R. No. 117604, Failure to submit the by-laws within 30 days from
March 26, 1997). incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
Q: PMI Colleges (PMI) an educational institution, revocation of its charter after proper notice and
it hiredGalvan as contractual hearing, under Section 6(I) of PD 902-A. The
instructor. Initially, Galvan and other corporation is, at the very least, a de facto
instructors were compensated for services corporation whose existence may not be collaterally
rendered. However, for unknown reasons, attacked (Sawadjaan v. CA, G.R. No. 142284, June 8,
Galvan stopped receiving payment for the 2005).

Articles of incorporation vs. By-laws

BASIS AOI BY-LAWS

Condition subsequent; its absence merely
Requirement for Condition precedent in the
furnishes a ground for the revocation of the
corporate existence acquisition of corporate existence
franchise
For the internal government of the
Essentially a contract between the:
corporation but has the force of a contract
1. corporation and SH/M;
Essence between the:
2. SH/M inter se; and
1. corporation and the SH/M and
3. corporation and the State;
2. between the SH/M inter se;
May be executed after incorporation. Sec. 46
allows the filing of the by-laws
Time of execution Executed before incorporation
simultaneously with the Articles of
Incorporation
Amended by a majority of the
May be amended by a majority vote of the
directors/ trustees and stockholders
Manner of BOD and majority vote of outstanding
representing 2/3 of the outstanding
amendment capital stock or a majority of the member in
capital stock, or 2/3 of the members
non-stock corporation
in case of non-stock corporations

UNIVERSITY OF SANTO TOMAS

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The Corporation Code
AMENDMENT OR REVISION
Ways of amending, repealing or adopting new
by-laws:
1. Amendment may be made by stockholders
together with the Board – by majority vote
of directors and owners of at least a
majority of the outstanding capital
stock/members; or
2. By the board only after due delegation by the
stockholders owning 2/3 of the outstanding
capital stock/members. Provided, that such
power delegated to the board shall be
considered as revoked whenever stockholders
owning at least majority of the outstanding
capital stock or members, shall vote at a regular
or special meeting (CC, Sec. 48)
CORPORATE POWERS
1. Express powers – granted by law, the
Corporation Code, and its Articles of
Incorporation or Charter, and administrative
regulations;
2. Inherent/incidental powers – not expressly
stated but are deemed to be within the capacity
of corporate entities;
3. Implied/necessary powers – exists as a
necessary consequence of the exercise of the
express powers of the corporation or the
pursuit of its purposes as provided for in the
Charter.
Q: The board of directors of Lopez Realty, Inc.
passed a resolution providing gratuity pay for
its employees in a special meeting called for the
purpose. At the time, however, Asuncion Lopez
Gonzales (a member of the board), was still out
of the country. Asuncion assailed the validity of
the said board resolution contending that the
same was ultra vires on the ground that she was
not duly notified of the special meeting in which
it was passed. Is the disputed board resolution
ultra vires as urged by Asuncion?
A: NO. The assailed resolution covers a subject
which concerns the benefit and welfare of the
company’s employees. To stress, providing gratuity
pay for its employees is one of the express powers of
the corporation under the Corporation Code, hence,
Asuncion cannot invoke the doctrine of ultra vires to
avoid any liability arising from the issuance of the
subject resolution (Lopez Realty, Inc. v. Fontecha,
G.R. No. 76801, August 11, 1995).
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Q: Sea Lion International Port Terminal
Services, Inc. filed a complaint for prohibition
and mandamus against National Power
Corporation (NPC) and Philippine Ports
Authority (PPA), wherein Sea Lion alleged that
NPC had acted in bad faith and with grave abuse
of discretion in not renewing its contract for
stevedoring services for coal-handling
operations at NPC's plant, and in taking over its
stevedoring services.NPC seeks to annul the
order of the RTC in issuing a writ of preliminary
injunction which enjoined NPC from further
undertaking stevedoring and arrastre services
in its pier and directing it either to enter into a
contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Does
NPC have the power to undertake stevedoring
and arrastre services in its pier?
A: YES. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national
policy of total electrification of the country, the NPC
was created and empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from
time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to
accomplish said purpose. If that act is one which is
lawful in itself and not otherwise prohibited, and is
done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those
ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the
corporation's charter powers. The rule is that a
corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter,
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation. The stevedoring services
which involve the unloading of the coal shipments
into the NPC pier for its eventual conveyance to the
power plant are incidental and indispensable to the
operation of the plant (NPC, v. Vera, et al., G.R. No.
83558, February 17, 1989).
Exercise of corporate powers
The Corporation Code of the Philippines vests in the
board of directors the exercise of the corporate
powers of a (stock) corporation, save in those
instances where the Code requires stockholders’
approval for certain specific acts (Great Asian Sales
Center Corp. v CA, G.R. No. 105774, April 25, 2002).
Note: The CC vestes in the Board of Trustees the
exercise of the corporate powers of a Non-stock
Corporation.
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Q: Eliodoro C. Cruz was the former president of
Filport. During the general stockholders’
meeting, he wrote a letter to the corporation’s
Board of Directors questioning the board’s
creation of certain positions and their
corresponding monthly renumeration. Because
his letter was not heeded favorably, Cruz,
purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he
describes as a derivative suit against the the
incumbent members of Filport’s BOD, for
alleged acts of mismanagement detrimental to
the interest of the corporation and its
shareholders at large. Did Filport’s BOD act
within its powers in creating the executive
committee and the positions of AVPs for
Corporate Planning, Operations, Finance and
Administration, and those of the Special
Assistants to the President and the Board
Chairman, each with corresponding
remuneration?
A: YES. The governing body of a corporation is its
board of directors. Section 23 of the Corporation
Code explicitly provides that unless otherwise
provided therein, the corporate powers of all
corporations formed under the Code shall be
exercised, all business conducted and all property of
the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of
some powers expressly granted by law to
stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in
case of non-stock corporations) has the sole
authority to determine policies, enter into contracts,
and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant
provisions of law. Verily, the authority of the board
of directors is restricted to the management of the
regular business affairs of the corporation, unless
more extensive power is expressly conferred. In the
present case, the board’s creation of the subject
positions was in accordance with the regular
business operations of Filport as it is authorized to
do so by the corporation’s by-laws, pursuant to the
Corporation Code (Filipinas Port Services, Inc., v. Go,
et al., G.R. No. 161886, March 16, 2007).
Three levels of control in the corporate
hierarchy
1. The board of directors - responsible for
corporate policies and the general
management of the business affairs of the
corporation;
2. The officers of the corporation - execution of the
policies laid down by the board, but in practice
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often have wide latitude in determining the
course of business operations;
3. The stockholders - have the residual power
over fundamental corporate changes, like
amendments of the articles of incorporation
(City Bank NA vs. Chua, G.R. No. 102300, March
17, 1993).
GENERAL POWERS, THEORY OF
GENERAL CAPACITY
Theory of General Capacity
The general powers of a corporation also called
Theory of General Capacity are the following:
(SuSuCo-ABS-PEDRO)
1. To Sue and be sued;
2. Of Succession (To have perpetual existence
unless the certificate of incorporation provides
otherwise;);
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and deal
with real and personal property, securities and
bonds subject to the Constitution and existing
laws;
8. To Enter into merger or consolidation, (To
enter into a partnership, joint venture, merger,
consolidation, or any other commercial
agreement with natural and juridical persons);
9. To make reasonable Donations for public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes, provided that no
donation is given to any:
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other
plans for the benefit of its directors, trustees,
officers and employees – basis of which is the
Labor code; and
11. To exercise Other powers essential or
necessary to carry out its purposes (CC, Sec. 36)
Commencement of the power to sue and be sued
The power to sue and be sued commences upon
issuance by SEC of Certificate of Incorporation.
The power of the corporation to sue and be sued
is exercised by the board of directors.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
The power of the corporation to sue and be sued is
exercised by the board of directors. The physical
acts of the corporation, like the signing of
documents, can be performed only by natural
persons duly authorized for the purpose by
corporate bylaws or by a specific act of the board.
Absent the said board resolution, a petition may not
be given due course (Ligaya Esguerra, et al. vs
Holcim Philippines, Inc., G.R. No. 182571, September
2, 2013).
If the real party in interest is a corporate body, an
officer of the corporation can sign the verification
against forum shopping so long as he has been duly
authorized by a resolution of its board of directors.
The court did not commit grave abuse of discretion
in dismissing the petition for lack of authority of the
officer who signed the certification of forum
shopping in representation of corporation (San
Miguel Bukid Homeowners Association, Inc. v. City of
Mandaluyong, et al, G.R. No. 153653, October 2, 2009;
Republic of the Philippines v. Coalbrine International
Philippines, et al, G.R. No. 161838, April 7, 2010).
GR: The verification and certification against forum
shopping must be signed on behalf of the
corporation pursuant to a valid board resolution.
XPN: The following officers may sign even in the
absence of a board resolution:
a. Chairperson of the Board of Directors;
b. President;
c. General Manager;
d. Personnel Officer; or
e. Employment Specialist in labor case.
These officers are in the position to verify the
truthfulness and correctness of the allegations in
the petition (Mid Pasig Land and Development
Corporation v. Tablante, G.R. No. 162924, February 4,
2010; Skyway Traffic Management and Security
Division Workers Organization v. PNCC Skyway Corp.,
G.R. No. 171231, February 17, 2010).
An unregistered corporation has no right to sue
or be sued for want of corporate personality.
“Lideco Corporation” had no personality to
intervene since it had not been duly registered as a
coporation. If petitioner “Laureano Investment &
Devlopment Corporation” legally and truly wanted
to intervene, it should have used its corporate name
as the law requires and not another name which it
had not registered (Laureano Investment &
Development Corp. v. CA., GR No. 100468, May 6,
1997).
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Limitations of the corporation in dealing with
property
1. It must be in the furtherance of the purpose for
which the corporation was organized.
2. Constitutional limitations – cannot acquire
public lands except by lease.
With regard to private land, 60% of the
corporation must be owned by the Filipinos,
same with the acquisition of a condominium
unit.
NOTE: No law disqualifies a person from
purchasing shares in a landholding corporation
even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the corporation
from owning land (JG Summit Holdings, Inc. vs. CA,
G.R. No. 124293, January 31, 2005).
3. Special law – subject to the provisions of the
Bulk Sales Law and law against monopoly,
illegal combination or restraint of trade.
Requisites for a valid donation (RPAI)
1. Donation must be Reasonable.
2. Must be for valid Purposes including public
welfare, hospital, charitable, cultural, scientific,
civic or similar purposes.
3. Must not be an Aid in any:
a. Political party;
b. Candidate; or
c. Partisan political activity.
4. Donation must bear a reasonable relation to the
corporation’s Interest and not be so remote and
fanciful.
Corporation as surety or guarantor
GR: A corporation cannot act as a surety or
guarantor because it will be contrary to the primary
purpose for which the corporation was created.
XPN: Such guaranty may be given in the
accomplishment of any object for which the
corporation was created, or when the particular
transaction is reasonably necessary or proper in the
conduct of its business.
Implied powers of a corporation
A corporation is not restricted to the exercise of
powers expressly conferred upon it by its charter
but has the power to do what is reasonably
necessary or proper to promote the interest or
welfare of the corporation (NAPOCOR v. Vera, G.R.
No. 83558, February 27, 1989).
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SPECIFIC POWERS, THEORY OF SPECIFIC
CAPACITY
Theory of Specific Capacity
The specific powers of a corporation, also called
Theory of Specific Capacity, are the following:
(ESB-PA-SIDE-A)
1. Power to Extend or shorten corporate term (CC,
Sec. 37)
2. Increase or decrease corporate Stock (CC, Sec.
38)
Note: Now, Section 36 RCC, in addition to the
provision, ALLOWANCE OF SENDING OF
NOTICE OF MEETING REGARDING PROPOSED
ACTION THRU ELECTRONIC MEANS SUCH AS
ELECTRONIC DATA MESSAGES IF ALLOWED
BY THE BY-LAWS IN ACCORDANCE WITH E-
COMMERCE ACT)
3. Incur, create, or increase Bonded indebtedness
(CC, Sec. 38)
4. Deny Pre-emptive right (CC, Sec. 39)
5. Sell, dispose, lease, encumber all or
substantially all of corporate Assets (CC, Sec. 40)
6. Purchase or acquire Shares (CC, Sec. 41)
7. Invest corporate funds in another corporation
or business for other purpose other than
primary purpose (CC, Sec. 42)
8. Declare Dividends out of unrestricted retained
earnings (CC, Sec. 43)
9. Enter into management contract with another
corporation (not with an individual or a
partnership – within general powers) whereby
one corporation undertakes to manage all or
substantially all of the business of the other
corporation for a period not longer than five (5)
years for any one term (CC, Sec. 44)
10. Amend Articles of Incorporation (CC, Sec. 16)
Authority to enter into contract (1996 Bar)
The Board of Directors or Trustees must act
together as a body in order to bind the corporation
by their acts (Yao KaSinTrading v. CA, et. al. G.R. No.
53820, June 15, 1992).
Corporate powers which are exercised by the
BOD and stockholders jointly (ASIA-FuSE)
1. Amendments to by-laws
2. Extending or Shortening the corporate term
3. Increase or decrease of capital stock
4. The sale or other disposition of All or
substantially all of the corporate assets
5. Investment of corporate funds in another
corporation or business or for any other
purpose;
6. Issuance of stock dividends
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7. Entering into management contract
POWER TO EXTEND OR SHORTEN
CORPORATE TERM
Procedural requirements in extending/
shortening corporate term
1. Majority vote of the BOD or BOT
2. Ratification by 2/3 of the SH representing
outstanding capital stock or by at least 2/3 of
the members in case of non-stock corporation.
3. Written notice of the proposed action and of the
time and place of the meeting shall be
addressed to each stockholder or member at his
place of residence as shown on the books of the
corporation and deposited to the addressee in
the post office with postage prepaid, or served
personally or when allowed in the bylaws or
done with the consent of the stockholder, sent
electronically in accordance with the rules and
regulations of the Commission on the use of
electronic data messages.
4. Copy of the amended AOI shall be submitted to
the SEC for its approval;
5. In case of Special Corporation, a favorable
recommendation of appropriate government
agency (CC, Sec. 37)
6. The extension must be done during the lifetime
of the corporation not earlier than 5 years prior
to the expiry date unless exempted. The
extension must not exceed 50 years (CC, Sec 16).
NOTE: After the term had expired without
extension, the corporation is deemed ipso facto
dissolved. The remedy of the stockholders is
reincorporation. Any dissenting stockholder may
exercise his appraisal right in case of shortening or
extending corporate term (CC, Sec. 37). (THERE IS A
NEW PROVISION REGARDING THE REVIVAL OF
THE CORPORATION)
Q: T Corp. has a corporate term of 20 years
under its Articles of Incorporation or from June
1, 1980 to June 1, 2000. On June 1, 1991 it
amended its AOI to extend its life by 15 years
from June 1, 1980 to June 1, 2015. On June 1,
2011, however, T Corp decided to shorten its
term by 1 year or until June 1, 2014. Both the
1991 and 2011 amendments were approved by
majority vote of its Board of Directors and
ratified in a special meeting by its stockholders
representing at least 2/3 of its outstanding
capital stock. The SEC, however, disapproved
the 2011 amendment on the ground that it
cannot be made earlier than 5 years prior to the
expiration date of the corporate term, which is
June 1, 2014. Is this SEC disapproval correct?
(2011 Bar)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
A: NO. The 5-year rule on amendment of corporate
term applies only to extension, not to shortening, of
term.
POWER TO INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS
Procedural requirements in increasing or
decreasing capital stock
1. Majority vote of the BOD
2. Ratification by stockholders representing 2/3
of the outstanding capital stock
3. Written notice of the proposed increase or
diminution of the capital stock and of the time
and place of the stockholder’s meeting at which
the proposed increase or diminution of the
capital stock must be addressed to each
stockholder at his place of residence as shown
on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally or through
electronic means recognized in the
corporation’s bylaws and/or the Commission’s
rules as a valid mode for service of notices.
4. A certificate in duplicate must be signed by a
majority vote of the directors of the corporation
and countersigned by the
chairman(chairperson) and the secretary of the
stockholder’s meeting, setting forth:
a. That the foregoing requirements have been
complied with;
b. The amount of increase or diminution of
the capital stock;
c. If an increase of the capital stock, the
amount of capital stock or number of
shares of no par stock actually subscribed,
the names, nationalities and residences of
the persons subscribing, the amount of
capital stock or number of no par stock
subscribed by each, and the amount paid by
each on his subscription in cash or
property, or the amount of capital stock or
number of shares of no par stock allotted to
each stockholder if such increase is for the
purpose of making effective stock dividend
authorized (and the amount paid by each
on the subscription in cash or property, or
the amount of capital stock or number of
shares of no-par stock allotted to each
stockholder if such increase is for the
purpose of making effective stock dividend
therefor authorized);
d. The amount of stock represented at the
meeting; and
e. The vote authorizing the increase or
diminution of the capital stock, or the
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incurring, creating or increasing of any
bonded indebtedness.
NOTE: The increase or decrease in the capital stock
or the incurring, creating or increasing bonded
indebtedness shall require prior approval of the SEC.
Prior to the approval of the SEC of the increase in
the authorized capital stock, such payments cannot
yet be deemed part of the corporation’s paid-up
capital, technically speaking, because its capital
stock has not yet been legally increased. Such
payments constitute deposits on future
subscriptions, money which the corporation will
hold in trust for the subscribers until it files a
petition to increase its capitalization and a
certificate of filing of increase of capital stock is
approved and issued by the SEC (Central Textile
Mills, Inc. v. NWPC, et al., GR No. 104102, August 7,
1996).
Additional requirement with respect to increase
of capital stock – Treasurer’s Affidavit
The application to be filed with the SEC shall be
accompanied by the sworn statement of the
treasurer of the corporation, showing that at least
25% of the increase in the capital stock was
subscribed and 25% of the said amount has been
paid either in actual cash to the corporation or that
there has been transferred to the corporation
property the valuation of which is equal to 25% of
the subscription.
NOTE: A corporation is not prohibited from
increasing its authorized capital stock even if the
same has not yet been fully subscribed. Once an
increase in authorized capital stock is effected, it
may be necessarily accompanied by an actual
increase in the assets and additional subscriptions
in order to comply with the 25% subscription
requirement. However, if such increase is for the
purpose of effecting a stock dividend previously
authorized, then additional subscriptions are NOT
urgent.
Reason: The actual capital is increased by
accumulated profits and such profits are distributed
to the stockholders in the form of stock dividends,
the capital stock is increased, for the profits are
reinvested in the corporation by transferring the
same from surplus account to a capital account. The
amount corresponding to the stock dividends
declared may be used to cover the required 25%
subscription to increase the authorized capital stock
and, if sufficient, will obviate the necessity of taking
in new subscription (De Leon, supra).
Basis of the required 25% subscription
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Mercantile Law
The 25% subscription shall be based on the
additional amount by which the capital stock
increased and not on the total capital stock as
increased.
NOTE: Treasurer’s affidavit is required in
increasing capital stock, NOT in decreasing capital
stock.
Additional requirement with respect to the
decrease of capital stock
In case of decrease in capital stock, the same must
not prejudice the right of the creditors.
Ways of increasing or decreasing the capital
stock
By increasing or decreasing the:
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the
number of shares;
3. Number of shares and increasing or decreasing
the par value.
NOTE: The distribution stated above is not
mandatory, notwithstanding the authority granted
by the CC for the same under Sec. 122, last par.
Over-issue of shares is not allowed
An issue of stock by a corporation in excess of the
amount prescribed or limited by its AOI is ultra vires
and the stock so issued is void even in the hands of
a bona fide purchaser for value.
An over-issued stock is a spurious stock (De Leon,
2010).
NOTE: Over-issue of stock does not avoid the
original issue
There is no over-issue in the case of shares, which
were surrendered and new shares issued in their
stead. The new issue in such case merely takes the
place of the shares surrendered.
Effects of an attempted unauthorized increase of
capital stock

NOTE: In decreasing the capital stock, resorting to
reduction of number of shares may also be done
through:
1. Redeeming redeemable shares (CC, Sec. 8);
2. Purchasing of own shares (CC, Sec. 41);
3. Cancelling or retiring the shares, including the
treasury shares (CC, Sec. 9);
4. The corporation may accept a surrender of
shares and give the holders in exchange
therefor a proportionate amount of its assets,
provided no rights of creditors are involved;
5. Issue bonds for that purpose;
6. Exchange another class of stock for that retired;
7. Exchange the corporation’s outstanding shares
for a smaller number of shares; or
8. Cancelling shares which have not yet been
issued (De Leon, 2010).
Q: Can there be a distribution of surplus on
reduction?
A: It depends whether there is an impairment of
capital.
1. If there is no impairment of capital - the surplus
may be equitably distributed by the directors or
so much thereof as may not be required in
carrying on the business for the best interests
of the stockholders: Provided the rights of
creditors will not be affected nor the capital
impaired.
2. If there is reduction to meet an impairment –
there will be no distribution.
An attempted unauthorized increase of capital stock
amounts to an over-issue and such stock is,
therefore, absolutely void and cannot be validated
by application of the doctrine of estoppel.
Thus, the following are the effects of such
unauthorized increase:
1. Subscriptions for such stock are likewise void
both on the ground of illegality and for want of
consideration;
2. Subscribers for or purchasers of such stock
acquire none of the rights of stockholders;
3. Subscribers for or purchasers of such shares do
not become liable to creditors of the
corporation or on a winding up as stockholders
for unpaid subscriptions, and are not subject to
a statutory liability to creditors imposed upon
stockholders; and
4. Subscribers for or purchasers of such shares
from the corporation may recover from it,
money paid to it under their subscription or
purchase as upon a failure of consideration, or
breach of warranty for the existence of the thing
sold, unless they are precluded from such relief
as parties in pari delicto.
The board of directors may issue additional
issuances of shares of stock without approval of
the stockholders.
A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue stocks is
lodged with the Board of Directors and no
stockholder’s meeting is required to consider it

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because additional issuance of stock (unlike
increase in capital stock) does not need approval of
the stockholders. What is only required is the board
resolution approving the additional issuance of the
shares. The corporation shall also file the necessary
application with the SEC to exempt these from the
registration requirements under the SRC (Majority
Stockholders of Ruby Industrial Corp v. Lim &
MinorityStockholders of Ruby Industrial Corp, supra).
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special
stockholders' meeting:
1. Resolution increasing the authorized capital
stock of PPI; and
2. Resolution authorizing the Board of
Directors to issue, for cash payment, the new
shares from the proposed capital stock
increase in favor of outside investors who
are non‐stockholders.
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter
was Jimmy Morato who owned 1% of the stock.
a. Are the resolutions binding on the
corporation and its stockholders including
Jimmy Morato, the dissenting stockholder?
b. What remedies, if any, are available to
Morato? (1998 Bar)
A:
a. NO. The resolutions are not binding on the
corporation and its stockholders including
Jimmy Morato. While these resolutions were
approved by the stockholders, the directors'
approval, which is required by law in such case,
does not exist.
b. Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken
by the Board of Directors thereunder, null and
void.
Evidence of the corporation’s indebtedness
When a corporation borrows money, its
indebtedness may be evidenced by notes or bonds
as its primary security (De Leon, 2010).
Difference between a note and a bond
NOTE BOND
Amount borrowed is Amount is large and
small and it is obtained from a owned by the stockholder (Share-a-like basis).
borrowed in a single number of people and
sum, or from a few
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persons, or for a short extends over a period
time. of years.
Bonded indebtedness
It is a long-term indebtedness secured by real or
personal property (corporate assets).
NOTE: The requirements for the power to incur,
create or increase bonded indebtedness is also the
same with the power to increase or decrease capital
stock.
Registration of the bonds issued by the
corporation
Bonds issued by a corporation shall be registered
with the SEC which shall have the authority to
determine the sufficiency of the terms thereof (CC,
Sec. 38).
Stockholders’ approval is not required for all
borrowings of the corporation
Not all borrowings of the corporation need
stockholders’ approval. Only bonded indebtedness
requires such approval.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right
It is the preferential right of shareholders to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings
(CC, Sec. 39). (now sec. 38)
NOTE: The stockholder must exercise his pre-
emptive right within the time fixed in the resolution
authorizing the increase of capital stock.
Purpose of pre-emptive right
The purpose of pre-emptive right is to enable the
shareholder to retain his proportionate control in
the corporation and to retain his equity in the
surplus.
Exercise of pre-emptive right
Pre-emptive right must be exercised within the
period stated in the AOI or the By-Laws. When the
AOI and the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
exercise the right.
NOTE: Pre-emptive right can only be exercised to
the same class of shares issued or disposed with that
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Pre-emptive right is available on the re-issuance
of treasury shares
When a corporation reacquires its own shares
which thereby become treasury shares, all
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when pre-
emptive right does not exist.
Pre-emptive right may be waived
The corporation can deny pre-emptive right if the
AOI or any amendment thereto denies such right
(Sec. 39, CC).
NOTE: A stockholder whose pre-emptive right is
violated may maintain an action to compel the
corporation to give him that right. If the denial is by
amendment to the AOI, he may exercise his
appraisal right under Sec. 81(1).
Instances when pre-emptive right is not
available

1. Preemptive right may be waived by the stockholder. 1. Shares to be issued to comply with laws
However, the waiver should be given individually requiring stock offering or minimum stock
by the stockholder concerned or by another by way ownership by the public.
of Special Power of Attorney. Being a personal right, 2. Shares issued in good faith with the approval of
the waiver cannot be waived by the corporation the stockholders representing 2/3 of the
itself through a stockholders’ resolution (SEC outstanding capital stock in exchange for
Opinion, Dec. 12, 1994). property needed for corporate purposes.
2. 3. Shares issued in payment of previously
3. A stockholder cannot be forced to waive the right contracted debts.
even if the majority of the stockholders opt to waive 4. In case the right is denied in the AOI.
it (SEC Opinion No. 08-08, March 31, 2008). 5. Waiver of the right by the stockholder.

NOTE: Pre-emptive right may be waived impliedly The validity of issuance of additional shares may
as when the stockholder fails to exercise his pre- be questioned if done in breach of trust by the
emptive right after being notified and given an controlling stockholders notwithstanding the
opportunity to avail of such right. non-existence of the pre-emptive right.

Transferability of pre-emptive right of a Even if pre-emptive right does not exist either
stockholder because the issue comes within the exceptions in
Sec. 39 of the CC or because it is denied in the AOI,
The pre-emptive right of a stockholder is an issue of shares may still be objectionable if the
transferable unless there is an express restriction in directors acted in breach of trust and their primary
the AOI. purpose is to perpetuate or shift control of the
corporation or to “freeze out” the minority interest.
Q: X Corporation has already issued the 1000 The issuance of unissued shares out of the original
originally authorized shares of the corporation authorized capital stock pursuant to a rehabilitation
so that its Board of Directors and stockholders plan the propriety or validity of which was on
wish to increase X's authorized capital stock. question by the minority stockholders and
After complying with the requirements of the subsequently disapproved by the Supreme Court
law on increase of capital stock, X issued an amounts to unlawful dilution of the minority
additional 1000 shares of the same value. shareholdings (Majority Stockholders of Ruby
Assume that stockholder A presently holds 200 Industrial Corp. vs. Miguel Lim and Minority
out of the 1000 original shares. Would A have a Stockholders of Ruby Industrial Corp., G.R. Nos.
pre‐emptive right to 200 of the new issue of 165887 & 165929, June 6, 2011, in Divina, 2014).
1000 shares? Why?
Pre-emptive right vs. Right of first refusal
A: YES, A would have a pre‐emptive right to 200 of
the new issue of 1000 shares. A is a stockholder of BASIS RIGHT OF
PRE-EMPTIVE
record holding 200 shares in X Corporation. FIRST
RIGHT
According to the Corporation Code, each REFUSAL
stockholder has the pre‐emptive right to all issues Right to
of shares made by the corporation in proportion to Right to
subscribe to all
the number of shares he holds on record in the purchase
issuance or
corporation. Description shares of a
dispositions of
stockholder.
shares of the
Denial by the corporation of pre-emptive right corporation

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even to the as shown on the books of the corporation and
subsequent sale deposited to the addressee in the post office
of treasury with postage prepaid, or served personally
stocks. (ALLOWANCE OF ELECTRONIC NOTICE IN
ACCORDANCE WITH E-COMMERCE AND
WHEN ALLOWED BY THE BY-LAWS)
Pertains to Pertains to
To what unsubscribed the sale of the NOTE: The sale of the assets shall be subject to the
does it portion of the stocks by provisions of existing laws on illegal combinations
pertain authorized another and monopolies.
capital stock. stockholder
Right Further, in case of non-stock corporations, where
Against Right exercised
exercised there are no members with voting rights, the vote of
who is it against the
against a co- at least a majority of the trustees in office will be
exercised corporation.
stockholder. sufficient authorization for the corporation to enter
Can only be into any transaction authorized by this section (Sec.
May be
exercised 40, CC).
exercised even
Effect of the when so
when there is no
absence of provided in Instances when the corporation may forego the
express
express the AOI, by- ratification by stockholders / members:
provision in the
provision laws and
AOI or
in the AOI printed in the 1. If sale is necessary in the usual and regular
amendment
stock course of business;
thereto.
certificate. 2. If the proceeds of the sale or other disposition
Does not of such property and assets are to be
Treasury It includes include appropriated for the conduct of the remaining
shares treasury shares. treasury business; or
shares 3. If the transaction does not cover all or
substantially all of the assets.
POWER TO SELL OR DISPOSE OF CORPORATE
ASSETS (SLEMPAD) Remedy of a stockholder who disagrees with the
plan of SLEMPAD of all or substantially all of
Substantially all of corporate assets corporate assets

There is a sale, lease, exchange, mortgage, pledge,
and any other disposition (SLEMPAD) of
substantially all of corporate asset if in the
SLEMPAD thereof, the corporation would be
rendered:
Any dissenting stockholder shall have the option to
exercise his appraisal right.
Abandonment of the plan for SLEMPAD even
after the vote of the stockholders or members

1. Incapable of continuing the business; or
2. Incapable of accomplishing the purpose for
which it was incorporated (Sec 40, CC). (now
Sec, 39)
Note: This is subject to the provisions of Republic
Act No. 10667, otherwise known as the “Philippine
Competition Act.”
Procedural requirements for SLEMPAD of all or
substantially all of corporate assets
The BOD, in its discretion, may abandon the plan for
SLEMPAD even after such authorization or approval
by the stockholders, subject to the rights of third
parties under any contract relating thereto, without
further action or approval by the stockholders or
members (Sec. 40, CC).
Effect of sale of all or substantially all of assets of
one corporation to another corporation (1996,
2005 Bar)

1. Majority vote of the BOD or BOT
2. Ratification by stockholders representing at
least 2/3 of the outstanding capital stock or by
at least 2/3 of the members in case of non-stock
corporation
3. Written notice of the proposed action and of the
time and place of the meeting addressed to each
stockholder or member at his place of residence
GR: The corporation who acquired all or
substantially all of the assets of the selling
corporation shall not be liable for the debts of the
latter.
XPNs:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;

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3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the
seller;
5. If there is violation of the Bulk Sales Law
Q: Divine Corporation, engaged in the
manufacture of garments for export, was able to
obtain loans from individuals and financing
institutions. However, due to the drop in the
demand for garments in the international
market, Divine Corporation could not meet its
obligations. It decided to sell all its equipment
such as sewing machines, permapress machines,
high-speed sewers, cutting tables, ironing
tables, etc., as well as its supplies and materials
to Top Grade Fashion Corporation, its
competitor.
a. How would you classify the transaction?
b. Can Divine Corporation sell aforesaid items
to its competitor, Top Grade Fashion
Corporation? What are the requirements to
validly sell the items? Explain. (Bar 2005)
A:
a. The transaction is deemed classified as a sale of
all or substantially all of the corporate assets
because the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
b. YES. The law does not prohibit sale of all or
substantially all of corporate assets to
competitor-company provided said sale is
subject to laws against illegal combination,
monopoly, or restraint of trade and Bulk Sales
Law. Nowhere in the facts state that the
competitor-company lies within the
restrictions provided for by law. For the
transaction to be valid, it needs a majority vote
of its board of directors and stockholder’s
approval representing at least 2/3 of
outstanding capital stock. Further, since bulk
sales apply to sale of all or substantially all of
corporate assets, it also requires the following:
a. list of creditors under oath must be given
by the seller to the buyer 10 days before
the sale containing the lists of their
respective names, addresses, due dates
and amount owing each;
b. inventory of goods or properties to be
sold, cost price and the amount for which
it has been sold; and
c. the list of inventory is filed with the DTI,
otherwise, it will be null and void for being
in fraud of creditors.
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Where an asset constitutes the only property of the
corporation, its sale to a 3rd party is a sale or
disposition of all the corporate property and assets
of the corporation falling squarely within the
contemplation of Sec. 40 of the Corporation Code.
Hence, for the sale to be valid, the majority vote of
the legitimate Board of Trustees, concurred in by
the vote of at least 2/3 of the bona fide members of
the corporation should have been obtained (Islamic
Directorate of the Philippines, et al., v. CA, G.R. No.
117897, May 14, 1997).
POWER TO ACQUIRE OWN SHARES
Instances when a corporation may acquire its
own shares (1991, 1992, 2005 Bar)
1. To eliminate fractional shares out of stock
dividends (CC, Sec. 41)
2. To collect or compromise an indebtedness to
the corporation, arising out of unpaid
subscription, in a delinquency sale and to
purchase delinquent shares sold during said
sale (Ibid.)
3. To pay dissenting or withdrawing stockholders
(in the exercise of the stockholder’s appraisal
right) (Ibid.)
4. To acquire treasury shares (CC, Sec. 9)
5. To acquire Redeemable shares regardless of
existence of retained earnings (CC, Sec 8)
6. To effect a decrease of capital stock (CC, Sec. 38)
7. In close corporations, when there is a deadlock
in the management of the business, the SEC may
order the purchase at their fair value of the
shares of any stockholder by a corporation
regardless of the availability of unrestricted
retained earnings (URE’s) in its books (CC, Sec.
104, par. 1 [4]).
NOTE: Where a corporation reacquires its own
shares, it does not thereby become a subscriber
thereof.
Rule in order that a corporation may acquire its
own shares
GR: The corporation may only acquire its own
stocks in the presence of unrestricted retained
earnings (URE).
XPNs: (RDC)
1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency of the Corporation
2. In cases that the corporation conveys its stocks
in payment of a Debt
3. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
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as long as it will not result to the insolvency of
the corporation.
Unrestricted retained earnings (URE)
It represents the surplus profits of the corporation.
It is determined by subtracting the liabilities (L), the
Capital Stock (CS) and the Restricted Retained
Earnings (RRE) from the assets (A) of the
corporation (URE = A – (L + CS+ RRE)).
Unrestricted Retained Earnings shall include
accumulated profits and gains realized out of the
normal and continuous operations of the company
after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts. It does NOT include:
1. Funds appropriated by its BOD for corporate
expansion projects or programs;
2. Funds covered by a restriction for dividend
declaration under a loan agreement; and
3. Funds required to be retained under special
circumstances obtaining in the corporation such
as when there is a need for a special reserve for
probable circumstances.
Guidelines for the acquisition of its own shares
1. The capital of the corporation must not be
impaired. There shall be URE’s to purchase the
shares.
2. Legitimate or proper corporate objective is
advanced.
3. Condition of the corporate affairs warrants it.
4. Transaction is designed and carried out in good
faith.
5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine
(Sec. 41, SEC Opinions, October. 12, 1992,
September 11, 1985, and April 11, 1994).
The requirement of unrestricted retained earnings
to cover the share is based on the trust fund doctrine
which means that the capital stock, property and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors. The
reason is that the creditors of a corporation are
preferred over the stockholders in the distribution
of corporate assets (Boman Environmental
Development Corp v. CA, GR No. 77860, November 22,
1988).
POWER TO INVEST CORPORATE FUNDS IN
ANOTHER CORPORATION OR BUSINESS
GR: The corporation is not allowed to engage in a
business different from those enumerated in its AOI.
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XPN: The purpose will be amended to include the
desired business activity among its secondary
purpose.
NOTE: However, in the case of pawnshops
organized as corporations and partnerships, they
may be allowed to engage in ancillary activity of
directly purchasing or selling goods or articles. The
Pawnshop Regulation Act contains no prohibition to
engage in ancillary activities. Hence, by implication,
their scope may be extended to other unrelated
business unless clearly prohibited by the said Act.
The only requirement is that the person or entity
engaged at the same time in other business not
directly related or not incidental to pawnshop
business, shall keep such business distinct and
separate from his pawnshop operations (De Leon,
2010 citing SEC Opinion, March 28, 1985).
Rule in case a corporation wants to invest in an
undertaking
GR: Investment of a corporation in a business which
is in line with its primary purpose requires only the
approval of the board.
XPN: Where the corporation undertakes to invest in
another corporation or business or for any purpose
other than a primary purpose, it has to comply with
the statutory requirements before it can do so (Sec.
42, CC).
Statutory requirements that the corporation
needs to comply with to invest in another
corporation or business or for any purpose
other than a primary purpose (1995, 1996 Bar)
1. Approval by the majority vote of the BOD or
BOT
2. Ratification by stockholders representing at
least 2/3 of the outstanding capital stock or by
at least 2/3 of the members in case of non-stock
corporations
3. Ratification must be made at a meeting duly
called for the purposes
4. Prior written notice of the proposed investment
and the time and place of the meeting shall be
made addressed to each stockholder or
member by mail or by personal service
NOTE: Investment of a corporation in a business
which is in line with its primary purpose requires
only the approval of the board. Any dissenting
stockholder shall have appraisal right.
Q: Stikki Cement Co. was organized primarily for
cement manufacturing. Anticipating substantial
profits, its President proposed that Stikki invest
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in: a) a powerplant project; b) a concrete road
project; and c) quarry operations for limestone
in the manufacture of cement.
a. What corporate approvals or votes are
needed for the proposed investments?
Explain.
b. Describe the procedure in securing these
approvals (1992 Bar)
A:
a. Since a powerplant project and a concrete road
project are neither primary purposes nor
reasonably necessary for the accomplishment
thereof, majority votes of the board of directors
plus the ratification of the stockholders
representing 2/3 of the outstanding capital
stock are needed.
On the other hand, quarry operations for
limestone are reasonably necessary or
incidental to attain the primary purpose of the
corporation, i.e. the manufacture of cement.
Hence, only the majority approval of the board
of directors is needed. The ratification by the
stockholders is no longer necessary.
b. To secure the aforementioned approvals, there
must be a written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each stockholder
or member at his place of residence as shown
on the books of the corporation and deposited
to the addressee in the post office with postage
prepaid, or served personally (CC, Sec. 42).
POWER TO DECLARE DIVIDENDS
Requirements for the declaration of dividends
1. Existence of URE’s. (Unrestricted Retained
Earnings)
2. Resolution of the board.
NOTE: In case stock dividend is to be declared, an
additional requirement of:
a. A vote representing 2/3 of outstanding
capital. (Sec. 43, CC)
b. A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders.
Q: Under what circumstances may a corporation
declare dividends? (2005 Bar)
A: A corporation may declare dividends when there
are unrestricted retained earnings, a resolution of
the Board of Directors and in case of declaration of
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stock dividends, a ratification of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock.
Q: At least 2/3 of the stockholders of Solar
Corporation, upon the recommendation of the
BOD, declared a 50% stock dividend during
their annual meeting. The notice of the annual
stockholders’ meeting did not mention anything
about a stock dividend declaration. The matter
was taken up only under the item “other
business” in the agenda of the meeting. C.K.
Senwa, a stockholder, who received his copy of
the notice but did not attend the meeting,
subsequently learned about the 50% stock
dividend declaration. He desires to have the
stock dividend declaration cancelled and set
aside, and wishes to retain your services as a
lawyer for the purpose. Will you accept the case?
Discuss with reasons. (1990 Bar)
A: NO, I will not accept the case. Sec 43 of the CC
states that no stock dividend shall be issued without
the approval of the stockholders representing not
less than 2/3 of the outstanding capital stock at a
regular or special meeting duly called for that
purpose. Conformably with Sec 50 of the CC, a
written notice of the holding of the regular meeting
sent to the shareholders will suffice. The notice
itself specified the said subject matter.
Alternative answer:
YES, I will accept the case. The problem does not
indicate that there is action by the BOD which is also
necessary for the declaration of 50% stock dividend.
Q: During the annual stockholders meeting,
Riza, a stockholder proposed that a part of the
corporation’s unreserved earned surplus be
capitalized and stock dividends be distributed
to the stockholders, arguing that as owners of
the company, the stockholders, by a majority
vote, can do anything. As chairman of the
meeting, how would you rule on the motion to
declare stock dividends? (1991, 2001 Bar)
A: As the chairman of the meeting, I would rule
against the motion considering that a declaration of
stock dividends should initially be taken by the BOD
and thereafter to be concurred in by a 2/3 vote of
the stockholders (CC, Sec. 43). There is no
prohibition, however, against the stockholders’
resolving to recommend to the BOD that it consider
a declaration of stock dividends for concurrence
thereafter by the stockholders. A stockholder
cannot compel the corporation to declare either
cash or stock dividends as it rests with the sound
discretion of the board.
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Forms of dividends Note: The declaration of cash dividends cannot be
recalled, because it can affect the market for the
1. Cash shares of stock. Stock Dividends can be revoked
before their issuance, because they do not give
Cash dividends due on delinquent stock shall any additional assets to the stockholders.
first be applied to the unpaid balance on the (Ballante p. 559)
subscription plus cost and expenses (Sec. 43,
CC). Q: From what funds are cash and stock
dividends sourced? Explain why (Bar 2005)
2. Stock
A: Dividends either cash or stock dividend must be
Stock dividends are withheld from the declared out of unrestricted retained earnings
delinquent stockholder until his unpaid because of the Trust Fund Doctrine. The Trust Fund
subscription is fully paid(Ibid). Doctrine provides that subscriptions to the capital
stock of a corporation constitute a fund to which the
3. Property creditors have the right to look for the satisfaction
of their claims (Ong v. Tiu, G.R. No. 144476, April 8,
Stockholders are entitled to dividends PRO‐ 2003). Thus, dividends must never impair the
RATA based on the total number of shares and subscribed capital stock.
not on the amount paid on shares.
Scrip dividend
Cash dividends vs. Stock dividends
A scrip dividend is dividend issued by the
CASH DIVIDENDS STOCK DIVIDENDS corporation when the obligation to pay becomes
Part of general fund Part of capital absolute. Thus, it becomes a debt absolutely due to
Results in cash outlay No cash outlay the stockholders although payment is postponed to
Once issued, can be a future date (De Leon, supra).
Not subject to levy by levied by corporate
corporate creditors creditors because they’re Stock split
part of corporate capital
Declared only by the Declared by the board It is merely a dividing up of the outstanding shares
board of directors at with the concurrence of of a corporation into a greater number of units,
its discretion the stockholders without disturbing the stockholder’s original
(majority of the representing at least 2/3 proportional participating interest in the
quorum only, not of the outstanding corporation.
majority of all the capital stock at a
board) regular/special meeting STOCK SPLIT STOCK DIVIDENDS
Does not increase the Corporate capital is A mere increase in the Capitalization of
corporate capital increased number of shares earnings or profits,
Its declaration which evidence together with a
creates a debt from ownership without distribution of the
No debt is created by its altering the amount of added shares which
the corporation to
declaration the capital, surplus, or evidence the assets
each of its
stockholders segregated earnings. transferred to capital
If received by
individual: subject to Sources of retained earnings
Not subject to tax either
tax;
received by individual or 1. Paid-in surplus – It is the difference between the
If received by
a corporation par value and the issued value or selling price of
corporation: not
subject to tax the shares. It cannot be declared as dividend
Can be revoked despite because it is a part of the capital.
Cannot be revoked
announcement but
after announcement Exception: The SEC allows the distribution of paid-
before issuance
Can be withheld until in surplus in exceptional cases when the following
Applied to the unpaid are present:
payment of unpaid
balance of a. that they be declared only as
balance of delinquent
delinquent shares stock dividends and not as
shares
cash dividends

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b. no creditor shall be prejudiced
therefrom
c. there is no resulting
impairment of capital
2. Operational Income - The amount of profit
realized from a business's operations after
taking out operating expenses. It is available for
both cash and stock dividends
3. Revaluation surplus – Increase in the value of a
fixed asset as a result of its appreciation. They
are by nature subject to fluctuations.
GR: It cannot be declared as dividends because
there is no actual gain.
XPN: It can be used in the declaration of
dividends provided the following conditions
exist:
a. The corporation has sufficient income from
operations from which the depreciation on
the appraisal increase was charged;
b. It has no deficit at the time the depreciation
on the appraisal increase was charged to
operations; and
c. Such depreciation on appraisal increase
previously charged to operations has not
been erased or impaired by subsequent
losses; otherwise, only that portion not
impaired by subsequent losses is available
for dividend (SEC Opinions, Oct. 2, 1981 and
March 19, 1992).
4. Reduction surplus – the surplus arises from the
reduction of the par value of the issued shares
of stocks. It cannot be declared as cash dividend
but can be declared only as stock dividend
provided that:
a. No creditor is prejudiced
b. There is no resulting impairment of
capital
Planters Bank v. Agana, G.R. No. 51765. March 3,
1997).
Prohibition imposed by law on URE's of a stock
corporation
GR: Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock.
XPNs: (2001 Bar)
1. When justified by definite corporate
expansion projects or programs approved by
the board of directors;
2. When the corporation is prohibited under any
loan agreement with any financial institution
or creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured; or
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special reserve
for probable contingencies (CC, Sec. 43).
Q: For the past three years of its commercial
operation, X, an oil company, has been earning
tremendously in excess of 100% of the
corporation’s paid-in capital. All of the
stockholders have been claiming that they share
in the profits of the corporation by way of
dividends but the Board of Directors failed to lift
its finger. Is Corporation X guilty of violating a
law? If in the affirmative, state the basis. (2001
Bar)
A: YES. Corporation X is guilty of violating Section
43 of the CC. This provision prohibits stock
corporations from retaining surplus profits in
excess of 100% of their paid-in capital.
Penalty in case of unjustifiable retention of
surplus profits

5. Gain from Sale of Real Property - Available as The penalty in case a corporation unjustifiably
dividends. retains surplus profits in excess of one hundred
6. Treasury Shares – Gain realized from reissuance (100%) percent of the paid-in accumulated capital
of treasury shares. It cannot be declared as is the payment of Improperly Accumulated
stock or cash dividends but it may be declared Earnings Tax equal to 10% of the improperly
as property dividend. accumulated taxable income (NIRC OF 1997, Sec.
29 [A]).
Q: Can the board be compelled to declare
dividends every year? Sources of dividends

A: NO. Declaration of dividends is discretionary
upon the board. Dividends are payable only when
there are profits earned by the corporation and as a
general rule, even if there are existing profits, the
Board of Directors has the discretion to determine
whether or not dividends are declared (Republic
GR: Dividends can only be declared out of actual and
bona fide unrestricted retained earnings
XPN: Dividends can be declared out of capital in the
following instances:

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1. Dividends from investments wasting assets
corporation or engage in “wasting business”
(e.g. timber cutting or mining); or
2. Liquidating a business.
3. Utilization of lease or patent.
Wrongful or illegal declaration of dividends
The Board of Director is liable in case of wrongful or
illegal declaration of dividends. The stockholders
should return the dividends to the corporation
based on the principle of solution indebiti.
Persons entitled to receive dividends
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
holders of record. (Cojuanco and Prime Holdings,
Inc., v. Sandiganbayan G.R. No. 183278, April 24,
2009).
Rule on transfer of shares which is not recorded
in the books of the corporation
Such transfer is valid only as between the parties
(CC, Sec. 63); hence, the transferor has the right to
dividends as against the corporation without notice
of the transfer but he is the trustee of the real owner
of the dividends subject to the contract between the
transferor and transferee as to who is entitled to
receive the dividends (De Leon, supra).
Rule on the receipt of dividends in case of
mortgaged or pledged shares
GR: The mortgagor or the pledgor has the right to
receive the dividends.
XPN: When the mortgagor or pledgor defaults and
the mortgagee or pledgee acquires the pledged
stocks and the transfer is recorded in the books of
the corporation, the mortgagee or pledgee is
entitled to receive the dividends.
Q: May stock dividends be issued to a person
who is not a stockholder in payment of services
rendered?
A: NO. Only stockholders are entitled to payment of
stock dividends (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. 21763, December
17, 1966).
Distinction between distribution in liquidation
and ordinary dividend
If the distribution is in the nature of a recurring
return on stock, it is an ordinary dividend. However,
if the corporation is really winding up its business
or recapitalizing and narrowing its activities, the
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distribution may properly be treated as incomplete
or partial liquidation and as payment by the
corporation to the stockholder for his stock or as
return of the capital invested by him(Wise & Co., Inc.
v. Meer,G.R. No. 48231, June 30, 1947).
POWER TO ENTER INTO
MANAGEMENT CONTRACT
Management Contract is any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise (CC, Sec. 44).
NOTE: Sec. 44 refers only to a management contract
with another corporation. Hence, it does not apply
to management contracts entered into by a
corporation with natural persons. Corollary to this,
management contract with a natural person need
not comply with the requisites of Sec. 44.
Requirements for a management contract to be
valid
1. Contract must be approved by the majority of
the BOD or BOT of both managing and managed
corporation.
2. Ratified by the stockholders owning at least the
majority of the outstanding capital stock, or
members in case of a non-stock corporation, of
both the managing and the managed
corporation, at a meeting duly called for the
purpose.
3. Contract must be approved by the stockholders
of the managed corporation owning at least 2/3
of the outstanding capital stock entitled to vote
or 2/3 of the members when:
a. Stockholders representing the same
interest in both of the managing and the
managed corporation own or control more
than 1/3 of the total outstanding capital
stock entitled to vote of the managing
corporation (Interlocking stockholders);
b. Majority of the members of the BOD of the
managing corporation also constitute a
majority of the BOD of the managed
corporation. (Interlocking Directors)(CC,
Sec. 44)
Q: ABC Management Inc. presented to the DEF
Mining Co, the draft of its proposed Management
Contract. As an incentive, ABC included in the
terms of compensation that ABC would be
entitled to 10% of any stock dividend which DEF
may declare during the lifetime of the
Management Contract. Would you approve of
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such provision? If not, what would you suggest or public duty, and are void, ultra vires acts are not
as an alternative? (1991 Bar) illegal but not merely within the scope of the articles
of incorporation and the by-laws. They are merely
A: NO. I would not approve a proposed stipulation voidable and may become binding and enforceable
in the management contract that the managing when ratified by the stockholders (Maria Clara
corporation, as an additional compensation to it, Pirovana, et al. v. the De La Rama Steamship Co., G.R.
should be entitled to 10% of any stock dividend that No. L-5377, December 29, 1954).
may be declared. Stockholders are the only ones
entitled to receive stock dividends. (Nielson & Co v. Types of UVA
Lepanto Mining G.R. No. L-21601, December 17,
1966). 1. Acts done beyond the powers of the corporation
(through BOD)
I would add that the unsubscribed capital stock of a 2. Ultra vires acts by corporate officers
corporation may only be issued for cash or property 3. Acts or contracts which are per se illegal as being
or for services already rendered constituting a contrary to law
demandable debt. (CC, Sec. 62) As an alternative, I
would suggest that the managing corporation Ultra vires acts by reason of lack of authority vs.
should instead be given a net profit participation Ultra vires acts by reason of illegality (illegal
and, if it later so desires, to then convert the amount acts)
that may be due thereby to equity or shares of stock
at no less than the par value thereof. ULTRA ILLEGAL
BASIS
VIRES ACT ACTS
Period for every management contract entered Not
into by the corporation Unlawful;
necessarily
against law,
unlawful, but
GR: Management contract shall be entered into for Lawfulness morals, public
outside the
a period not longer than 5 years for any one term. policy, and
powers of the
public order
corporation
XPN: In cases of service contracts or operating Merely
agreements which relate to the exploitation, voidable and
development, exploration or utilization of natural may be Cannot be
resources, it may be entered for such periods as may Enforceability enforced by validated.
be provided by the pertinent laws or regulations. performance, VOID
ratification or
ULTRA VIRES ACTS (UVA) estoppel
Can be Cannot be
No corporation shall possess or exercise any Ratification
ratified ratified
corporate powers except those conferred by this Can bind the
Code or by its articles of incorporation and except parties if
such as are necessary or incidental to the exercise of Cannot bind
Binding effect wholly or
the powers so conferred (CC, Sec. 45). the parties
partly
executed
An ultra vires act refers to an act outside or beyond
express, implied and incidental corporate powers. Distinguished from acts that do not comply with
The concept also includes those acts that may formalities and unauthorized acts
ostensibly be within such powers but are, by
general or special laws, either proscribed or ACTS THAT DO NOT
declared illegal. (Rural Bank of Milaor v. Ocefemia, COMPLY WITH UNAUTHORIZED ACTS
G.R. No. 137686, February 8, 2000). FORMALITIES
If certain procedures The act may be within
It is one committed outside the object for which a or formalities are the powers of the
corporation is created as defined by the law of its prescribed in the AOI corporation but not
organization and therefore beyond the power or BL and the same within the powers of the
conferred upon it by law. (Atrium Management are not complied particular officer. The
Corporation vs. CA, G.R. No. 109491, February 28, with, the resulting act latter is sometimes
2001). is not an ultra vires referred to as ultra vires
act of the act of the officer. The law
Unlike illegal acts which contemplate the doing of an corporation. on agency applies.
act that is contrary to law, morals, or public policy

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Instances when the acts of the officers bind the
corporation(PRADa)
1. If it is provided in the by-laws
2. When the act was ratified
3. If authorized by the board
4. Under the doctrine of apparent authority
Doctrine of apparent authority
If a corporation knowingly permits one of its
officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the
public possessing the power to do those acts; and
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped from denying the agent’s authority.
Its existence may be ascertained through:
1. The general manner in which the corporation
holds out an officer or agent as having the
power to act, or in other words, the apparent
authority to act in general, with which it clothes
him; or
2. The acquiescence in his acts of a particular
nature, with actual or constructive notice
thereof, within or beyond the scope of his
ordinary powers.
It is not the quantity of similar acts which
establishes apparent authority but the vesting of a
corporate officer with the power to bind the
corporation (Advance Paper Corp. v. Arma Traders
Corp., GR No. 176897, December 11, 2013).
Instances when the corporation is estopped to
deny ratification of contracts or acts entered by
its officers or agents
Generally, when the corporation has knowledge
that its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
other party or third person to act in the belief that it
was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails
to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, April 14,
2004).
So settled is the precept that ratification can be
made by the corporate board either expressly or
impliedly. Implied ratification may take various
forms - like silence or acquiescence; by acts showing
approval or adoption of the contract; or by
acceptance and retention of benefits flowing
therefrom (MWSS v. CA, G.R. No. 126000, Oct. 7,
1998).
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Where the practice of the corporation has been to
allow its general manager to negotiate and execute
contracts in its copra trading activities for and in
behalf of the corporation without board approval,
the board itself, by its acts through acquiescence,
practically laid aside the by-law requirement of
prior approval. Settled is the rule that where similar
acts have been approved by the directors as a
matter of general practice, custom, and policy, the
general manager may bind the company without
formal authorization from the board of
directors(The Board of Liquidators, representing the
Government of the Philippines v. Heirs of Maximo M.
Kalaw, et al., G.R. No. L-18805, August 14, 1967).
A corporation cannot deny the authority of a lawyer
when they clothed him with apparent authority to
act in their behalf such as when he entered his
appearance accompanied by the corporation’s
general manager and the corporation never
questioned his acts and even took time and effort to
forward all the court’s documents to him. The
lawyer may not have been armed with a board
resolution but the doctrine of apparent authority
imposes liability not as a result of contractual
relationship but rather because of the actions of the
principal or an employer in somehow misleading
the public that the relationship or authority exists
(Megan Sugar Corporation v. RTC Iloilo Br. 68, G.R.
NO. 170352, June 1, 2011).
Q: May the board of directors of a rural banking
corporation be compelled to confirm a deed of
absolute sale of real property owned by the
corporation which deed of sale was executed by
the bank manager without prior authority of the
board of directors of the rural banking
corporation?
A: YES, the corporation may be compelled. A bank is
liable to innocent third persons where
representation is made in the course of its normal
business by an agent like the bank manager, even
though such agent is abusing her authority. Clearly,
persons dealing with her could not be blamed for
believing that she was authorized to transact
business for and on behalf of the bank. The bank is
estopped from questioning the authority of the bank
manager to enter into the contract of sale. If a
corporation knowingly permits one of its officers or
any other agent to act within the scope of an
apparent authority, it holds the agent out to the
public as possessing the power to do those acts;
thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be
estopped from denying the agent’s
authority. Unquestionably, the bank has authorized
its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the
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board resolution sought by. Having authorized her
to sell the property, it behooves the bank to confirm
the Deed of Sale so that the buyers may enjoy its full
use. (Rural Bank of Milaor v. Ocfemia, et al., G.R. No.
137686, February 8, 2000).
Q: Associated Bank (the Bank) purchased in a
foreclosure sale the real properties of Sps. Vaca
mortgaged in its favor. The Sps. Vaca, however,
prayed for the nullification of the mortgage and
foreclosure sale. In the meantime, the Bank
advertised for sale the subject properties, and
the Sps. Pronstroller offered to buy the same.
The offer was made through Atty. Soluta, the
Bank’s Vice-President, Corporate Secretary and
a member of its BOD. The Bank accepted the Sps.
Pronstroller’s offer.
Sps. Pronstroller and Atty. Soluta executed two
Letters-Agreement wherein the balance of the
purchase price will be paid upon receipt of a
final order from the Supreme Court in the Vaca
case and the delivery of the property to the Sps.
Pronstroller free from occupants.
The Bank was later on reorganized, and Atty.
Soluta was relieved from his duties. The Bank,
through its Assistant Vice-President, Atty.
Dayday, informed Sps. Pronstroller that their
request for extension was disapproved and, in
view of their breach of the contract, the Bank
was rescinding the same and forfeiting their
deposit.
Is the Associated Bank bound by the Letter-
Agreement signed by Atty. Soluta under the
doctrine of apparent authority?
A: YES. The authority of a corporate officer or agent
in dealing with third persons may be actual or
apparent. Accordingly, the authority to act for and
to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power
was exercised without any objection from its board
or shareholders. Undoubtedly, Associated Bank
had previously allowed Atty. Soluta to enter into the
first agreement without a board resolution
expressly authorizing him; thus, it had clothed him
with apparent authority to modify the same via the
second letter-agreement. It is not the quantity of
similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power
to bind the corporation. (Associated Bank v.
SpousesPronstroller, G.R. No. 148444, July 14, 2008).
Q: Sps. Magsalang obtained a loan from
Philippine Countryside Rural Bank (PCRB),
secured by a real estate mortgage over their
property, including the house constructed
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thereon owned by the Sps. Cortel. Sps.
Magsalang and Sps. Cortel asked permission
from PCRB to sell the subject properties.
Mondigo, Branch Manager of PCRB, verbally
agreed to their request but first required full
payment of the loan. The subject properties
were later sold to Banate. The title issued to
Banate, however, carried over the mortgage lien
in PCRB’s favor. PCRB refused to release the
property from the lien.
Did the purported agreement between Banate
and Mondigo novate the mortgage contract over
the subject properties and is thus binding upon
PCRB?
A: NO. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
consider the power to undo or nullify solemn
agreements validly entered into as within the
doctrine’s ambit. Although a branch manager,
within his field and as to third persons, is the
general agent and is in general charge of the
corporation, with apparent authority
commensurate with the ordinary business
entrusted him and the usual course and conduct
thereof, yet the power to modify or nullify corporate
contracts remains generally in the board of
directors. Being a mere branch manager alone is
insufficient to support the conclusion that Mondigo
has been clothed with “apparent authority” to
verbally alter terms of written contracts, especially
when viewed against the telling circumstances of
this case: the unequivocal provision in the mortgage
contract; PCRB’s vigorous denial that any
agreement to release the mortgage was ever
entered into by it; and, the fact that the purported
agreement was not even reduced into writing
considering its legal effects on the parties’
interests. To put it simply, the burden of proving
the authority of Mondigo to alter or novate the
mortgage contract has not been established
(Banate,et al., v. Philippine Countryside Rural Bank,
Inc., et al., G.R. No. 163825, July 13, 2010).
Q: PPI, a fertilizer manufacturer, entered into an
arrangement with Janet Layson for the delivery
of fertilizers to her, payable from the proceeds
of the loan that UCPB extended to her. Layson
executed a document called “pagares,” written
on the dorsal side of a UCPB promissory
note. The pagares stated that Layson had an
approved loan with UCPB-Iloilo Branch. The
second portion of the pagares, signed by that
branch’s manager Gregory Grey, stated that the
assignment has been duly accepted and
payment duly guaranteed within 60 days from
PPI’s Invoice. But contrary to her undertakings,
Layson withdrew with branch manager Grey’s
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connivance, the loan that UCPB granted her. On
the strength of the three documents, PPI
delivered quantities of fertilizers to
Layson. When PPI presented the documents of
the financed transactions to UCPB for collection,
the bank denied the claim on the ground that it
neither authorized the transactions nor the
execution of the documents which were not part
of its usual banking transactions. UCPB claimed
that branch manager Grey exceeded his
authority in guaranteeing payment of Layson’s
purchases on credit. UCPB contends that the
pagares were illegal and void since banking laws
prohibit bank officers from guaranteeing loans
of bank clients. Is UCPB bound by Grey’s
undertaking on its behalf to deliver to PPI the
proceeds of the bank’s loan in payment of the
fertilizers Laysonbought?
A: NO, UCPB is not bound. A corporation like UCPB
is liable to innocent third persons where it
knowingly permits its officer, or any other agent, to
perform acts within the scope of his general or
apparent authority, holding him out to the public as
possessing power to do those acts. But, here, it is
plain from the guarantee Grey executed that he was
acting for himself, not in representation of UCPB.
The latter cannot be bound by Grey’s above
undertaking since he appears to have made it in his
personal capacity. He signed it under his own name,
not in UCPB’s name or as its branch
manager. Indeed, the wordings of the undertaking
do not at all make any allusion to UCPB(UCPB v.
Planters Products, Inc., et al., G.R. No. 179015, June
13, 2012).
Q:. Tan was formerly the President of Arma
Traders while Uy is the Treasurer. They
represented Arma Traders when dealing with
its supplier, Advance Paper, for about 14 years.
Upon the representation of Tan and Uy, Arma
Traders was able to obtain a loan from Advance
Paper, which the latter granted due to its good
business relations with Arma Traders.
Arma Traders issued postdated checks signed
by Tan and Yu, who were its authorized bank
signatories. Thechecks were dishonored due to
insufficient balance. Arma Traders failed to
settle the loan despite several demands,
claiming thatthe purchase on credit and the loan
were spurious as the Board of Arma Traders did
not issue a resolution authorizing the same.
Is the Doctrine of Apparent Authority
applicable?
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A. YES. Apparent authority is derived not merely
from practice. Its existence may be ascertained
through (1) the general manner in which the
corporation holds out an officer or agent as having
the power to act or, in other words the apparent
authority to act in general, with which it clothes
him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of
his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor
or in favor of other parties. It is not the quantity of
similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power
to bind the corporation.
The Court held that Arma Traders is liable to pay the
loans. To begin with, Arma Traders’ Articles of
Incorporation provides that the corporation may
borrow or raise money to meet the financial
requirements of its business by the issuance of
bonds, promissory notes and other evidence of
indebtedness. Likewise, it states that Tan and Uy are
not just ordinary corporate officers and authorized
bank signatories because they are also Arma
Traders’ incorporators. Furthermore, Arma
Traders, et al., through Ng who is Arma Traders’
corporate secretary, incorporator, stockholder and
director, testified that the sole management of Arma
Traders was left to Tan and Uy and that he and the
other officers never dealt with the business and
management of Arma Traders for 14 years
Thus, Arma Traders bestowed upon Tan and Uy
broad powers by allowing them to transact with
third persons without the necessary written
authority from its non-performing board of
directors. Arma Traders failed to take precautions
to prevent its own corporate officers from abusing
their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped
from denying Tan and Uy’s authority to obtain loan
from Advance Paper. (Advance Paper Corporation vs.
Arma Traders Corporation, G.R. No 176897,
December 11, 2013).
Consequences of Ultra Vires Acts
Ultra vires acts entered into by the board of
directors bind the corporation, and the courts will
not interfere unless terms are oppressive and
unconscionable. (Gamboa vs. Victoriano, G.R. No. L-
43324. May 5, 1979).
These are the effects for the specific acts:
1. Executed contract – courts will not set aside or
interfere with such contracts;
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2. Executory contracts – no enforcement even at corporation(CC, Sec. 32). Such contract can be
the suit of either party (void and ratified by the vote of the stockholders
unenforceable); representing at least two-thirds of the
3. Partly executed and partly executory – outstanding capital stock in a meeting called for
principle of “no unjust enrichment at expense of the purpose: Provided, that full disclosure of the
another” shall apply; adverse interest of the directors or trustees
4. Executory contracts apparently authorized involved is made at such meeting: Provided,
but ultra vires – the principle of estoppel shall however, That the contract is fair and
apply. reasonable under the circumstances.
b. Valid – Approval of the stockholders is not
Remedies in case of ultra vires act required in declaring cash dividends
c. Void – This is an ultra vires act on part of XL
1. State Foods Corporation, and is not one of the powers
a. Obtain a judgment of forfeiture; or provided for in Sec. 36 of the Corporation Code.
b. The SEC may suspend or revoke the It can be ratified provided it is not illegal per se
certificate of registration but merely beyond the powers of the
corporation by the approval of the majority of
2. Stockholders the board and vote of the stockholders
a. Injunction; or representing at least two thirds of the
b. Derivative suit outstanding capital stock. Where the contract
or act is not illegal per se but merely beyond the
3. Creditors- Nullification of contract in fraud of power of the corporation, the same is merely
creditors. voidable and may be enforced by performance,
ratification, or estoppels, or on equitable
Q: X Corp., whose business purpose is to grounds (Republic v. Acoje Mining Co., Inc.)
manufacture and sell vehicles, invested its funds especially if no creditors are prejudiced thereby
in Y Corp., an investment firm, through a and no rights of the state or the public are
resolution of its Board of Directors. The involved(Flecher, p.585).
investment grew tremendously on account of Y
Corp.'s excellent business judgment. But a HOW EXERCISED
minority stockholder in X Corp. assails the
investment as ultra vires. Is he right and, if so, BY THE SHAREHOLDERS
what is the status of the investment? (2011 Bar)
The shareholders participate in controlling the
A: YES, it is an ultra vires act of its Board of Directors affairs of the corporation by exercising their right to
but voidable only, subject to stockholders’ vote. They can elect the directors who will actually
ratification. govern the corporation and they can also vote on
important matters that are still reserved to them by
Q: Which of the following corporate acts is valid, the Corporation Code(Aquino, 2006).
void or voidabe?
BY THE BOARD OF DIRECTORS
a. XL Food Corporation, which is engaged in
the fast-food business, entered into a The Board of Directors is primarily responsible for
contract with its President, Jose Cruz, the governance of the corporation. Their primary
whereby the latter would supply the duty is to set the policies for the accomplishment of
corporation with its meat and poultry the corporate objectives. (Revised Code of Corporate
requirements. Governance, Art. 3).
b. The Board of Drectors of XL Foods
Corporation declared and paid cash They elect the officers who carry out the policies
dividends without approval of the that they have established.
stockholders.
c. XL Foods Corporation guaranteed the loan The general rule is that a corporation, through its
of its sister company XL Meat Products, Inc. Board of Directors, should act in a manner and
(2002 Bar) within the formalities, if any, prescribed by its
charter or by the general law. Directors must act as
A: a body in a meeting called for the pursuant to the
a. Voidable – A contract of the corporation with law or the corporation’s by laws, otherwise, any
one or more of its directors or trustees or action taken therein may be questioned by any
officers is voidable, at the option of such objecting director or shareholder; but an action of

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the Board of Directors during a meeting, which was
illegal for lack of notice, may be ratified expressly,
by the action of directors in a subsequent legal
meeting, or impliedly, by the corporation’s
subsequent course of conduct(Lopez Realty, Inc., v.
Fontecha, et al., GR No. 76801, August 11, 1995).
Q: Sheryl Oabel was initially hired by Maranaw
Hotel as an extra beverage attendant. Oabel
worked in Century Park Hotel, an establishment
owned by the Maranaw Hotels. The latter
contracted with Manila Resource Development
Corporation (MANRED). Subsequently, Oabel
was transferred to MANRED, with the latter
deporting itself as her employer. After
sometime, Oabel filed before the Labor Arbiter a
petition for regularization of employment
against the Maranaw Hotels. However, Oabel
was dismissed from employment. Oabel
converted her petition for regularization into a
complaint for illegal dismissal. The NLRC found
that Oabel was illegally dismissed. Maranaw
Hotels subsequently appealed before the CA.
The CA dismissed the petition on account of the
failure of the Maranaw Hotels to append the
board resolution authorizing the counsel for
Maranaw Hotels to file the petition before the
CA. Maranaw Hotels invokes substantial justice
as justification for a reversal of the resolution of
the CA. It contends that the filing of a motion for
reconsideration with the certificate of non-
forum shopping attached constitutes
substantial compliance with the requirement.
Did the petition before the CA comply with the
procedural requirements under the law and the
rules?
A: NO. Well-settled is the rule that the certificate of
non-forum shopping is a mandatory requirement.
Substantial compliance applies only with respect to
the contents of the certificate but not as to its
presence in the pleading wherein it is required.
Furthermore, the lawyer acting for the corporation
must be specifically authorized to sign pleadings for
the corporation. Specific authorization, the Court
held, could only come in the form of a board
resolution issued by the Board of Directors that
specifically authorizes the counsel to institute the
petition and execute the certification, to make his
actions binding on his principal, i.e., the corporation.
The SC has not wavered in stressing the need for
strict adherence to procedural requirements. The
rules of procedure exist to ensure the orderly
administration of justice. They are not to be trifled
with lightly. (Maranaw Hotels and Resort
Corporation v. CA, et al., G.R. No. 149660, January 20,
2009).
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NOTE: Court has recognized the authority of some
corporate officers to sign the verification and
certification against forum shopping. In sum, the
following officials or employees of the company can
sign the verification and certification without need
of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting
General Manager, (4) Personnel Officer, and (5) an
Employment Specialist in a labor case. The rationale
applied in the foregoing cases is to justify the
authority of corporate officers or representatives of
the corporation to sign the verification or certificate
against forum shopping, being in a position to verify
the truthfulness and correctness of the allegations
in the petition. (Mid-Pasig Land
DevelopmentCorporation v. Tablante, G.R. No.
162924, February 4, 2010).
Power of directors or trustees to delegate
authority
GR: The board may validly delegate, either
expressly or impliedly, some of its powers and
functions to other officers or agents of the
corporation appointed by it. (Yu Chuck v. Kong Li Po,
G.R. No. L-22450, December 3, 1924).
XPNS:
1. Discretionary powers which, by provisions of
law or the by-laws or by the vote of the
stockholders, are vested exclusively in the
board of directors. (Bliss v. Kaweah Canal, etc.,
65 Cal. 502, August 18, 1884);
2. They cannot delegate entire supervision and
control of the corporation to others for this is
not only unnecessary and contrary to usage, but
it is inconsistent with Section 23 of the
Corporation Code; and
3. Neither can the board delegate special powers
especially conferred upon it by a resolution of
the stockholders or members of the
corporation.
BY THE OFFICERS
After the election of directors, the latter must
formally organize by electing the corporate officers.
(Sec. 25, CC).
The corporate officers are tasked to carry out the
policies laid down by the Board, the AOI and the by-
laws.
Corporate officer’s position
1. An “office” that is created by the charter of the
corporation; and
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2. The officer is elected by the directors or
stockholders (Easycall Communications Phils.,
Inc. v. King, G.R. No.145901, December 15, 2005).
Limitations on the holding of a corporate
officer’s position
Any two or more positions may be held
concurrently by the same person, except that no one
shall act as president and secretary or as president
and treasurer at the same time. (CC, Sec. 25).
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing
Quezon City. Z is a resident alien residing in
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and
60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign
corporation registered with the Philippines SEC,
KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years
of age, and daughter of Y.
A. Who are qualified to act as Treasurer of the
company?
Positions of corporate officers to be filled up by the Directors
CORP. OFFICER MEMBERSHIP REQUIREMENT
1. Must be a director at the time he
assumes office
President
2. Must be the stockholder on record
of at least 1 share of stock
May or may not be a director, unless
Secretary required by the by-laws
Treasurer May or may not be a director
Such other
officers as may
Qualifications may be provided for in the by-laws
be provided in
the by-laws
Corporate officer vs.Corporate employee
CORPORATE OFFICER
Position is provided for in the by-laws or under the
Corporation Code.
RTC acting as a special commercial court has
jurisdiction over intra-corporate controversies.
Power to amend/repeal articles cannot be delegated
by the stockholders/ members to the board of
directors/ trustees
A party in a suit against a corporation cannot
compel the latter’s officers to appear as
witnesses without first serving written
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B. Who can be appointed Corporate Secretary?
(Bar 2012)
A: A. The Corporation Code does not impose any
nationality or residency requirement in respect of
the Treasurer. Any such requirement or any other
reasonable requirement may be adopted by the
corporation and reflected in its by-laws, or required
by the law(s) governing the business of the
corporation or a law of general application (e.g., the
AntiDummy Law which applies to all nationalized
businesses). Accordingly, anybody with the
qualifications required under the by-laws of the
corporation or under the law(s) governing the
business of the corporation, could be elected
Treasurer by the Board of Directors. However, the
Treasurer could not be President at the same time.
NOTE: the treasurer must be a resident of the
Philippines (section 24 of the Revised Corporation
Code)
B. The Secretary is required to be both a resident
and a citizen of the Philippines.
CITIZENSHIP RESIDENCY
Need NOT be a Need NOT be a Philippine
Filipino Citizen Resident
Must be a Filipino Must be a Philippine
Citizen Resident
Need NOT be a Must be a Philippine
Filipino Citizen Resident
CORPORATE EMPLOYEE
Employed by the action of the managing officer of
the corporation.
Labor Arbiter has jurisdiction in case of labor
disputes.
Power to amend or repeal by-laws or adopt new by-
laws may be delegated by the 2/3 of the outstanding
capital stock or 2/3 of the members in the case of
non-stock corporation
interrogatories upon the latter, as said officers
are also considered as adverse parties
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

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In a complaint for nullification of mortgage and
foreclosure with damages against the mortgagee-
bank, the plaintiff cannot compel the officers of the
bank to appear and testify as plaintiff’s initial
witnesses unless written interrogatories are first
served upon the bank officers. This is in line with
the Rules of Court provision that calling the adverse
party to the witness stand is not allowed unless
written interrogatories are first served upon the
latter. This is because the officers of a corporation
are considered adverse parties as well in a case
against the corporation itself based on the principle
that corporations act only through their officers and
duly authorized agents (Spouses Afulugencia v.
Metropolitan Bank and Trust Co., G.R. No. 185145,
February 5, 2014, in Divina, 2014).
Q: Arevalo set up Broadcom with Cosare, his
former employee, as an incorporator. Cosare
was later promoted to the position of Assistant
Vice-President for Sales and Head of the
Technical Coordination. Abiog was appointed as
Broadcom’s VP for Sales and thus, became
Cosare’s immediate superior. Later, Cosare sent
a confidential memo to Arevalo to inform him of
the anomalies which were allegedly being
committed by Abiog against the company.
Subsequently, Cosare was totally barred from
entering the company premises. Cosare
attempted to furnish the company with a memo
by which he addressed and denied the
accusations cited in Arevalo’s memo. Soon after,
Cosare filed a labor complaint, claiming that he
was constructively dismissed from employment
by Broadcom and Arevalo. CA ruled that the case
is an intra-corporate controversy and is under
the RTC’s jurisdiction.
Is the CA correct?
A: NO. The Court has determined that contrary to
the ruling of the CA, it is the LA, and not the regular
courts, which has the original jurisdiction over the
subject controversy. An intra-corporate
controversy, which falls within the jurisdiction of
regular courts, has been regarded in its broad sense
to pertain to disputes that involve any of the
following relationships:
a. Between the corporation, partnership or
association and the public;
b. Between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned;
c. Between the corporation, partnership or
association and its stockholders, partners,
members or officers; and
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d. Among the stockholders, partners or associates,
themselves.
Settled jurisprudence, however, qualifies that when
the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LA’s
upon whose jurisdiction, as a rule, falls termination
disputes and claims for damages arising from
employer-employee relations as provided in Article
217 of the Labor Code. Consistent with this
jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time
the subject controversy developed failed to
necessarily make the case an intra-corporate
dispute. Applying the case of Matling Industrial and
Commercial Corporation v. Coros, to the present
case, the LA had the original jurisdiction over the
complaint for illegal dismissal because Cosare,
although an officer of Broadcom for being its AVP
for Sales, was not a “corporate officer” as the term is
defined by law(Raul C. Cosare v. Broadcom Asia, Inc.,
et al., G.R. No. 201298, February 5, 2014).
Q: Respondents filed a motion to dismiss the
complaint filed against them where some of the
issues include whether the withdrawals and
disbursements are in accordance with the By-
Laws and whether there was a complete, audited
report and accounting of all the corporate funds.
The RTC dismissed the case. Is the RTC correct?
A: No. Based on Section 8, Rule 1 of the Interim
Rules of Procedure for Intra-Corporate
Controversies, in cases involving an intra-corporate
dispute, a motion to dismiss is a prohibited
pleading. (ALDERSGATE v. JUNIFEN GR No. 192951
Nov 14, 2012)
Awards for damages in Intra-Corporate
Controversies
As can be gleaned from the title of A.M. No. 01-2-04-
SC, the amendment of Section 4, Rule 1 of the
Interim Rules of Procedure Governing Intra-
Corporate Controversies was crafted precisely to
clarify the previous rule that decisions on intra-
corporate disputes are immediately executory, by
specifically providing for an exception. Thus, the
prevailing rule now categorically provides that
awards for moral damages, exemplary damages,
and attorney’s fees in intra-corporate controversies
are not immediately executor. (Heirs of Santiago
Divinagracia, v. Ruiz, G.R. No. 172508, Janaury 12,
2011).
TRUST FUND DOCTRINE
The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
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corporation which the creditors have the right to
look up to satisfy their credits, and which the
corporation may not dissipate. The creditors may
sue the stockholders directly for the latter’s unpaid
subscription. (2015 Bar)
Effects of the trust fund doctrine
1. Dividends must never impair the subscribed
capital stock and must only be declared out of
unrestricted retained earnings (URE).
2. Subscription commitments cannot be condoned
or remitted
3. GR: The corporation cannot buy its own shares
using the subscribed capital as the
consideration therefore (NTC v. CA, G.R. No.
127937. July 28, 1999).
XPN: (ReDeC)
a. Redeemable shares may be acquired even
without surplus profit for as long as it will
not result to the insolvency of the
Corporation;
b. In cases that the corporation conveys its
stocks in payment of a Debt; or
c. In a Close corporation, a stockholder may
demand the payment of the fair value of
shares regardless of existence of retained
earnings for as long as it will not result to
the insolvency of the corporation
4. Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation (Ong v Tiu, ibid)
NOTE: Rescission of a subscription agreement is not
one of the instances when distribution of capital
assets and property of the corporation is allowed
(Ibid).
When negotiations ensued in the light of a planned
takeover of a company and the counsel of the buyer
advised the stockholder through a letter that he may
take the machineries he brought to the corporation
out with him for his own use and sale, the previous
stockholder cannot recover said machineries and
equipment because these properties remained part
of the capital property of the corporation. Under the
trust fund doctrine, the capital stock, property, and
other assets of a corporation are regarded as equity
in trust for the payment of corporate creditors
which are preferred over the stockholders in the
distribution of corporate assets (Yamamoto v.
Nishino Leather Industries, Inc., G.R. No. 150283,
April 16, 2008).
Exceptions to the trust fund doctrine
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The Code allows distribution of corporate capital
only in instances of:
1. Amendment of the AOI to reduce authorized
capital stock;
2. Purchase of redeemable shares by the
corporation regardless of existence of
unrestricted retained earnings; or
3. Dissolution and eventual liquidation of the
corporation.
Proper scope of the Trust Fund doctrine
Insolvent
Solvent Corporation
Corporation
Encompasses only the Encompasses not only
capital stock of the the capital stock, but
corporation. It does also other property
NOT cover and assets (Divina,
unrestricted retained 2015)
earnings (Villanueva,
2018)
The trust fund doctrine covers not only capital
stock but also unpaid subscriptions, and other
corporate property and assets.
The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock,
but also other property and assets generally
regarded in equity as a trust fund for the payment of
corporate debts. The creditor is allowed to maintain
an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for
the satisfaction of the debt. Subscriptions to the
capital stock of a corporation constitute a fund to
which creditors have the right to look for
satisfaction of their claims (Halley v. Printwell, Inc.,
G.R. No. 157549, May 30, 2011, in Divina, 2014).
Q: A corporation executed a promissory note
binding itself to pay its President/ Director, who
had tendered his resignation, a certain sum in
payment of the latter’s shares and interests in
the company. The corporation defaulted in
paying the full amount so that the said former
President filed suit for collection of the balance
before the SEC. Is the arrangement between the
corporation and its President covered by the
trust fund doctrine? (Bar 1992)
A: The arrangement between the corporation and
its President to the extent that it calls for the
payment of the latter’s shares is covered by the trust
fund doctrine. The only exceptions from the trust
fund doctrine are the redemption of redeemable
shares and, in the case of close corporation, when
there should be a deadlock and the SEC orders the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
payment of the appraised value of a stockholder’s
share.
BOARD OF DIRECTORS
AND TRUSTEES
DOCTRINE OF CENTRALIZED MANAGEMENT
GR: The Doctrine of Centralized Management states
that all corporate powers are exercised by the BOD
or BOT. (CC, Sec. 23)
The Board is the body which: (ExBuCo)
(1) Exercises all powers provided for under the
Corporation Code;
(2) Conducts all Business of the corporation; and (3)
Controls and holds all the properties od the
corporation (CC, Sec 23 [RCC, Sec 22])
XPN: The doctrine is not applicable to the following
instances:
1. In case of delegation to the Executive
Committee duly authorized in the by-laws;
2. Authorization pursuant to a contracted
manager which may be an individual, a
partnership, or another corporation; and
3. In case of close corporations, the stockholders
may manage the business of the corporation
instead of a board of directors, if the articles of
incorporation so provide.
Independent director
An independent director is a person who apart from
shareholdings and fees received from the
corporation, is independent of management and
free from any business or other relationship which
could, or could reasonably be perceived to
materially interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director. (RCC, Sec 22)
Cases where independent directors are
required
At least two (2) independent directors are required
in the following companies:
1. Any corporation with a class of equity securities
listed for trading on an Exchange (Publicly
traded companies);
2. Banks; and
3. Corporations with secondary franchise.
[New provision in RCC:]
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The board of the following corporations vested with
public interest shall have independent directors
constituting at least twenty percent (20%) of the
board: (Co-BO)
1. Corporations whose: (Re-Li-Ass)
a. Securities are registered with the
Commission
b. Corporations listed with an exchange
c. Corporations with:
c.1. assets of at least 50 Million Pesos;
c.2. having 200 or more shareholders;
c.3. each shareholder holding at least 100
shares of a class of its equity shares
2. (B-PIN-PEF): Banks, quasi-banks, preneed,
insurance and trust companies, nonstock savings
and loan associations, pawnshops, corporations
engaged in money service business and other
financial intermediaries; and
3. Other corporations engaged in business vested
with public interest similar to the above, as may be
determined by the Commission, after taking into
account relevant factors which are germane to the
objective and purpose of requiring the election of
independent director
[New provision in RCC]
Factors to consider by the Commission in
determining a coporation engaged in business with
public interest: ExTyPO
1. Extent of minority ownership
2. Type of financial products or securities issued or
offered to investors
3. Public interest involved in the nature of business
operations
4. Other analogous factors
Required number of independent directors for
the corporations covered by the Revised Code of
Corporate Governance (RCCG)
At least two (2) or such number of independent
directors that constitute 20% of the members of the
board, whichever is lesser, but in no case less than
two (2) (RCCG, Art. 3 [A]).
Q: May the composition of the board of directors
of the National Power Corporation be validly
reduced to three (3)? (2008 Bar)
A: YES. NPC is a government owned and controlled
corporation created by a special charter. Its charter
allows composition of its board of directors to be
reduced. As clearly enunciated in Section 16, Article
XII, 1987 Constitution: Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private corporations.
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The prohibition under the Corporation Code only
applies to private corporations. Since NPC is not
governed by the Corporation Code, the standard
number of directors is not required.
BUSINESS JUDGMENT RULE
Questions of policy or management are left solely to
the honest decision of officers and directors of a
corporation and the courts are without authority to
substitute their judgment for the judgment of the
board of directors; the board is the business
manager of the corporation and so long as it acts in
good faith, its orders are not reviewable by the
courts or the SEC. (Montelibano v. Bacolod-Murica
Milling Co., G.R. No. L-15092, May 18, 1962; Phil.
Stock Exchange, Inc. v. Ca, G.R. No. 125469, October
27, 1997).
GR: Contracts intra vires entered into by the board
of directors are binding upon the corporation
beyond the interference of courts. The courts are
barred from intruding into business judgments of
corporations, when the same are made in good faith
(Ong v Tiu, G.R. No. 144476. April 8, 2003).
XPNs: Courts can inquire unto contracts which are:
1. Unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority
(Ong v Tiu, ibid); or
2. When there is bad faith or gross negligence by
the directors (Republic Communications Inc v
CA, G.R. No. 135074, January 29, 1999).
Consequences of Business Judgment Rule
1. Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders.
2. Directors and officers acting within such
business judgment cannot be held personally
liable for such acts.
3. If the cause of the losses is merely error in
business judgment, not amounting to bad faith
or negligence, directors and/or officers are not
liable (Filipinas Port Services v. Go, G.R. No.
161886, March 16, 2007).
4. The Board of Directors has the power to create
positions not provided for in the corporation's
by-laws since the board is the corporation’s
governing body, clearly upholding the power of
its board to exercise its prerogatives in
managing the business affairs of the
corporation (Filipinas Port Services v. Go, supra).
5. Directors and officers who purport to act for the
corporation, keep within the lawful scope of
their authority and act in good faith, do not
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become liable, whether civilly or otherwise, for
the consequences of their acts, which are
properly attributed to the corporation alone
(Benguet Electric Cooperative, Inc. v. NLRC,GR
89070, May 18, 1992).
6. The power to elect corporate officers was a
discretionary power that the law exclusively
vested in the Board of Directors and could not
be delegated to subordinate officers or agents
(Matling Industrial and Commercial
Corporation, et al. v. Coros, G.R. No. 157802,
October 13, 2010).
Requirement for the Business Judgment Rule to
apply:
1. Presence of a business decision including
decisions on policy management and
administration;
2. The decision must be intra vires and must comply
with the procedural and substantive requirements
of law;
3. Good faith
4. Due care in making the decision;
5. The director must not have personal interest or
nor self-dealing or otherwise on breach of the duty
of loyalty. (Villanueva, 2018)
Q: PALI sought to offer its shares to the public in
order to raise funds for development of
properties and pay its loans with several banks.
To facilitate the trading of its shares, PALI
applied for a listing in the Philippine Stock
Exchange Inc. (PSE), a non-profit corporation.
Subsequently, PSE received a letter from the
Heirs of Marcos, requesting PSE to defer PALI’s
registration, contending that certain properties
of PALI are owned by Marcos. Consequently, PSE
rejected PALI’s application. The SEC reversed
the ruling of the PSE. Is the SEC correct?
A: NO. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on
the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing
(PSE v. CA, G.R. No. 125469, October 27, 1997).
TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR
TRUSTEES
Term of office of BOD/BOT
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The Corporation Code
GR: The regular director shall hold office for 1 year.
[Amendment in RCC, Sec 22: a trustee may be
elected for a period not exceeding 3 years
For a director, the rule remains the same {1 year}].
XPN: If no election is held, the directors and officers
will continue to occupy position even after the lapse
of 1 year under a hold-over capacity until their
successors are elected and qualified.
NOTE: This is applicable to a going concern where
there is no break in the exercise of the duties of the
officers and directors (SEC Opinion, Dec. 15, 1989).
Term, Tenure, and Holdover Period
Term – time during which the officer may claim to
hold the office as a matter of right, and fixes the
interval after which the several incumbents shall
succeed one another. The term of office is not
affected by the holdover. It is fixed by statute and
does not change simply because the office may have
become vacant, nor because the incumbent holds
office beyond his term when a successor has not
been elected.
Tenure – represents the term during which the
incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the
incumbent.
Holdover Period – the time from the lapse of one
year from a member’s election to the Board and
until his successor’s election and qualification. It is
not part of the director’s original term of office, nor
is it a new term; the holdover period, however,
constitutes part of his tenure (Valle Verde Country
Club v. Africa, G.R. No. 151969, September 4, 2009).
Duties of Directors/Trustees: (OLD)
1) Duty of Obedience – the directors should direct
the affairs of the corporations only in
accordance with the purposes for which it was
organized.
2) Duty of Diligence – The directors should not
willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or act
in bad faith or with gross negligence in directing
the affairs of the corporation.
3) Duty of Loyalty – The directors should not
acquire any personal or pecuniary interest in
conflict with their duty as directors
Common qualifications of a director and trustee
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1. Majority of the directors/trustees must be
residents of the Philippines (CC, Sec. 23).
2. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for period exceeding 6 years or a
violation of the Corporation Code, committed
within 5 years prior to the date of his election
(CC, Sec. 27).
3. He must be of legal age
4. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of
the corporation.
A director cannot be elected without owning any
stock in the corporation
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before
assuming the duties of his office (SEC Opinions,
November 9, 1987 & April 5, 1990).
Sec. 30 of the Corporation Code requires directors
to own the shares of stock in their own right.. To be
eligible to be a director, it is not required that he
owns legal title to the share of stock. It suffices that
he posseses a beneficial ownership in the books
of the corporation. A trustee is a stockholder of
record. (Lee v. CA, G.R. No. 93695, February 4, 1992).
Consequently, The omission of the phrase “in his
own right” in Section 23 of the Revised
Corporation Code means that in order to be
eligible to be elected to the Board and to remain a
member thereof, what is material is lega title
thereto, beneficial ownership being insufficient.
(RCC Annotated Aquino, Cruz 2019)
Both under the old and the new Corporation Codes,
there is no dispute as to the most immediate effect
of a Voting Trust Agreement (VTA) on the status of
a stockholder who is a party to its execution - from
legal titleholder or owner of shares subject of the
VTA, he becomes equitable or beneficial owner. Any
director who executes a VTA over all his shares
ceases to be a stockholder of record in the books of
the corporation and therefore ceases to be a
director (Lee v. CA, G.R. No. 93695, February 4, 1992)
Q: Grace Christian High School is an educational
institution at the Grace Village in Quezon City
while Grace Village Association, Inc., is an
organization of lot and/or building owners,
lessees and residents at Grace Village. From
1975 up to 1990, Grace Christian High School
was given a permanent seat in the board of
directors of the association. After some time,
the association’s committee on election
informed James Tan, the principal of the school
that all directors should be elected by members
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of the association. Tan was told that the the decision of the SEC is final and executory unless
proposal to make the Grace Christian High appealed in CA and a TRO is obtained
School representative as a permanent director
of the association, although previously tolerated [Amendment in RCC, Sec 26:]
in the past elections should be reexamined. A person shall be disqualified from being a director,
Grace Christian High School argues that it had trustee or officer of any corporation if, within 5
acquired a vested right to a permanent seat in years prior to election or appointment of such, the
the board of directors. Did Grace Christian High person was: (ConFoFo)
School acquire vested right to a permanent seat
in the board of directors? (a) Convicted by final judgment: (ICS)
(1) of an offense punishable by imprisonment for a
A: NO. The board of directors of corporations must period exceeding 6 years;
be elected from among the stockholders or (2) violation of the Corporation Code;
members. Sec 23 of the CC [Sec 22, RCC] provides (3) Violation of RA 8799 (SRC)
that unless otherwise provided, the corporate
powers of all corporations formed under this Act (b) Found administratively liable for any offense
shall be exercised, all business conducted and all involving fraudulent acts; and
property of such corporations controlled and held
by a board of not less than five nor more than eleven (c) By a foreign court or equivalent foreign
directors to be elected from among the holders of regulatory authority for acts, violations or
stock or, where there is no stock, from the members misconduct similar to those enumerated in
of the corporation paragraphs (a) and (b) above

Since the provision in question is contrary to law, Q: John Gokongwei Jr., as stockholder of San
the fact that for fifteen years it has not been Miguel Corporation, filed with SEC a petition for
questioned or challenged but, on the contrary, declaration of nullity of amended by-laws
appears to have been implemented by the members against the majority of the members of the
of the association cannot forestall a later challenge Board of Directors and San Miguel Corporation.
to its validity. Neither can it attain validity through Gokongwei claimed that prior to the questioned
acquiescence because, if it is contrary to law, it is amendment, he had all the qualifications to be a
beyond the power of the members of the association director of the corporation, being a substantial
to waive its invalidity (Grace Christian High School v. stockholder thereof, Gokongwei had acquired
CA, et al., G.R. No. 108905, October 23, 1997). rights inherent in stock ownership, such as the
rights to vote and to be voted upon in the
Additional qualifications provided by the election of directors, and that in amending the
Revised Code of Corporate Governance by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him
A director should have the following: of his vested right as aforementioned, hence the
amended by-laws are null and void. Is a
1. College education or equivalent academic provision on the by-laws disqualifying a person
degree; for a position in the board of directors on the
2. Practical understanding of the business of the ground that he is engaged in a business which
corporation; competes with that of the Corporation valid?
3. Membership in good standing in relevant
industry, business or professional A: YES. A corporation is authorized to prescribe the
organizations; and qualifications of its directors. A provision in the by-
4. Previous business experience (RCCG, Art. 3 [D]) laws of the corporation that no person shall qualify
or be eligible for nomination for elections to the
Grounds for disqualification of a board of directors if he is engaged in any business
director/trustee which compete with that of the Corporation is valid;
provided, however, that before such nominee is
1. Conviction by final judgment of an offense disqualified, he should be given due process to show
punishable by imprisonment exceeding 6 that he is covered by the disqualification. A director
years;or stands in fiduciary relation to the corporation and
2. Violation of the Corporation Code committed its stockholders. The disqualification of a
within 5 years prior to his election or competitor from being elected to the board of
appointment (CC, Sec. 27). directors is a reasonable exercise of corporate
NOTE: Disqualification by reason of violation of the authority. Sound principles of corporate
CC does not require conviction for the reason that management counsel against sharing sensitive

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The Corporation Code
information with a director whose fiduciary duty to
loyalty may well require that he discloses this
information to a competitive rival. When a person
buys stock in a corporation, he does so with the
knowledge that its affairs are dominated by a
majority of the stockholders (Gokongwei v. SEC, et
al., G.R. No. L-45911, April 11, 1979).
Foreigners are not disqualified from being
elected/ appointed as members of the BOD
While foreigners are disqualified from being
elected/ appointed as corporate officers in wholly
or partially nationalized business activities, they are
allowed representation in the BOD or governing
body of said entities in proportion to their
shareholding (Anti-Dummy Law, Sec. 2-A;
1987Constitution, Art. XII, Sec. 11).
REASON: The BOD/ governing body performs
specific duties as a “body”. Unlike corporate officers,
each member of the BOD/ governing body has no
individual power or authority to perform
management functions (De Leon, supra).
Q: A Korean national joined a corporation and
was elected to the Board of Directors. To
complement its furniture manufacturing
business, the corporation also engaged in the
logging business. With the additional logging
activity, can the Korean national still be a
member of the Board of Directors? Explain
(2005 Bar)
A: YES. The Korean national can still be a member
of the Board of Directors as long as sixty percent
(60%) of the Board of Directors are Filipinos.
Corporations that are sixty percent (60%) owned by
Filipinos can engage in the business of exploration,
development and utilization of natural resources
(1987 Constitution, Art. XII, Sec. 2). The election of
aliens as members of the Board of Directors
engaging in partially-nationalized activities is
allowed in proportion to their allowable
participation or share in the capital of such entities
(Anti-Dummy Law, Sec. 2-A). Nothing in the facts
shows that more than forty percent (40%) of the
Board of Directors are foreigners.
Q: X is a Filipino immigrant residing in
Sacramento, California. Y is a Filipino residing in
Quezon City. Z is a resident alien residing in
Makati City. GGG Corporation is a domestic
corporation—40% owned by foreigners and
60% owned by Filipinos, with T as authorized
representative. CCC Corporation is a foreign
corporation registered with the Philippines SEC,
KKK Corporation is a domestic corporation
(100%) Filipino owned. S is a Filipino, 16 years
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of age, and daughter of Y. Who are qualified to
become members of the board of directors of the
corporation? (2012 Bar)
A: X, Y, Z and T could be directors (subject to the
residency requirement mentioned in (a) above and
any nationality requirement under the law
governing the business of the corporation) but not
GGG Corporation, CCC Corporation, and KKK
Corporation as they are not natural persons.
However, the aforementioned corporations could
have their respective representatives nominated
and possibly elected as directors by the
stockholders. Each director must own at least one
share of the capital stock of the corporation.
ELECTIONS
Requirements and limitations for the election of
directors or trustees
1. Presence of Stockholders representing a
majority of the outstanding capital stock of the
corporation or majority of the members, either
in person or by proxy.
[New ways to vote in RCC, Sec 24]:
Through remote communication or in absentia
GR: it must be provided in the by-laws
XPN: the right to vote through such modes may
be exercised in corporations vested with public
interest notwithstanding the absence of a
provision in the bylaws of such corporations
2. The election must be by ballot, if requested by
any voting stockholder or member.
3. The total number of votes cast by him must not
exceed the number of shares owned by him as
shown in the books of the corporation
multiplied by the whole number of directors to
be elected.
4. No delinquent stock shall vote or be voted for.
5. A stockholder cannot be deprived in the articles
of incorporation or in the by-laws of his statutory
right to use any of the methods of voting in the
election of directors.
6. The candidates receiving the highest number of
votes shall be declared elected (CC, Sec. 24 [RCC, Sec
23]).
Reportorial requirement
Within 30 days after the election of directors,
trustees and officers of the corporation, the
secretary or any other officer of the corporation,
shall submit to the Commission, the names,
shareholdings, and residence addresses of the
directors, trustees and officers elected.
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Permanent representation is not allowed in the
BOD
The board of directors of corporations must be
elected from among the stockholders or
members directors every year. Estoppel does not set
in to legitimize what is wrongful (Grace Christian
High School v. CA, G.R. No. 108905, October 23, 1997).
Jurisdiction over election contests in stock and
non-stock corporations
As amended by R.A. 8799 (The Securities Regulation
Code), the jurisdiction of the SEC under Sec. 5 P.D.
No. 902‐A (SEC Reorganization Act) is now
transferred to Courts of General Jurisdiction
(Regional Trial Court). Thus, RTC now has
jurisdiction over election contest.
Q: In case where there are 2 lists of BOD
submitted to SEC, which one is controlling?
A: It is the list of directors in the latest general
information sheet as filed with the SEC which is
controlling (Premium Marble Resources, Inc. v. CA,
G.R. No. 96551, Nov. 4, 1996).
Q: At the annual meeting of ABC Corporation for
the election of five directors as provided for in
its articles of incorporation, A, B, C, D, E, F and G
were nominated. A, B, C, D and E received the
highest number of votes and were proclaimed
elected. F received ten votes less than E.
Subsequently, E sold all his shares to F. In the
next Board of Directors’ meeting following the
transfer of the shares in the books of the
corporation, both E and F appeared. E claimed
that notwithstanding the sale of his shares to F,
he remained a director since the Corporation
Code provides that directors “shall hold office
for 1 year and until their successors are elected
and qualified.” On the other hand, F claimed that
since he would have been elected as a director
had it not been for E’s nomination and election,
then he (F) should now be considered a director
as he had acquired all the shares of E. Decide
with reasons. (1984 Bar)
A: Neither E nor F are directors of ABC Corporation.
E automatically ceased to be a director upon the
transfer of all his shares to F in the books of the
corporation. Every director must own at least one
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least 1 share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. F’s
claims are without merit since he was not duly
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elected as a director at the stockholders’ meeting.
Only the candidates receiving the highest number of
votes shall be declared elected.
METHODS OF VOTING
Different methods of voting
1. Straight voting – every stockholdermay vote
such number of shares for as many persons as
there are directors to be elected.
2. Cumulative voting for one candidate – a
stockholder is allowed to concentrate his votes
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. Cumulative voting by distribution – a
stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he shall
see fit.
Cumulative voting in stock v nonstock
Cumulative voting in case of non-stock corporations
is allowed only if it is provided in the AOI. The
members of non-stock corporations may cast as
many votes as there are trustees to be elected but
may cast not more than one vote for one candidate.
Cumulative voting is mandatory in stock
corporations to protect the rights of minority
stockholders
NON-HOLDING OF ELECTIONS
Report
Within 30 days from the date of the scheduled of
election. The report shall specify a new date for the
election, which shall not be later than 60 days from
the scheduled date (Sec 25, RCC)
Summary order of Commission
If:
(1) No new date has been designated; or
(2) If the rescheduled election is likewise not
held;
The Commission, may, upon the application of the
stockholder, member, director, or trustee, and after
verification of the unjustified non-holding of the
election, summarily order that an election be held.
The Commission shall have power the power to
issue orders as may be appropriate , including:
(1) Orders directing the issuance of a notice
stating the time and place of election;
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FACULTY OF CIVIL LAW

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(2) The designated presiding officer; and
(3) The record date or dates for the
determination fo stockholders or members
entitled to vote (Sec 25, RCC).
QUORUM
Quorum required in a stock or non-stock
corporation
Unless otherwise provided for in the by-laws, a
quorum shall consist of the stockholders
representing a majority of the outstanding capital
stock entitled to vote or a majority of the members
in the case of non-stock corporations (CC, Sec. 52).
When the stock and transfer book is inaccurate
and deficient, it cannot be the sole basis of the
quorum. The AOI may be used as the basis of the
quorum.
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the
issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the
owners and/or successors in interest of the said
shares. This case is one instance where resort to
documents other than the stock and transfer books
is necessary. The stock and transfer book of PMMSI
cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares
which have been subscribed, more so when the
articles of incorporation show a significantly larger
amount of shares issued and outstanding as
compared to that listed in the stock and transfer
book (Lanuza, et al. v. CA, et al., G.R. No. 131394,
March 28, 2005).
REMOVAL
Power to remove directors or trustees
The power to remove belongs to the stockholders
exclusively (Sec. 28, CC).
GR: Removal may be with or without cause
XPN: If the director was elected by the minority,
there must be cause for removal because the
minority may not be deprived of the right to
representation to which they may be entitled under
Sec. 24 of the Code (Sec. 28, CC).
NOTE: The right of representation referred to is the
right to cumulative voting for one candidate under
Sec. 24 of the Code.
Requisites for removal of directors or trustees
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1. It must take place either at a regular meeting or
special meeting of the stockholders or members
called for the purpose;
A special meeting for the purpose of removing
directors or trustees may be called by:
(1) The secretary, on order of the president; or
(2) The secretary, upon written demand of the
stockholders representing or holding at
least a MAJORITY of the capital stock or
MAJORITY of the members entitled to vote;
2. Previous notice to the stockholders or members
of the intention to remove a director;and
3. A vote of the stockholders representing 2/3 of
outstanding capital stock or 2/3 of members.
Remedy for refusal to call a meeting
If there is:
(1) No secretary; or
(2) If the secretary, despite demand, fails or
refuses to call the special meeting or to give
notice thereof
The stockholder or member signing the demand
may call for the meeting by directly addressing the
stockholders or members
New Power of SEC under the Revised
Corporation Code (Sec 27, RCC)
The Commission shall, motu propio or upon verified
complaint, and after due notice and hearing, order
the removal of a director or trustee elected despited
the disqualification or whose disqualification arose
is discovered subsequent to an election.
NOTE: The removal of a disqualified director shall
be without prejudice to other sanctions that the
Commission may impose on the board of directors
or trustees who, with knowledge of the
disqualification, failed to remove such director or
trustee.
Q: Henry is a board director in XYZ Corporation.
For being a fiscalizer in the Board, the majority
of the directors want him removed and his
shares be sold at auction, so he can no longer
participate even in the stockholder’s meetings.
Henry approaches you for advice on whether he
can be removed as board of director and
stockholder without cause. What is your advice?
Explain “amotion” and the procedure in
removing a director. (2016 Bar)
A: Henry cannot be removed by his fellow directors.
The power to remove belongs to the stocjholders.
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He can only be removed by the stockholders owning
at least 2/3 of the outstanding capital stock in a
meeting called for that purpose. The removal may
be with or without cause except that in this case, the
removal must be with cause because it is intended
to deprive the minority of the right of
representation.
Amotion is the premature ousting of a director or
officer from his post in the corporation.
Q: In 1999, Corporation A passed a board
resolution removing X from his position as
manager of said corporation. The by‐laws of A
corporation provide that the officers are the
president, vice‐president, treasurer and
secretary. Upon complaint filed with the SEC, it
held that a manager could be removed by mere
resolution of the board of directors. On motion
for reconsideration, X alleged that he could only
be removed by the affirmative vote of the
stockholders representing 2/3 of the
outstanding capital stock. Is X's contention
legally tenable. Why? (2001 Bar)
A: N0. Stockholders' approval is necessary only for
the removal of the members of the Board. For the
removal of a corporate officer or employee, the vote
of the Board of Directors is sufficient for the
purpose.
FILLING OF VACANCIES
Ways of filling up the vacancies in the board
1. Vacancies to be filled up by stockholders or
members: (ERORI)
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration
of term, where the remaining directors do
not constitute a quorum for the purpose of
filling the vacancy;
d. If the vacancy may be filled by the
remaining directors or trustees but the
board Refers the matter to stockholders or
members; or
e. Increase in the number of directors results
to vacancy.
2. Vacancies filled up by members of the board
-If still constituting a quorum, at least a majority
of the members are empowered to fill any
vacancy occurring in the board other than by
removal by the stockholders or members or by
expiration of term (CC, Sec. 29. RCC, Sec 28).
NOTE: The phrase “may be filled” in Sec. 29
indicates that the filling of vacancies in the board by
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the remaining directors constituting a quorum is
merely permissive. Corporations may choose how
vacancies in their boards may be filled up, either by
the remaining directors or trustees constituting a
quorum or by all stockholders or members.
However, if the by-laws prescribe the specific mode
of filling up existing vacancies, the provisions of the
by-laws should be followed (De Leon, supra).
Duration of the term of a replacement director
A director elected to fill vacancy shall serve the
unexpired term of the predecessor in office (CC, Sec.
29).
Filling-up a vacancy caused by resignation of a
director in a hold-over position
The vacancy caused by resignation of a director in a
hold-over position can only be filled up by the
stockholders or members, for the cause of vacancy
is not resignation but by expiration of term because
the hold-over period is not a part of the director’s
original term of office, nor is it a new term (De Leon,
supra).
Emergency Board (Sec 28, RCC)
When to call for an Emergency Board
When the vancacy prevents the remaining directors
from constituting a quorum and emergency action
is required to prevent grave, substantial, and
irreparable loss or damage to the corporation
Who who fill the vacancy
It may be temporarily filled from among the officers
of the corporation
Voting requirement
He will be elected by a UNANIMOUS vote of the
remaining directors or trustees
Limitations and Cessation
It shall be limited to the emergency action necessary
and term shall cease within:
(a) Reasonable time from the termination of
the emergency action; or
(b) Upon election of the replacement director
or trustee,
Whichever comes earlier
Reportorial requirement
The corporation must notify the Commission within
3 DAYS from the creation of the emergency board,
stating therein the reason for its creation
Period of election to fill a vacancy
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Grounds:
(1) Tem expiration- No later than the day of such
expiration at a meeting called for the purpose;
(2) Result of removal by the stockholders or
members – on the same day the meeting authorizing
the removal and this fact must be stated in the
agenda and motice of said meeting
(3) In all other cases -45 days from the time the
vacancy arose (Sec 28, RCC)
Q: Dinglasan and Makalintal were elected as
new members of the board of directors of Valle
Verde Country Club, Inc. (VVCC). In the
succeeding years however, the requisite
quorum for the holding of the stockholders’
meeting could not be obtained. Consequently,
Dinglasan and Makalintal continued to serve in
the VVCC Board in a hold-over capacity.
Subsequently, Dinglasan resigned from his
position as member of the VVCC Board. In a
meeting, the remaining directors, still
constituting a quorum of VVCC’s nine-member
board, elected Eric Roxas to fill in the vacancy
created by the resignation of Dinglasan. A year
later, Makalintal also resigned as member of the
VVCC Board. He was replaced by Jose Ramirez,
who was elected by the remaining members of
the VVCC Board. Victor Africa, a member of
VVCC, questioned the election of Roxas and
Ramirez as members of the VVCC Board with the
SEC and the RTC. May the remaining directors of
the corporation’s Board, still constituting a
quorum, elect another director to fill in a
vacancy caused by the resignation of a hold-over
director?
A: NO. The remaining directors of the corporation’s
Board, even if still constituting a quorum, cannot
elect another director to fill in a vacancy caused by
the resignation of a hold-over director. Section 23 of
the CC means that the term of the members of the
board of directors shall be only for one year; their
term expires one year after election to the
office. The holdover period – that time from the
lapse of one year from a member’s election to the
Board and until his successor’s election and
qualification – is not part of the director’s
original term of office, nor is it a new term; the
holdover period, however, constitutes part of
his tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a
holdover capacity, it implies that the office has a
fixed term, which has expired, and the incumbent is
holding the succeeding term. With the expiration of
Makalintal’s term of office, a vacancy resulted
which, by the terms of Section 29 of the Corporation
Code, must be filled by the stockholders of VVCC in
a regular or special meeting called for the
purpose. His resignation as a hold-over director did
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not change the nature of the vacancy; the vacancy
due to the expiration of Makalintal’s term had been
created long before his resignation (Valle Verde
Country Club, Inc., et al., v. Africa, G.R. No. 151969,
September 4, 2009; 2013 Bar).
The derivative suit was improper. In a derivative
suit, the corporation, not the individual stockholder,
must be the aggrieved party and that the
stockholder is suing on behalf of the corporation.
What stockholder X is asserting is his individual
right as a stockholder to elect the two directors. The
case partake more of an election contest under the
rules on intra-corporate controversy (Legaspi
Towers 300, Inc. v. Muer, G.R. No. 170783, June 18,
2012).
COMPENSATION
Compensation of directors/trustees
GR: Directors, in their capacity as such, are not
entitled to receive any compensation except for
reasonable per diems.
NOTE: Directors or trustees shall not participate in
the determination of their own per dierms or
compensation (Sec 29, RCC)
XPNs:
1. When their compensation is fixed in the by-
laws;
2. When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or special
meeting; or
3. If they perform services other than as directors
of the corporation (i.e. where directors are also
corporate officers or employees of the
corporation) (Sec. 30, CC).
NOTE: Per diems are paid attendance in board
meetings. Other benefits and emoluments of
directors fall within the term “compensation.”
BOD is not prohibited from securing an
insurance policy for the life of its members and
making the directors the beneficiaries instead of
the corporation
The Insurance Code does not contain any
prohibition as to such. However, the premium paid
thereon is analogous to a continuing bonus and gift
and thus falls within the context of additional
compensation. A corporation may not be used by its
officers or stockholders as a means of diverting
profits or proceeds to the payment of premium on
insurance policies to the enrichment of its
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beneficiaries at the expense of, or to the detriment
of, its creditors (SEC Opinion, December 8, 1987).
Limitation on the amount of compensation to be
received by the directors
In no case shall the total yearly compensation of
directors exceed 10% of the net income before
income tax of the corporation during the preceding
year (CC, Sec. 30).
Remedy of the stockholders if there was no
proper authorization for the grant of
compensation to the directors
Compensation to the directors of a corporation
without proper authorization in the by-laws or by
the vote of the stockholders may be recovered in a
stockholders’ suit (De Leon, supra).
Reportorial requirement for corporations
vested with public interest
Corporations vested with public interest shall
submit to their shareholders and the Commission,
an annual report of the total compensation of each
of their directors or trustees (RCC, Sec 29)
Q: Is the general rule that directors are not
entitled to compensation applicable to
corporate officers, who are not directors?
A: NO. Such officers, not being directors and having
no control over the funds and property of the
corporation, even though they may be stockholders,
do not occupy the relation of trustees to the
corporation (De Leon, supra, citing Cheeney vs.
Lafayette, BOR Co., 61 III. 570).
For Services other than as directors/Trustees:
Illustrative case:
Q: Ricardo T. Salas, et al., are the majority and
controlling members of the Board of Trustees of
Western Institute of Technology, Inc. (WIT), a
stock corporation engaged in the operation of an
educational institution. According to Homero
Villasis, et al., the minority stockholders of WIT,
a special board meeting was held whereby the
the Board of Trustees passed resolution
granting monthly compensation to Salas, et al.,
as corporate officers. Villasis, et al., filed an
affidavit-complaint against Salas, et al., for
falsification of a public document and
estafa. Villasis, et al., would like to hold Salas, et
al., civilly liable despite their acquittal in the
criminal cases. They base their claim on the
alleged illegal issuance by Salas, et al., of the
resolution ordering the disbursement of
corporate funds representing the retroactive
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compensation in favor of the board members of
WIT. They maintain that this grant of
compensation is proscribed under Section 30 of
the Corporation Code. Is the resolution granting
Salas, et al., compensation for services rendered
as officers of WIT valid?
A: YES. The resolution is valid. There is no argument
that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they
perform nothing more than the usual and ordinary
duties of their office. This rule is founded upon a
presumption that directors /trustees render service
gratuitously and that the return upon their shares
adequately furnishes the motives for service,
without compensation. Under Section 30, there are
only two (2) ways by which members of the board
can be granted compensation apart from reasonable
per diems: (1) when there is a provision in the by-
laws fixing their compensation; and (2) when the
stockholders representing a majority of the
outstanding capital stock at a regular or special
stockholders’ meeting agree to give it to them. This
proscription, however, against granting
compensation to directors/trustees of a
corporation is not a sweeping rule. Section 30 states
that the directors shall not receive any
compensation, as such directors. The phrase “as
such directors” is not without significance for it
delimits the scope of the prohibition to
compensation given to them for services performed
purely in their capacity as directors or trustees. The
unambiguous implication is that members of the
board may receive compensation, in addition to
reasonable per diems, when they render services to
the corporation in a capacity other than as
directors/trustees. In the case at bench, the
resolution granted monthly compensation to Salas,
et al., not in their capacity as members of the board,
but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer
and Secretary of Western Institute of Technology
(Western Institute of Technology, Inc., v. Salas, et al.,
G.R. No. 113032, August 21, 1997).
FIDUCIARY DUTIES AND LIABILITY RULES
Nature of the obligation of the directors to the
corporation
The directors’ character is that of a fiduciary insofar
as the corporation and the stockholders as a body
are concerned. As agents entrusted with the
management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
relation, and in this sense the relation is one of trust.
The ordinary trust relationship of directors of a
corporation and stockholders springs from the fact
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that directors have the control and guidance of
corporate affairs and property and hence of the
property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only
beneficiaries thereof (Gokongwei v. SEC, supra).
Majority Rule Doctrine in the dealings of
directors with stockholders
The majority rule states that a director has a
fiduciary duty with respect to the corporation as an
entity, and notto the stockholders as individuals.
Consequently, he is subject to the duty to disclose all
material facts only to the corporation and not to the
stockholders (American T. Co. v. California etc. Ins.
Co., 15 Cal.2d 42, 1940).
Special Fact Doctrine
The special fact doctrine is an exception to the
majority rule doctrine. It states that where special
circumstances or facts are present which make it
inequitable for the director to withhold information
from the stockholder, the duty to disclose arises,
and concealment is fraud (Ibid).
Instances where the Special Fact Doctrine has
been applied
In foreign US jurisprudence, the special fact doctrine
was applied in the following cases:
1. Where a director actively participates in the
negotiations for a transfer of the corporate
property (Strong v. Repide, 213 U.S. 419, 29 S.Ct.
521, 53 L.Ed. 853).
2. Where a director undertakes to speak or
become active in inducing the sale, he must
speak fully, frankly, and honestly, and conceal
nothing to the disadvantage of the selling
stockholder (Poole v. Camden, 79 W. Va. 310).
3. Where a director personally seeks a
stockholder for the purpose of buying his
shares without making disclosure of material
facts within his peculiar knowledge and not
within reach of the stockholders, the
transaction will be closely scrutinized and relief
may be granted in appropriate instances
(Strong v. Repide, Ibid).
Liability of the directors/ trustees or officers of
a corporation for their official acts
GR: The officers of a corporation are not personally
liable for their official acts.
XPNs: If it is shown that they exceeded their
authority.
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In the following instances, the directors/ trustees
may be held personally liable for damages:
1. When they willfully and knowingly vote for or
assent to patently unlawful acts of the
corporation;
2. When they are guilty of gross negligence or bad
faith in directing the affairs of the corporation;
NOTE: Bad faith or negligence is a question of
fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest
purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known
duty through some motive or interest or ill-will;
it partakes of the nature of fraud (Ford Phils.,
Inc., et al. vs. CA, GR 99039, Feb. 3, 1997).
3. When they acquire any personal or pecuniary
interest in conflict with their duty as such
directors or trustees (CC, Sec. 31);
4. When they consent to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary
his written objection thereto (CC, Sec. 65);
5. When they are made, by a specific provision of
law, to personally answer for their corporate
action (CC, Sec. 144; PD 115, Sec.13; Uichico v.
NLRC, G.R. No. 121434, June 2, 1997);
6. When they agree to hold themselves personally
and solidarily liable with the corporation
(Tramat Mercantile, Inc. vs. CA, G.R. No. 111008,
November 7, 1994); or
7. When the corporate fiction is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime (Carag v. NLRC, GR No.
147590, April 2, 2007)
NOTE: When the officers of the corporation
exceeded their authority, their actions are not
binding upon the corporation unless ratified by the
corporation or is estopped from disclaiming them
(Reyes v. RCPI Credit Employees Union, G.R. No.
146535, August 18, 2006).
Q: BF Corporation, in a collection complaint filed
against Shangri-La and its Board of Directors,
alleged that Shangri-La induced BF Corporation
to continue with the construction of the
buildings using its own funds and credit despite
Shangri-La’s default. It claims that Shangri-La
misrepresented that it had funds to pay for its
obligations with BF Corporation. The latter
eventually completed the construction of the
buildings. Shangri-La took possession of the
same while still owing BF Corporation an
outstanding balance. Shangri-La’s BoD based
their defense on the separate personality given
to juridical persons vis-à-vis their directors,
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officers, stockholders, and agents. Since they did
not sign the arbitration agreement in any
capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in
accordance with the arbitration agreement. The
Arbitral Tribunal rendered a decision, finding
that BF Corporation failed to prove the existence
of circumstances that render Shangri-La and the
other directors solidarily liable. It ruled that
Shangri-La’s Board of Directors is not liable for
the contractual obligations of Shangri-La to BF
Corporation.
Are Shangri-La’s directors liable for the
contractual obligations of Shangri-La to BF
Corporation?
A: NO. Indeed, as petitioners point out, their
personalities as directors of Shangri-La are separate
and distinct from Shangri-La. A corporation is an
artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives
it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with
a personality that is distinct and separate from
other persons including its stockholders, officers,
directors, representatives, and other juridical
entities. As a general rule, therefore, a corporation’s
representative who did not personally bind himself
or herself to an arbitration agreement cannot be
forced to participate in arbitration proceedings
made pursuant to an agreement entered into by the
corporation. He or she is generally not considered a
party to that agreement.
Requisites before a Director or Officer of a
Corporation can be held personally liable for
corporate obligations:
Before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
1. The complainant must allege in the complaint
that the director or officer assented to patently
unlawful acts of the corporation, or that the
officer was guilty of gross negligence or bad
faith; and
2. The complainant must clearly and convincingly
prove such unlawful acts, negligence or bad
faith (Heirs of Fe Tan Uy vs. International
Exchange Bank, G.R. No. 166282, G.R. No.
166283, February 13, 2013).
NOTE: The fact that the corporation ceased
operations the day after the promulgation of the
SC resolution finding the corporation liable
does not prove bad faith on the part of the
incorporator of the corporation (Polymer
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Rubber Corp. v. Ang, G.R. No. 185160, July 24,
2013, in Divina, 2014).
Q: Rana and Burgos are the President and
General Manager of SKILLEX. The latter entered
into a service contract with Robinsons Land
Corporation. Halfway through the service
contract, Skillex asked the respondents-
employees Seva, et al. to execute individual
contracts which stipulated that their respective
employments shall end at the last day of the
year. Skillex and Robinsons no longer extended
their contract of janitorial services.
Consequently, the Skillex dismissed Seva, et al.
as they were project employees whose duration
of employment was dependent on the former's
service contract with Robinsons. Seva, et al. filed
a complaint for illegal dismissal with the NLRC.
Should Rana and Burgos be held solidarily liable
with the corporation for respondents-
employees’ monetary claims against the
corporation?
A: NO. Seva, et al. failed to show the existence of the
first requisite. They did not specifically allege in
their complaint that Rana and Burgos willfully and
knowingly assented to petitioner’s patently
unlawful act of forcing the respondents to sign the
dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that
Rana and Burgos had been guilty of gross negligence
or bad faith in directing the affairs of the
corporation.
To hold an officer personally liable for the debts of
the corporation, and thus pierce the veil of
corporate fiction, it is necessary to clearly and
convincingly establish the bad faith or wrongdoing
of such officer, since bad faith is never presumed
(FVR Skills and Services Exponents, Inc. [SKILLEX], et.
Al. v. Seva, et. Al., G.R. No. 200857, October 22, 2014).
Liability of a director for termination of
employees
Without any evidence of bad faith or malice,
directors may not be held personally liable. Only
when the termination is done with malice or in bad
faith on the part of the director may the director be
held solidarily liable with the corporation
(Equitable Banking Corporation vs. NLRC, GR No.
02467, June 13, 1997; Rolando DS Torres v. Rural
Bank of San Juan, Inc., et al., GR No. 184520, March
13, 2013).
Q: Jacob and Fernandez are STI officers, the
former being the President and CEO and the
latter as the Senior VP. Ico was hired as Faculty
Member by STI College Makati, Inc., a wholly-
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owned subsidiary of STI. Ico was subsequently
promoted as Dean of STI College-Parañaque
and, thereafter, as COO of STI-Makati. However,
after the merger between STI and STI College
Makati (Inc.), Ico received a memorandum
cancelling her COO assignment, citing the
management’s decision to undertake an
"organizational restructuring" in line with the
merger, and further ordering Ico to turn over
her work to one Victoria Luz, who shall function
as STI-Makati’s School Administrator. Based on
a report, it was recommended that an
investigation committee be formed to
investigate Ico for grave abuse of authority,
falsification, gross dishonesty, maligning and
causing intrigues, and other charges. The LA
found Ico to have been illegally, constructively
and in bad faith, dismissed by STI, Jacob and
Fernandez. On appeal, the NLRC reversed the
ruling of the LA. CA affirmed the ruling of the
NLRC.
Is Jacob solidarily liable with STI?
A: NO. The Court fails to discern any bad faith or
negligence on the part of respondent Jacob. The
principal character that figures prominently in this
case is Fernandez; he alone relentlessly caused
petitioner’s hardships and suffering. He alone is
guilty of persecuting petitioner. His superior, Jacob,
may have been, for the most part, clueless of what
Fernandez was doing to petitioner. A corporation,
as a juridical entity, may act only through its
directors, officers and employees. Obligations
incurred as a result of the directors’ and officers’
acts as corporate agents, are not their personal
liability but the direct responsibility of the
corporation they represent. As a rule, they are only
solidarily liable with the corporation for the illegal
termination of services of employees if they acted
with malice or bad faith (Girly G. Ico v. STI, Inc., et. Al,
G.R. No. 185100, July 9, 2014)
Liability of directors for the issuance of watered
stocks
A director or trustee who:
(1) Consents to the issuance of stocks for a
consideration less than its par or issued
value;
(2) Consents to the issuance of stocks for a
consideration other than cash, valued in
excess of its fair value; or
(3) Having knowledge of the inssuficient
consideration, does not file a written
objection with corporate secretary.
Shall be liable to the corporation or its creditors,
solidarily with the stockholder concerned for the
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difference between the value received at the
issuance of the stoch and the par or issued value of
the same.
NOTE: The prohibition to issue “watered stock”
refers only to the original issue of stocks but not
to a subsequent transfer of such stocks by the
corporation, for then it would no longer be an
“issue” but a sale thereof (Rochelle Roofing Co v.
Burley as cited in De Leon, Corporation Code of the
Philippines Annotated).
Liability of the director, trustee or officer who
attempts to acquire or acquires any interest
adverse to the corporation in respect of any
matter which has been reposed in him in
confidence
When a director, trustee, or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable
as a trustee for the corporation and must account
for the profits which otherwise would have accrued
to the corporation (CC, Sec. 31).
NOTE: Private or secret profits obtained must be
accounted for, even though the transaction on
which they are made is advantageous or is not
harmful to the corporation, or even though the
director/ trustee or officer acted without intent to
injure the corporation.
Q: Is the above rule changed by the fact that the
agreement whereby the director/ trustee or
officer is to receive a secret profit is made prior
to the time he becomes as such director/ trustee
or officer?
A: NO. Even though the agreement to receive a
secret profit is made prior to the time the recipient
becomes a director/ trustee or officer, he is still
liable under the above rule (De Leon, supra).
Q: Is the above rule changed by the fact that the
secret profits were obtained from ultra vires
transactions?
A: NO. Notwithstanding the fact that the profits
were derived from transaction ultra vires, the
director/ trustee or officer is still liable (Ibid).
NOTE: The members of the board of directors who
approved the payment of the cash dividends despite
the insolvency of the corporation and the
stockholders who received the payment should
make good the losses. (Steinberg vs. Velasco 53 Phil
953)
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Doctrine of Corporate Opportunity
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong
to the corporation, thereby obtaining profits to the
prejudice of such corporation, thereby obtaining
profits to the prejudice of such corporation, is guilty
of disloyalty and should, therefore, account to the
latter for all such profits by refunding the same,
notwithstanding that he risked his funds in the
venture (CC, Sec. 34).
A director shall refund to the corporation all the
profits he realizes on a business opportunity which:
1. The corporation is financially able to
undertake;
2. From its nature, is in line with corporations
business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable
expectancy (Ibid).
The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture
(Ibid).
NOTE: If such act is ratified by a vote of the
stockholders representing at least 2/3 of the
outstanding capital stock, the director is excused
from remitting the profit realized (Ibid).
Non-applicability of the Doctrine of Corporate
Opportunity
The doctrine is not applicable to the following
instances:
1. When a director engages in a distinct enterprise
of the same general class of business as that
which his corporation is engaged in, so long as
he acts in good faith;
2. The opportunity is one which is not essential to
the corporation’s business, or employment of
company’s resources, or where the director or
officer embracing opportunity personally is not
brought into direct competition with the
corporation; or
3. When the property or business opportunity has
ceased to be a “corporate opportunity” and has
transformed into a “personal opportunity”. In
such a case the corporation is definitely no
longer able to avail itself of the opportunity,
which may “arise from financial insolvency”, or
from legal restrictions, or from any other factor
which prevents it from acting upon the
opportunity for its own advantage (SEC Opinion,
March 4, 1982).
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Q: Malyn, Schiera and Jaz are the directors of
Patio Investments, a close corporation formed
to run the Patio Cafe, an al fresco coffee shop in
Makati City. In 2000, Patio Cafe began
experiencing financial reverses, consequently,
some of the checks it issued to its beverage
distributors and employees bounced.
In October 2003, Schiera informed Malyn that
she found a location for a second cafe in Taguig
City. Malyn objected because of the dire
financial condition of the corporation.
Sometime in April 2004, Malyn learned about
Fort Patio Cafe located in Taguig City and that its
development was undertaken by a new
corporation known as Fort Patio, Inc., where
both Schiera and Jaz are directors. Malyn also
found that Schiera and Jaz, on behalf of Patio
Investments, had obtained a loan of P500,000,
from PBCom Bank, for the purpose of opening
Fort Patio Cafe. This loan was secured by the
assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action
before the Regional Trial Court of Makati City
against Schiera and Jaz, alleging that the two
directors had breached their fiduciary duties by
misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Did Schiera and Jaz violate the principle of
corporate opportunity? Explain. (2005 Bar)
A: YES, Schiera and Jaz violated the Principle of
Corporate Opportunity, because they used Patio
Investments to obtain a loan, mortgaged its assets
and used the proceeds of the loan to acquire a coffee
shop through a corporation they formed (CC, Sec.
34).
RESPONSIBILITY FOR CRIMES
Where a law requires a corporation to do a
particular act, failure of which on the part of the
responsible officer to do so constitutes an offense,
the responsible officer is criminally liable therefore.
The reason is that a corporation can act through its
officers and agents and where the business itself
involves a violation of law all who participate in it
are liable. While the corporation may be fined for
such criminal offense if the law so provides, only the
responsible corporate officer can be imprisoned
(People vs. Tan Boon Kong, GR L-35262, March 15,
1930).
However, a director or officer can be held liable for
a criminal offense only when there is a specific
provision of law making a particular officer liable
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because being a corporate officer by itself is not
enough to hold him criminally liable.
Trust Receipts Law makes the officers of a
corporation criminally liable
The Trust Receipts Law recognizes the impossibility
of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation,
the law makes the officers or employees or other
persons responsible for the offense liable to suffer
the penalty of imprisonment (Ong v. the Court of
Appeals, G.R. No. 119858, April 29, 2003).
Though the entrustee is a corporation, nevertheless,
the law specifically makes the officers, employees or
other persons responsible for the offense, without
prejudice to the civil liabilities of such corporation
and or board of directors, officers, or other officials
or employees responsible for the offense. The
rationale is that such officers or employees are
vested with the authority and responsibility to
devise means necessary to ensure compliance with
the law and, if they fail to do so, are held criminally
accountable; thus, they have a responsible share in
the violations of the law (Ching v. the Secretary of
Justice, et al., G.R. No. 164317, February 6, 2006).
INSIDE INFORMATION
Any material non-public information about the
issuer of the securities (corporation) or the security
obtained by being an insider, which includes:
(ID-ReGoL)
1. The Issuer;
2. A Director or officer (or any 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, 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 forgoing insiders
(SRC, Sec. 3.8).
CONTRACTS
BY SELF-DEALING DIRECTORS
WITH THE CORPORATION
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Dealings of directors, trustees or officers with
the corporation
RCC: Prohibition now covers directors’, trustees’ or
officers’:
(1) Spouses
(2) Relatives within the fourth civil degree of
consanguinity or affinity (RCC, Sec 31)
A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the
option of the corporation unless all the following
conditions are present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under
the circumstances;
4. In case of corporations vested with public
interest, material contracts are approved by at
least 2/3 of the entire membership of the board,
with at least a majority of the independent
directors voting to approve the material
contract; and
5. That in the case of an officer, the contract with
the officer has been previously authorized by
the board of directors (CC, Sec. 32, par. 1).
NOTE: Sec. 32 (RCC, SEC 31) does not require that
the corporation suffers injury or damage as a result
of the contract.
Contract entered with a director or trustee may
be ratified by the vote of stockholders
A contract of the corporation with one or more of its
directors or trustees or officers may be ratified by
the vote of the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the
members in a meeting called for the purpose.
However, the following should concur:
1. Any of the first 2 conditions set forth in the 1st
paragraph of Sec. 32, CC is absent;
2. Contract is with a director or trustee;
NOTE: If the contract is with an officer of the
corporation, there must be a prior board
resolution authorizing the same.
3. Full disclosure of the adverse interest of the
directors or trustees involved is made at the
stockholders’ meeting called for the purpose;
and
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4. The contract is fair and reasonable under the
circumstances (CC, Sec. 32, par. 2).
NOTE: Hence, in all such instances, the element that
the contract is fair and reasonable cannot be
dispensed with for the transaction is to be valid and
enforceable.
Q: Suppose that the by-laws of X Corporation, a
mining firm, provides that "The directors shall
be relieved from all liability for any contract
entered into by the corporation with any firm in
which the directors may be interested." Thus,
director A acquired claims which overlapped
with X's claims and were necessary for the
development and operation of X's mining
properties. Is the by-law provision valid? Why?
(2001 Bar)
A: NO. It is in violation of Sec. 32 of the Corporation
Code (RCC, Sec 31).
Q: What happens if director “A” is able to
consummate his mining claims over and above
that of the corporation’s claims?(2001 Bar)
A: “A” should account to the corporation for the
profits which he realized from the transaction. He
grabbed the business opportunity from the
corporation (CC, Sec. 34).
BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
Contracts between corporations with
interlocking directors
A contract between two or more corporations
having interlocking directors shall not be
invalidated on that ground alone. Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is merely nominal
(not exceeding 20% of the outstanding capital
stock), he shall be subject to the provisions of
Sec. 32 insofar as the latter corporation or
corporations are concerned. (CC, Sec. 33)
NOTE: Stockholdings exceeding 20% of the
outstanding capital stock shall be considered
substantial for purposes of interlocking
directors.
When a mortgagee bank foreclosed the mortgage on
the real and personal property of the debtor and
thereafter assigned the properties to a corporation
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it formed to manage the foreclosed assets, the
unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee
and the assignee have interlocking directors. There
is no bad faith on the part of DBP by its creation of
Nonoc Mining, Maricalum and Island Cement as the
creation of these three corporations was necessary
to manage and operate the assets acquired in the
foreclosure sale lest they deteriorate from non-use
and lose their value (DBP v. CA, G.R. No. 126200,
August 16, 2001).
EXECUTIVE COMMITTEE
An executive committee is a body created by the by-
laws and composed of not less than three (3)
members of the board which, subject to the
statutory limitations, has all the authority of the
board to the extent provided in the board resolution
or by-laws. The committee may act by a majority
vote of all of its members (CC, Sec. 35).
NOTE: An executive committee can only be created
by virtue of a provision in the by-laws and that in
the absence of such by-law provision, the board of
directors cannot simply create or appoint an
executive committee to perform some of its
functions.
In such a case where there was an unauthorized
creation of executive committee by the board, the
principle of de facto officers may be applied insofar
as third persons are concerned. However, insofar as
the corporation is concerned, the unauthorized act
of appointment of an executive committee may be
subject to Sec. 144, which provides for penalties in
violation of the Code (SEC Opinion, Sept. 27, 1993).
Non-members of the board may be appointed as
members of the executive committee
Non-members of the board may be appointed as
members of the executive committee provided that
there are at least three (3) members of the board
who are members of the committee (SEC Opinion,
Sept. 16, 1986).
NOTE: A person not a director can be a member of
the executive committee but only in a
recommendatory or advisory capacity.
A foreigner is allowed to be a member of the
executive committee
A foreigner can be allowed representation in the
executive committee since he can be allowed in the
BOD. An Executive Committee is a governing body
which functions as the board itself. Thus,
membership therein shall be governed by the same
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FACULTY OF CIVIL LAW

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law/ rules applicable to the BOD as provided in Sec.
35 (SEC Opinion, June 3, 1998).
Executive committees provided in the Revised
Code of Corporate Governance
1. Audit Committee
2. Nomination Committee
3. Compensation and Remuneration Committee
Limitations on the powers of the executive
committee
The executive committee cannot act on the
following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable; and
5. Cash dividend declaration (CC, Sec. 35)
Quorum required of the executive committee
The quorum requirement for executive committee
is the same as that of the BOD.
Creation of special Committees
The Board of directors may create special
committees of temporary of permanent nature and
determine the members’ term, composition,
powers, and responsibilities (RCC, Sec. 34).
Decisions of the executive committee are not
subject to appeal to the board
Decisions of the executive committee are not
subject to appeal to the board. However, if the
resolution of the Executive Committee is invalid, i.e.
not one of the powers conferred to it, it may be
ratified by the board (SEC Opinion, July 29, 1995).
Q: Pursuant to its By-Laws, Soei Corporation’s
Board of Directors created an Executive
Committee to manage the affairs of the
MEETING
REGULAR
WHEN: The date fixed in the by-laws; or
If there is no date in the by-laws – shall be held
monthly.
NOTICE REQUIREMENT:
A. State the date, time and place of the meeting;
B. Be sent to every director or trustee
i. Within the period provided in the by- laws.
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corporation in between board meetings. The
Board of Directors appointed the following
members of the Executive Committee: the
President, Sarah L; the Vice-President, Jane L;
and a third member from the board, Juan Riles.
On December 1, 2013, the Executive Committee,
with Sarah L and Jane L present, met and
decided on the following matters:
1. Purchase of a delivery van for use in the
corporation’s retail business;
2. Declaration and approval of the 13th month
bonus;
3. Purchase of an office condominium unit at
the Fort; and
4. Declaration of P10.00 per share cash
dividend.
Are the actions of the Executive Committee
valid? (2014 Bar)
A: NO. All the actions taken by the Executive
Committee in the problem are not valid. The
Executive Committee was not properly created and,
therefore, its acts are invalid. Sec. 35 of the
Corporation Code requires that at least three
members of an Executive Committee be directors of
the corporation. In the problem, only Member Sarah
L (who is a director as she is the president) and
Member Juan Riles (who is clearly identified in the
problem as a director) are directors of Soei
Corporation. Member Jane L is not identified as a
director. As the Executive Committee in the problem
was not properly created, it could not act at all as the
minimum quorum would be three. As stated earlier,
the Executive Committee lacks one qualified
member.
If the Executive Committee were properly
organized and a quorum was present, all the actions
taken by the Executive Committee in the problem,
except the declaration of P10.00 per share cash
dividend, would have been valid. The distribution of
cash dividends to the shareholders may not be
delegated by the Board of Directors to the Executive
Committee pursuant to Sec. 35 of the CC.
SPECIAL
WHEN: At any time deemed necessary or as may be
provided in the bylaws.
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ii. In the absence of provision in the by-laws, at least 1 day prior to the scheduled meeting. (2 days
in RCC)
A director or trustee may waive this requirement, either expressly or impliedly.
VENUE:
A. Venue fixed by the by-laws; or
B. If venue is not provided by the by-laws, anywhere in or outside of the Philippines.
Q: Lopez Realty, Inc. issued a Board Resolution
authorizing Arturo, a member of the Board of
Directors of the corporation, to negotiate with
the Tanjanco spouses for the sale of the ½
shares of Lopez Realty Corporation. Because of
this, Arturo and the spouses executed a Deed of
Sale for the shares for Php3.6M. However,
Asuncion, another Board of Director of the said
corporation, submitted a letter requesting the
Board to defer any transaction with Tanjanco as
she was not apprised and given notice of the said
transaction. Despite this, the execution of the
Deed of Absolute Sale between Arturo and
spouses Tanjanco proceeded. Asuncion then
filed a complaint for the Annulment of the Deed
of Sale with a prayer for a writ of preliminary
injuction in the RTC. Asuncion alleges that she
was neither notified nor apprised of the on-
going sale of the shares of LRI. Is Asuncion’s
contention correct?
A: NO. The general rule is that a corporation,
through its board of directors, should act in the
manner and within the formalities, if any,
prescribed by its charter or by the general law.
Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by-
laws, otherwise, any action taken therein may be
questioned by any objecting director or
shareholder. However, the actions taken in such a
meeting by the directors or trustees may be ratified
expressly or impliedly. In the present case, the
ratification was expressed through the July 30, 1982
Board Resolution. Asuncion claims that the July 30,
1982 Board Resolution did not ratify the Board
Resolution dated August 17, 1981 for lack of the
required number of votes because Juanito is not
entitled to vote while Leo voted "no" to the
ratification of the sale even if the minutes stated
otherwise. The Court takes into account that
majority of the board of directors except for
Asuncion, had already approved of the sale to the
spouses Tanjangco prior to this meeting. As a
consequence, the power to ratify the previous
resolutions and actions of the board of directors in
this case lies in the stockholders, not in the board of
directors. It would be absurd to require the board
of directors to ratify their own acts—acts which the
same directors already approved of beforehand.
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Hence, Juanito, as the administrator of Teresita’s
estate even though not a director, is entitled to vote
on behalf of Teresita’s estate as the administrator
thereof (Lopez Realty, Inc. et. al. v. Tanjangco, G.R.
No. 154291, November 12, 2014).
Meeting held in the absence of some of the
directors and without any notice given to them
is illegal
It is illegal, and the action at such meeting although
by a majority of the directors, is invalid unless:
1. Subsequently ratified or waived, expressly or
impliedly, by the absent directors or
2. Rights have been acquired by innocent third
persons, as against whom the corporation must
be held estopped to set up the failure to observe
formalities (De Leon, supra).
Directors or trustees cannot attend or vote by
proxy at board meetings
Directors or trustees cannot attend or vote by proxy
at board meetings (CC, Sec. 25).
The members of the BOD are required to exercise
their judgment and discretion in running the affairs
of the corporation and they cannot be substituted by
others (SEC Opinion, May 27, 1970).
Requisites for a valid tele/videoconferencing
R.A. 8792, as implemented by SEC Memo. Circular
No. 15 on November 30, 2001, provides that:
1. Directors must express their intent on
teleconferencing;
2. Proper identification of those attending; and
3. The corporate secretary must safeguard the
integrity of the meeting by recording it.
NOTE: There is no violation of the Anti-Wire
Tapping Act (R.A. 4200) because all the parties to
the board meeting are aware that all the
communications are recorded.
The basic types of teleconferencing are:
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1. Video conferencing;
2. Computer conferencing;
3. Audio conferencing.
Contents of the notice, which should be sent to
every director in case of a directors?
tele/videoconferencing
The Corporate Secretary shall send out the notices
of the meeting to all directors in accordance with
the manner of giving notice as stated in the
corporate by-laws.
The notice shall include the following:
1. Inquiry on whether the director will attend
physically or through tele/videoconferencing;
2. Contact number/s of the Secretary and office
staff whom the director may call to notify and
state whether he shall be physically present or
attend through tele/videoconferencing;
3. Agenda of the meeting; and
4. All documents to be discussed in the meeting,
including attachments, shall be numbered and
duly marked by the Secretary in such a way that
all the directors, physically or electronically
present, can easily follow, refer to the
documents and participate in the meeting (SEC
Memo Circ. No. 15, Series of 2001).
If the director chooses tele/videoconferencing, he
shall give notice of at least five (5) days prior to the
scheduled meeting to the Secretary. The latter shall
be informed of his contact number/s. In the same
way, the Secretary shall inform the director
concerned of the contact number/s he will call to
join the meeting. The Secretary shall keep the
records of the details, and on the date of the
scheduled meeting, confirm and NOTE such details
as part of the minutes of the meeting (ibid). In the
absence of an arrangement, it is presumed that the
director will physically attend the Board meeting
(Ibid).
WHO PRESIDES
The president shall preside at all meetings of the
directors or trustees as well as of stockholders or
members unless the by-laws provide otherwise (CC,
Sec. 54).
Q: Under the articles of incorporation of Manila
Industrial Corp., its principal place of business
shall be in Pasig, Metro Manila. The principal
corporate offices are at Ortigas Center, Pasig,
Metro Manila, while factory processing leather
products is in Manila. The corporation holds its
annual stockholders’ meeting at the Manila
Hotel in Manila and its BOD meeting at a hotel in
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Makati, Metro Manila. The by-laws are silent as
to the place of meeting of the stockholders and
directors.
a. Who shall preside at the meeting of the
b. Can Ting, a stockholder, who did not attend
the stockholders’ annual meeting in Manila,
question the validity of the corporate
resolutions passed at such meeting?
c. Can the same stockholder question the
validity of the resolutions adopted by the
BOD at the meeting held in Makati? (1993
Bar)
A:
a. Section 54 of the Code provides that it is the
President who shall preside over the directors’
meeting, unless the by-laws provide otherwise.
However, in practice, it is the Chairman who
presides because the President only reports to
the Chairman. Only in the absence of a
Chairman can a President preside over
directors’ meetings.
b. NO. Section 51 provides that the annual
stockholders’ meeting shall be held in the city
or municipality where the principal office is
located. For this purpose, the law also provides
that Metro Manila is considered a city or
municipality. Since the principal office or
business of MIC is Pasig, Metro Manila, the
holding of the annual stockholders’ meeting in
Manila is proper.
c. NO. Ting cannot question the validity of
corporate resolutions passed in the BOD meeting
because Section 53 of the Code does not require
that the meeting must be held within the city or
municipality where the principal office of the
corporation is located. The directors’ meeting
can be held anywhere in or outside the
Philippines.
QUORUM
Quorum in board meetings
GR: Majority of the number of directors or trustees.
XPN: If AOI or the by-laws provide for a greater
number (CC, Sec. 25)
NOTE: The quorum is the same even if there is
vacancy in the board.
Rule as to the decision of the quorum
GR: Every decision of at least a majority of the
directors or trustees present at a meeting at which
there is quorum shall be valid as a corporate act.
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XPNs:
1. The election of officers which shall require the
vote of a majority of all the members of the
board.
2. No board approval is necessary where there is
custom, usage and practice in the corporation
not requiring prior board approval or where
subsequent approval is sufficient (Board of
Liquidators v. Kalaw, G.R. No. L‐18805, August
14, 1967).
Three out of five directors of the board of directors
present in a special meeting do not constitute a
quorum to validly transact business when its by-
laws requires at least four members to constitute a
quorum. Under Section 25 of the CC, the articles of
incorporation or by-laws may fix a greater number
than the majority of the number of directors to
constitute a quorum. Any number less than the
number provided in the articles or by-laws cannot
constitute a quorum; any act therein would not bind
the corporation; all that the attending directors
could do is to adjourn (Pena vs. CA, G.R. No. 91478,
February 7, 1991, in Divina, 2014).
RULE ON ABSTENTION
Effect of Abstention
No inference can be drawn in a vote of abstention.
When a director or trustee abstains, it cannot be
said that he intended to acquiesce in the action
taken by those who voted affirmatively. Neither, for
that matter, can such inference be drawn from the
abstention that he was abstaining because he was
not then ready to make a decision (Lopez v. Ercita,
G.R. No. L-32991, June 29, 1972).
Instances when a director is required to abstain
in voting
Whenever a director believes he/she has a conflict
of interest, the director should abstain from voting
on the issue and make sure his/her abstention is
noted in the minutes (Robert's Rules, 10th ed.).
The other reason a director might abstain is that
he/she believes there was insufficient information
for making a decision. Otherwise, directors should
cast votes on all issues put before them. Failure to
do so could be deemed a breach of their fiduciary
duties.
Example where a director needs to abstain
To avoid “Insider Trading”, Insiders are obligated to
abstain from trading the shares of his
corporation. This duty to abstain is based on two
factors:
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1. The existence of a relationship giving access,
directly or indirectly, to information intended
to be available only for a corporate purpose and
not for the personal benefit of anyone; and
2. The inherent unfairness involved when a party
takes advantage of such information knowing it
is unavailable to those with whom he is dealing
(SEC v. Interport Resources Corporation, G.R.
No. 135808, October 6, 2008).
STOCKHOLDERS AND MEMBERS
A person becomes a shareholder the moment he:
1. Enters into a subscription contract with an
existing corporation (he is a stockholder upon
acceptance of the corporation of his offer to
subscribe whether the consideration is fully
paid or not);
2. Purchase treasury shares from the corporation;
or
3. Acquires shares from existing shareholders by
sale or any other contract, or acquires shares by
operation of law like succession (Sundiang Sr. &
Aquino, 2009).
RIGHTS OF A STOCKHOLDER AND MEMBER
1. Management Right
a. To attend and vote in person or by proxy at
a stockholders’ meetings (CC, Secs. 50, 58);
b. To elect and remove directors (CC, Secs. 24,
28);
c. To approve certain corporate acts (CC, Sec.
58);
d. To adopt and amend or repeal the by-laws
of adopt new by-laws (CC, Secs. 46, 48);
e. To compel the calling of the meetings (CC,
Sec. 50);
f. To enter into a voting trust agreement (CC,
Sec. 59); and
g. To have the corporation voluntarily
dissolved (CC, Secs. 118, 119).
2. Proprietary rights
a. To transfer stock in the corporate book (CC,
Sec. 63);
b. To receive dividends when declared (CC,
Sec. 43);
c. To the issuance of certificate of stock or
other evidence of stock ownership (CC, Sec.
64);
d. To participate in the distribution of
corporate assets upon dissolution (CC, Sec.
118, 119); and
e. To pre-emption in the issue of shares (CC,
Sec. 39).
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3. Remedial rights
a. To inspect corporate books (CC, Sec. 74);
b. To recover stock unlawfully sold for
delinquent payment of subscription (CC,
Sec. 69);
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation (CC, Sec. 74, 75);
d. To bring suits (derivative suit, individual
suit, and representative suit); and
e. To demand payment in the exercise of
appraisal right (CC, Secs. 41, 81).
DOCTRINE OF EQUALITY OF SHARES
Where the articles of incorporation do not provide
for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal
and enjoy the same rights and privileges and are
also subject to the same liabilities (CC, Sec. 6).
PARTICIPATION IN MANAGEMENT
Under the CC, stockholders or members periodically
elect the board of directors or trustees, who are
charged with the management of the corporation.
The board, in turn, periodically elects officers to
carry out management functions on a day-to-day
basis. As owners, though, the stockholders or
members have residual powers over fundamental
and major corporate changes.
While stockholders and members (in some
instances) are entitled to receive profits, the
management and direction of the corporation are
lodged with their representatives and agents -- the
board of directors or trustees. In other words, acts
of management pertain to the board; and those of
ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must
seek approval of the stockholders or members (Tan
v. Sycip, G.R. No. 153468, August 17, 2006).
PROXY
Stockholders and members may vote in person or
by proxy in all meetings of stockholders or members
(Sec. 58, CC).
However the right of members to vote by proxy may
be denied under the articles of incorporation or by-
laws of a non-stock corporation (Sec. 89. CC.)
The term “proxy” designates the formal written
authority given by the owner or holder of the stock,
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise
the voting rights of the former.
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It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or
member to vote for him at a stockholders’ or
members’ meeting.
It also refers to the instrument which evidences the
authority of the agent (De Leon, supra).
NOTE: A proxy is a special form of agency. A proxy
holder is an agent and as such a fiduciary (De Leon,
supra).
Since a proxy acts for another, he may act as such
although he himself is disqualified to vote his
shares. A proxy-stockholder disqualified to vote
because his stock has been declared delinquent may
vote the stocks of his principal which is not
delinquent.
Purposes of proxies
The purposes and use of proxies are as follows:
1. Assures the presence of a quorum in meetings
of stockholders of large corporations;
2. Enables those who do not wish to attend a
stockholders’/ members’ meeting to protect
their interest by exercising their right to vote
through a representative; and
3. One of the devices in securing voting control or
management control in the corporation (Ibid.).
Who may be a proxy
Any person whom the stockholder or member sees
fit to represent him.
NOTE: By-laws restricting the stockholder’s or
member’s right in this respect are void (De Leon,
supra).
Further, same person may act as proxy for one or
several stockholders or members.
Duration of proxy
1. Specific proxy – authority granted to the proxy
holder to vote only for a particular meeting on
a specific date.
2. Continuing proxy – authority granted a proxy to
appear and vote for and in behalf of a
shareholder for a continuing period which
should not be more than 5 years at any one
time. By-laws may provide for a shorter
duration of a continuing proxy.
Extent of authority of a proxy
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1. General proxy – A general discretionary power
to attend and vote at an annual meeting, with all
the powers the undersigned would possess if
personally present, to vote for directors and all
ordinary matters that may properly come
before a regular meeting.
NOTE: A holder of a general proxy has no
authority to vote for a fundamental change in
the corporate charter or other unusual
transactions such as merger or consolidation.
2. Limited proxy – Restrict the authority to vote to
specified matters only and may direct the
manner in which the vote shall be cast (Ibid.).
Requirements of a valid proxy
1. Proxies shall be in writing and shall be signed
by the stockholder or member concerned. Oral
proxies are NOT valid;
2. The proxy shall be filed before the scheduled
meeting with the corporate secretary;
3. Unless otherwise provided (continuing in
nature) in the proxy, it shall be valid only for the
meeting for which it is intended. The authority
may be general or limited; and
4. No proxy shall be valid and effective for a period
longer than 5 years at any one time (CC, Sec. 58,
as amended by SRC, Sec. 20).
Instances when the right to vote by proxy may
be exercised
1. Election of the BOD/BOT (CC, Sec. 24)
NOTE: When proxies are solicited in relation to
the election of corporate directors, the resulting
controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation,
should be properly seen as an election
controversy within the original and exclusive
jurisdiction of the trial courts by virtue of
Section 5.2 of the SRC in relation to Section 5(c)
of Presidential Decree No. 902-A. From the
language of Section 5(c) of Presidential Decree
No. 902-A, it is indubitable that controversies as
to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for
election to the board of directors are properly
cognizable and adjudicable by the regular
courts exercising original and exclusive
jurisdiction over election cases. (GSIS v. CA, G.R.
No. 183905, April 6, 2009)
2. Voting in case of joint ownership of stock (CC,
Sec. 56)
3. Voting by trustee under VTA (CC, Sec. 59, last
par.)
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4. Voting by members in non-stock corps (CC, Sec.
89, par. 2)
NOTE: In non-stock corporations the right to
vote by proxy, or even the right to vote may be
denied to members in the articles of
incorporation or the by-laws as long as the
denial is not discriminatory.
5. In considering other matters:
a. Pledge or mortgage of shares (CC, par. 2,
Sec. 55);
b. In all other matters as may be provided in
the by-laws (CC, Sec. 47[4]);and
c. In all meetings of stockholders or members
(CC, Sec. 58).
Power to appoint a proxy is a personal right
The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
same at the time it is be voted (SEC Opinion, Dec. 3,
1993, citing 5 Fletcher, Sec. 2053).
Unless the stockholder or member who executed a
proxy gives his consent in writing, a designated
proxy may not further re-designate another under
the same proxy. An alternate proxy can only act as
proxy in case of non-attendance of the other
designated proxy (De Leon, supra).
Revocation of proxy
A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to vote may
revoke the same at anytime.
XPN: Said proxy is coupled with interest, even if it
may appear by its terms to be revocable (De Leon,
supra).
Last proxy given revokes all previous proxies (SEC
Opinion, October 14, 1991).
SEC may pass upon the validity of the issuance
and use of proxies
PD 902-A empowers the SEC, among others, “to pass
upon the validity of the issuance and use of proxies
and voting trust agreements for absent
stockholders or members” (Sec. 6[g]).
Procedural Matters Relating to Proxies
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1. “Proxy Solicitation” involves the securing and
submission of proxies, while “Proxy Validation”
concerns the validation of such secured and
submitted proxies;
2. The SEC’s power to pass upon the validity of
proxies in relation to election controversies has
effectively been withdrawn, tied as it is to its
abrogated jurisdictional powers and has been
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of the
Securities Regulation Code;
3. However, although an intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporations violations of SEC rules and
regulations, but that motive alone should not be
sufficient to deprive the SEC of its investigatory
and regulatory powers, especially so since such
powers are exercisable on a motu proprio basis.
The fact that the jurisdiction of the regular courts
under Section 5(c) is confined to the voting on
election of officers, and not on all matters which
may be voted upon by stockholders, elucidates that
the power of the SEC to regulate proxies remains
extant and could very well be exercised when
stockholders vote on matters other than the
election of directors (GSIS v. CA, G.R. No. 183905,
April 16, 2009).
Note: It must be noted however that directors or
trustees cannot vote by proxy at board meetings.
(Par.3, Sec. 5, CC)
VOTING TRUST
A voting trust agreement (VTA) is an agreement
whereby one or more stockholders transfer their
shares of stocks to a trustee, who thereby acquires
for a period of time the voting rights (and/or any
other specific rights) over such shares; and in
return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
Note: The voting trust agreement filed with the
Principal purpose: acquire control of the
corporation.
Other purposes of a VTA
1. VTA makes possible a unified control of the
affairs of the corporation and a consistent
policy by binding stockholders to vote as a unit.
2. To assure continuity of policy and management
especially of a new corporation desirous of
attracting investors.
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3. To enable the owners of the majority of the
stock of the corporation to control the
corporation.
4. To vest and retain the management of the
corporation in the persons originally promoting
it.
5. To prevent a rival concern from acquiring
control of the corporation.
6. To carry out a proposed sale of the
corporation’s assets and to facilitate its
dissolution.
7. To enable two holding companies to operate
jointly a corporation controlled by them.
8. To effect a plan for reorganization of a
corporation in financial difficulty or in
bankruptcy proceedings.
9. To aid a financially embarrassed corporation to
obtain a loan and protect its creditors (De Leon,
supra).
Procedural requirements and limitations
imposed on VTA’s
1. The agreement must be in writing and
notarized and specify the terms and conditions
thereof.
2. A certified copy of such agreement shall be filed
with the corporation and with the SEC,
otherwise, it is ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA
shall be cancelled.
4. A new certificate shall be issued in the name of
the trustee/s stating that they are issued
pursuant to the VTA.
5. The transfer shall be noted in the books of the
corporation, that it is made pursuant to said
VTA.
6. The trustee/s 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. GR: No VTA shall be entered into for a period
exceeding 5 years at any one time (i.e., for every
voting trust)
XPN: In case of a voting trust specifically
requiring a longer period as a condition in a
loan agreement, the period may exceed 5 years
but shall automatically expire upon full
payment of the loan.
8. No VTA shall be entered into for the purpose of
circumventing the law against monopolies and
illegal combinations in restraint of trade.
9. The agreement must not be used for purposes
of fraud (CC, Sec. 59).
NOTE: Unless expressly renewed, all rights granted
in a voting trust agreement shall automatically
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expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of
stock in the name of the trustee or trustees shall
thereby be deemed cancelled and new certificates of
stock shall be reissued in the name of the
transferors (CC, Sec. 59).
Effect of a voting trust agreement with respect to
the rights of the trustor and the trustee
It is the trustee of the shares who acquires legal title
to the shares under the voting trust agreement.
And thus entitled to the right to vote and the right to
be elected in the board of directors while the
trustor-stockholder has the beneficial title which
Voting trust agreement vs. Proxy
VOTING TRUST
If validly executed, VTA is intended to be
irrevocable for a definite and limited period of time.
Trustee acquires legal title to the shares of the
transferring stockholder
Right to vote as well as other rights may be given
except the right to receive dividends. The trustee
may vote in person or by proxy unless the
agreement provides otherwise
The agreement must be notarized
Trustee is not limited to act at any particular
meeting
The stock certificate shall be cancelled and a new
one in the name of the trustee shall be issued stating
that they are issued pursuant to a VTA.
A trustee can vote and exercise all the rights of the
stockholder even when the latter is present.
An agreement must not exceed 5 years at any one
time except when the same is made a condition of a
loan.
Governed by the law on trust
A trustee has the right to inspect corporate books.
Pooling agreement
Pooling or voting agreements are agreements by
which two or more stockholders agree that their
shares shall be voted as a unit. They are usually
concerned with the election of directors to gain
control of the management. The parties remain the
legal owners of their stocks with the right to vote
them (De Leon).
NOTE: This does not involve a transfer of stocks but
is merely a private agreement (CC, Sec. 100).
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includes the right to receive dividends (Lee v. CA,
G.R. No. 93695, February 4, 1992).
Note: The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder in the same manner as any other
corporate book or record. Both the transferor and
the trustee may exercise the right of inspection of all
corporate books and records (Villanueva,
Commercial Law Reviewer, p. 741, 2017.
Trustor has the right to terminate voting trust
agreement when the trustee has committed a
breach of trust (Everett v. Asia Banking Corp., G.R.
No. L-25241, November 3, 1926).
PROXY
A proxy, unless coupled with interest, is revocable at
anytime.
Proxy has no legal title to the shares of the principal
Only right to vote is given. The proxy must vote in
person.
Proxy need not be notarized
Proxy can only act at a specified stockholder’s meeting
(if not continuing)
No cancellation of the certificate shall be made
A proxy can only vote in the absence of the owner of the
stocks
A proxy is usually of shorter duration although under
Sec. 58 it cannot exceed 5 years at any one time
Governed by the law on agency
A proxy does not have a right of inspection of corporate
books.
e.g. Shareholders A,B,C,D,E, hold 50% of the
outstanding capital stock, entered into a pooling
agreement to vote for F as a member of the board of
director.
Validity of pooling agreements
Pooling agreements are valid as long as they do not
limit the discretion of the BOD in the management
of corporate affairs or work any fraud against
stockholders not party to the contract.
Test: the validity and legality of such pooling
agreements depend upon the objects sought to be
attained and the acts which are done under them,
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and the other circumstances. There is some
authority for holding pooling agreements to be
invalid if the consideration for entering into the
same gives a private benefit to the stockholder.
Pooling agreement vs.Voting Trust Agreement
of all its assets and properties, including the
management and operation of the company,
claiming that under the Voting Trust Agreement,
the bank was constituted as trustee of the
management and operations of the Company. Is
the company correct? (1992 Bar)

In Pooling Agreement, the stockholders themselves
exercise their right to vote. On the other hand, the
trustees are the ones who exercise the right to vote
under the Voting Trust Agreement.
Q: A distressed corporation executed a VTA for a
period of three years over 60% of its
outstanding paid up shares in favor of a bank to
which it was indebted, naming the the Bank as
trustee. The Company mortgaged all its
properties to the Bank.The Bank foreclosed the
mortgaged properties, and as the highest
bidder, acquired said properties and assets of
the Company.
The three-year period having expired, the
company demanded the turn-over and transfer
A: NO. The company’s demand does not tally with
the concept of a VTA because such agreement
merely conveys to the trustee the right to vote the
shares of the grantor. The consequence of the
foreclosure of the mortgaged properties would not
be in consonance with the VTA and its effects
CASES WHEN STOCKHOLDERS’ ACTION IS
REQUIRED
Under Section 6 of the Corporation Code, each share
of stock is entitled to vote, unless otherwise
provided in the articles of incorporation or declared
delinquent under Section 67 of the Corporation
Code (Tan v. Sycip, G.R. No. 153468, August 17, 2006).

Corporate powers exercised jointly by the BOD and stockholders (I.4PA.2G.E2-SMAV)

VOTE REQUIREMENT
CORPORATE ACT
BOARD OF DIRECTORS STOCKHOLDERS
GR: Majority vote of the outstanding capital stock
Amendments, repeal, or
Majority vote of the BOD
adoption of new by-laws
XPN: If delegated by the stockholders to the board
GR: Vote of the majority of the outstanding shares
of stock or members of both the managing and the
managed corporation.

XPN: The vote required for the managed

corporation is not merely majority but 2/3 of the
outstanding capital stock in cases where:

1) A stockholder or stockholders representing

Entering into Majority of the quorum of
the same interest of both the managing and
management contract the BOD
the managed corporations own or control
more than one-third (1/3) of the total
outstanding capital stock entitled to vote of
the managing corporation; or
2) 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.
Issuance of stock Majority of the quorum of Vote representing 2/3 of the outstanding capital
dividends the BOD stock
Amendment to articles of Vote representing 2/3 of the outstanding capital
Majority vote of the BOD
incorporation stock

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Grant of compensation to
directors
Extending or shortening
the corporate term
Increase or decrease of
capital stock
To incur, create, or
increase bonded
indebtedness
Deny Pre-emptive Right
(CC, Sec. 39)
Investment of corporate
funds in another
corporation or business or
for any other purpose
other than the primary
purpose
The sale or other
disposition of all or
substantially all of the
corporate assets
Merger or consolidation
Voluntary dissolution
To adopt a plan of
distribution of assets of a
non-stock corporation
MERCANTILE LAW
Approval of the Board
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the board
Majority vote of the BOD
Majority vote of the BOD
Majority vote of
Trustees
Majority vote of the outstanding capital stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
Vote representing 2/3 of the outstanding capital
stock
the
2/3 of the members having voting rights

Corporate powers exercised solely by the stockholders

CORPORATE ACT APPROVAL OF STOCKHOLDERS

Election of directors or trustees; filling up
of vacancies by the stockholders due to Candidates receiving the highest number of votes from the
the expiration of term, removal from outstanding capital stock or members entitled to vote (plurality,
office or increase in the number of board NOT majority)
seats
Plurality vote of the BOD listed in the AOI, not merely those
To elect officers of the corporation
present constituting a quorum
Majority of the quorum of the BOD if authorized by the AOI or in
Fixing the issued price of no-par value
the absence of such authority, by a majority of the outstanding
shares
capital stock
Declaration of cash and other dividends
Majority of the quorum of the board
other than stock dividends
To adopt by laws Majority of the outstanding capital stock or of the members
To revoke the power delegated to the
BOD to amend or repeal the by-laws or Majority of the outstanding capital stock or of the members
adopt new by laws
To call a special meeting to remove Majority of the outstanding capital stock or of the members
directors or trustees entitled to vote
Vote representing 2/3 of the outstanding capital stock or of
Removal of directors
members entitled to vote
Delegation of the power to amend by-
Vote representing 2/3 of the outstanding capital stock
laws to the board of directors
Ratification of corporate contract with a
director Vote representing 2/3 of the outstanding capital stock

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To delegate to the BOD the power to
amend or repeal the by-laws or adopt 2/3 of the outstanding capital stock or of the members
new by laws

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MERCANTILE LAW
PROPRIETARY RIGHTS A record date is the date fixed in the
resolution declaring dividends, when the
The following are the proprietary rights of the dividend shall be payable to those who are
stockholders: stockholders of record on a specified future
date or as of the date of the meeting
1. Right to Dividends declaring said dividend. (De Leon, supra)
2. Right of Appraisal Holders of shares not fully paid which are
3. Right to Inspect not delinquent shall have all the rights of a
4. Pre-emptive Right stock holder.
5. Right to Vote
6. Right of First Refusal GR: Prior to the declaration of a dividend, a
stockholder cannot maintain an action at
RIGHT TO DIVIDENDS law to recover his share of the accumulated
profits because such stockholder has no
Right to dividend of a stockholder individual interest in the profits of a
corporation until a dividend has been
It is the right of the stockholder to demand payment declared.
of dividends after the board’s declaration.
Stockholders are entitled to dividends pro rata XPN: An action at law may be maintained
based on the total number of shares that they own where it is alleged that sufficient net profits
and not on the amount paid for the shares (SEC have been earned to obligate the
Opinion, October 10, 1992 and July 16, 1996). corporation to pay, however, there must be
a prior application with the directors for
G.R. Stock corporations are prohibited from the relief sought. If it appears that the
retaining surplus profits in excess of 100% of their directors have wantonly violated their
paid-in capital stock duty, and such application would be
inefficacious, such application need not be
XPN: made.
a) When justified by definite corporate
expansion projects or programs approved No dividends can be declared out of capital, except
by the board of directors; or when liquidating dividends distributed at
b) When the corporation is prohibited under dissolution (Sec. 122, CC).
any loan agreement with any financial
institution or creditor, whether local or Rule in applying dividends in delinquent shares
foreign, from declaring dividends without
its/his consent, and such consent has not Cash dividends due on delinquent
yet been secured; or stock shall first be applied to the
Cash
c) When it can be clearly shown that such unpaid balance on the subscription
retention is necessary under special plus cost and expenses.
circumstances obtaining in the corporation, Stock dividends are withheld from
such as when there is need for special Stock the delinquent stockholder until his
reserve for probable contingencies (Sec. 43, unpaid subscription is fully paid.
CC)
RIGHT OF APPRAISAL
Entitlement to receive dividends
It refers to the right of the stockholder to demand
GR: Those stockholders at the time of declaration payment of the fair value of his shares, after
are entitled to dividends (Sundiang Sundiang Sr. & dissenting from a proposed corporate action
Aquino, 2009, citing SEC Opinion, July 15, 1994). involving a fundamental change in the charter or
articles of incorporation in the cases provided by
NOTE: Dividends declared before the transfer of law (De Leon, 2010).
shares belong to the transferor and those
declared after the transfer, belong to the Requisites: (GWAFU)
transferee (Ibid).
1. Any Ground for appraisal must be present.
XPN: 2. A written demand on the corporation must
1. In case a record date is provided for. be made within 30 days after the date when the
vote was taken

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3. The dissenting stockholders attend the
meeting of the stockholders and voted against
the proposed action.
4. The price of the Fair Market Value of the
shares on the day before the date of voting.
Note: In case of disagreement, the value will
be determined by appraisal of 3 disinterested
persons (Sec 82. CC)
5. The corporation has sufficient unrestricted
retained earnings to pay (Turner vs. Lorenzo
636 scra 137)
Instances where a stockholder may exercise his
appraisal right
Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares
of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code;
3. In case of merger or consolidation (CC, Sec. 81);
4. In case the corporation decides to invest its
funds in another corporation or business for
any purpose other than its primary purpose as
provided in Sec. 42 of the CC;
5. Under Sec. 105, any stockholder of a close
corporation may, for any reason, compel 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.
Limitations on the exercise of appraisal right
1. Any of the instances provided by law for the
exercise of the right by a dissenting stockholder
must be present.
2. The dissenting stockholder must have voted
against the proposed corporate action. The
right is not available to a stockholder who was
either absent at the meeting where the
corporate action was approved, or was present
at such meeting but abstained from casting his
vote.
3. A written demand on the corporation for
payment of his shares must be made by him
within 30 days after the date the vote was taken.
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NOTE: Failure to make the demand within such
period shall be deemed a waiver of the appraisal
right.
4. The price must be based on the fair value of the
shares as of the day prior to the date on which
the vote was taken. If the proposed corporate
action is implemented or effected, the payment
shall be made upon surrender of the certificates
of stock representing his shares.
5. Such fair value must be determined as provided
in Sec. 82.The fair value shall exclude any
appreciation or depreciation in anticipation of
such corporate action.
6. Payment of the shares must be made only out of
the unrestricted earnings of the corporation.
NOTE: No payment shall be made to any
dissenting stockholder unless the corporation
has unrestricted retained earnings in its books
to cover the payment. The trust fund
doctrine backstops the requirement of
unrestricted retained earnings to fund the
payment of the shares of stocks of the
withdrawing stockholders (Philip Turner, et al.,
v. Lorenzo Shipping Corp., G.R. No. 157479,
November 24, 2010).
7. Upon such payment, the stockholder must
transfer his shares to the corporation (CC, Secs.
81, 42).
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares; may the stockholder invoke his
appraisal rights and demand payment for his
shareholdings? (1999 Bar)
A: NO, the stockholder may not invoke his appraisal
right because disagreement with the issuance of
new shares and its pricing do not fall under any of
the instances where the appraisal right is available.
Effects of the exercise of the right of appraisal
1. Once the dissenting stockholder demands
payment of the fair value of his shares:
a. All rights accruing to such shares including
voting and dividend rights shall be
suspended; and
b. He shall be entitled to receive payment of
the fair value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by
him;
c. GR: He is not allowed to withdraw his
demand for payment of his shares
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XPN: Unless the corporation consents
thereto.
2. If the dissenting stockholder was not paid the
value of his shares within 30 days after the
award, his voting and dividend rights shall be
immediately restored until payment of his
shares (CC , Sec. 83);
NOTE: Even if his rights as stockholder are
suspended after his demand in writing is made,
he cannot be considered as an ordinary creditor
of the corporation (SEC Opinion, Jan. 11, 1982);
3. Upon payment of the stockholder’s shares, all
his rights as stockholders are terminated, not
merely suspended (CC, Sec. 82); and
4. If before the stockholder is paid, the proposed
corporate action is abandoned, his rights and
status as a stockholder shall thereupon be
permanently restored (CC, Sec. 84).
Rule if there is a disagreement between the
withdrawing stockholder and the corporation
as to the fair value of the shares
If within a period of 60 days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within 30 days after such award is
made (CC, Sec. 82).
Cost of appraisal
The costs and expenses of appraisal shall be borne
as follows:
1. By the corporation—
a. Where the price which the corporation
offered to pay the dissenting stockholder is
lower than the fair value as determined by
the appraisers named by them;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and
the refusal of the stockholder to receive
payment is found by the court to be
justified.
2. By the dissenting stockholder—
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a. Where the price offered by the corporation
is approximately the same as the fair value
ascertained by the appraisers;
b. Where the same action is filed by the
dissenting stockholder and his refusal to
accept payment is found by the court to be
unjustified (De Leon, 2010).
Q: In case of disagreement between the
corporation and a withdrawing stockholder
who exercises his appraisal right regarding the
fair value of his shares, a three-member group
shall by majority vote resolve the issue with
finality. May the wife of the withdrawing
stockholder be named to the three member
group? (2011 Bar)
A: NO, the wife of the withdrawing shareholder is
not a disinterested person.
Q: When does the right to payment cease?
A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as
a stockholder shall thereupon be restored, and all
dividend distributions which would have accrued
on his shares shall be paid to him if:
1. Demand for payment is withdrawn with the
consent of the corporation;
2. The proposed corporate action is abandoned by
the corporation;
3. The proposed corporate action is rescinded by
the corporation;
4. The proposed corporate action is disapproved
by the SEC where such approval is necessary; or
5. The SEC determines that the dissenting
stockholder is not entitled to the appraisal right
(CC, Sec. 84).
NOTE: A dissenting stockholder who demands
payment of his shares is no longer allowed to
withdraw from his decision unless the corporation
consents thereto.
RIGHT TO INSPECT
The stockholder’s right of inspection of the
corporation’s book and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection (Puno v. Puno, G.R. No,
177066, September 11, 2009)
The mere fact that the shareholdings of a
stockholder is merely .001 per cent of the issued
shares of stock does not justify the denial of the
request of inspection of the corporate records.
(Terelay v Yulo 765 SCRA 1)
Valid purposes for inspection:
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The Corporation Code
1. Ascertainment of financial condition of
corporation or propriety of dividends
2. Value of the shares of stock for sale or
investment.
3. Existence of mismanagement.
4. Obtainment of list of stockholders to solicit
proxies or influence voting.
5. Obtainment of information in aid of litigation
with the corporation or its officers regarding
corporate transactions.
Books and records required to be kept by the
corporation
The following are the books and records required to
be kept by private corporations:
1. A record of all business transactions, which
shall include contract, memoranda, journals,
ledgers, etc;
2. Minutes of all meetings of stockholders or
members;
3. Minutes of all meetings of directors or trustees;
and
4. Stock and transfer book, in case of stock
corporations (CC, Sec. 74).
NOTE: The duty to keep these books is imperative
and mandatory. The stockholder can likewise
inspect the financial statements of the corporation
(CC, Sec. 75).
Place where the books and records shall be kept
GR: All the above books and records must be kept at
the principal office of the corporation.
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of
its stock transfer agent, if one has been appointed by
the corporation (CC, Sec. 75).
Requirement in order for the minutes of the
board meetings be given probative value
The minutes of board meetings should be signed by
the corporate secretary. Without such signature,
neither probative value nor credibility could be
accorded such minutes (Union of Supervisors [RB]-
NATU v. Sec. of Labor, G.R. No. L- 39889, November
12, 1981).
Minutes of meetings without the signature of the
corporate secretary have no probative value, and
therefore cannot be demanded for inspection or
examination (Villanueva).
Requirements for the Exercise of the Right of
Inspection
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1. The right must be exercised during reasonable
hours on business days;
2. The person demanding the right has not
improperly used any information obtained
through any previous examination of the books
and records of the corporation;
3. The demand is made in good faith or for
legitimate purpose germane to his interest as a
stockholder (CC, Sec. 74).
Good purposes may be:
(a) To investigate acts of management;
(b) To investigate financial conditions; fix
value of shares;
(c) Mailing list for proxies; or
(d) Information for litigation (Villanueva)
4. It should follow the formalities that may be
required in the by-laws;
5. The right does not extend to trade secrets; and
6. It is subject to limitations under special laws,
e.g. Secrecy of Bank Deposits and FCDA or the
Foreign Currency Deposits Act.
NOTE: The right extends, in compliance with equity,
good faith, and fair dealing, to a foreign subsidiary
wholly-owned by the corporation.
However, this right does not apply where the
corporation is not organized under the Philippine
law as in such a case, the right of the stockholder is
governed by the inspection requirements in the
jurisdiction in which the corporation was organized
(De Leon, 2010).
The right to inspect extends to the books and
records of the wholly-owned subsidiary of the
corporation.
It would be more in accord with equity, good faith
and fair dealing to construe the statutory right of the
stockholder to inspect the books and records of the
corporation as extending to books and records of its
wholly-owned subsidiary which are in the
corporation’s possession and control (Gokongwei v.
SEC, supra).
Rationale behind the right of inspection of a
corporation
The stockholder's right of inspection of the
corporation's books and records is based upon their
ownership of the assets and property of the
corporation. It is, therefore, an incident of
ownership of the corporate property (Republic v.
Sandiganbayan, G.R. No. 88809, July 10, 1991).
Persons entitled to inspect corporate books
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The following are entitled to inspect the corporate
books:
1. Any director, trustee, or stockholder or member
of the corporation at reasonable hours on
business day (CC, Sec. 74);
2. Voting trust certificate holder – The term
“stockholder”, as used in Sec. 74 means not only
a stockholder of record; it includes a voting
trust certificate holder who has become merely
an equitable owner of the shares transferred
(CC, Sec. 59 [3]);
3. Stockholder of a sequestered company
(Republic vs. Sandiganbayan, supra); and
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is
provided that his interest is clearly established
by evidence.
Q: The deceased Carlos L. Puno, was an
incorporator of Puno Enterprises, Inc. (Puno,
Inc). Joselito Musni Puno, claiming to be an heir
of Carlos L. Puno, initiated a complaint for
specific performance against Puno, Inc. Joselito
averred that he is the son of the deceased with
the latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the
rights and privileges of his late father as
stockholder of Puno, Inc. The complaint thus
prayed that Joselito be allowed to inspect its
corporate book, and be given an accounting and
all the profits pertaining to the shares of Puno..
May an heir of a stockholder can automatically
exercise the rights (inspection, accounting,
dividends) pertaining to the deceased?
A: NO.The stockholder’s right of inspection of the
corporation’s books and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. After all, a shareholder
has the right to be intelligently informed about
corporate affairs. Such right rests upon the
stockholder’s underlying ownership of the
corporation’s assets and property. Similarly, only
stockholders of record are entitled to receive
dividends declared by the corporation, a right
inherent in the ownership of the shares. Upon the
death of a shareholder, the heirs do not
automatically become stockholders of the
corporation and acquire the rights and privileges of
the deceased as shareholder of the corporation. The
stocks must be distributed first to the heirs in estate
proceedings, and the transfer of the stocks must be
recorded in the books of the corporation. During
such interim period, the heirs stand as the equitable
owners of the stocks, the executor or administrator
duly appointed by the court being vested with the
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legal title to the stock (Puno v. Puno Enterprises, Inc.,
G.R. No. 177066, September 11, 2009).
Q: Who are the persons who may be held liable
under Section 74?
A: The first, second and fourth paragraphs of
Section 74 are provisions that enumerates the
obligations of a corporation, such as what books or
records required to be kept, where it shall be kept,
and other obligations of the corporation to its
stockholders or members in relation to such books
and records. Hence, by parity of reasoning, such
provisions can only be violated by a corporation.
It is clear that a criminal action based on the
violation of the second or fourth paragraphs of
Section 74 can only be maintained against corporate
officers or such other persons that are acting on
behalf of the corporation. Violations of the second
and fourth paragraphs of Section 74 contemplates a
situation wherein a corporation, acting thru one of
its officers or agents, denies the right of any of its
stockholders to inspect the records, minutes and the
stock and transfer book of such corporation (Aderito
Z. Yujuico and Bonifacio C. Sumbilla v. Cezar T.
Quiambao and Eric C. Pilapil, G.R. No. 180416, June 2,
2014).
Remedies for enforcement of right to inspect
1. Action for mandamus or damages
2. Civil and criminal liability
Liability of a corporate officer or agent in case he
violates the stockholder’s right to inspection
Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy
excerpts from its records or minutes, shall be liable
to such director, trustee, stockholder or member for
damages, and in addition, shall be liable for 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 (CC, Sec 75 and Sec 144).
Requisites for existence of probable cause to file
a criminal case of violation of a stockholder’s
right to inspect corporate books
1. A director, etc. has made a prior demand in
writing for a copy or excerpts from the
corporation’s records or minutes;
2. Any officer or agent of the concerned
corporation shall refuse to allow the said
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director, etc., to examine and copy said
excerpts;
3. If such refusal is made pursuant to a resolution
or order of the BOD’s the liability for such action
shall be imposed upon the directors or trustees
who voted such refusal; and
4. Where the officer or agent of the corporation
sets up the defense that the person demanding
to examine and copy excerpts from the records
and minutes has improperly used any
information secured through any prior
examination of the same or was not acting in
good faith or for a legitimate purpose in making
his demand, the contrary must be shown or
proved (De Leon, supra, citing Ang-Abaya v. Ang,
G.R. No. 178511, December 4, 2008).
The Corporation Code has granted to all
stockholders the right to inspect the corporate
books and records, and in so doing has not required
any specific amount of interest for the exercise of
the to inspect (Terelay Investment and Development
Corp. v. Yulo, G.R. No. 160924, August 05, 2015).
Refusal to allow inspection is a criminal offense
We find inaccurate the pronouncement of the RTC
that the act of refusing to allow inspection of the
stock and transfer book is not a punishable offense
under the Corporation Code. Such refusal, when
done in violation of Section 7 4(4) of the
Corporation Code, properly falls within the purview
of Section 144 of the same code and thus may be
penalized as an offense (Yujuico and v. Quiambao,
supra).
Defenses that can be set up:
1. Improper use of the information obtained in the
past;
2. There was bad faith;
3. Use the information for an illegitimate purpose
(Villanueva).
PRE-EMPTIVE RIGHT
It is the preferential right of shareholders to
subscribe to all issues or disposition of shares of any
class in proportion to their present shareholdings
(CC, Sec. 39).
Purpose of pre-emptive right
To enable the shareholder to retain his
proportionate control in the corporation and to
retain his equity in the surplus
Exercise of pre-emptive right
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Pre-emptive right must be exercised in accordance
with the AOI or the By-Laws. When the AOI and the
By-Laws are silent, the Board may fix a reasonable
time within which the stockholders may exercise
the right.
Stock Transactions covered includes:
a) The re-issuance of treasury shares which would
cover the increase in the authorized capital
stock;
b) Opening for subscription the unissued portion
of existing capital stock; and
c) Disposition of treasury shares.
Pre-emptive right on the re-issuance of treasury
shares
When a corporation reacquires its own shares
which thereby become treasury shares, all
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when pre-
emptive right does not exist.
Transferability of pre-emptive right
Pre-emptive right is transferable unless there is an
express restriction in the AOI.
Waiver of pre-emptive right by the stockholder
The stockholder may waive his pre-emptive right
either expressly or impliedly as when the
stockholder fails to exercise his pre-emptive right
after being notified and given an opportunity to
avail of such right.
Denial by the corporation of the pre-emptive
right
The corporation can deny pre-emptive right if the
articles of incorporation or amendment thereto
denies such right.
The stockholder must be given a reasonable time
within which to exercise their preemptive rights.
Upon the expiration of said period, any stockholder
who has not exercised such right is deemed to have
waived it (Majority Stockholders of Ruby Industrial
Corp. vs. Lim and the Minority Stockholders of Ruby
Industrial Corp., G.R. Nos. 165887 & 165929, June 6,
2011).
RIGHT TO VOTE
The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other
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corporate acts which require stockholders’ capacity by the holders thereof, any one of the joint
approval. owners can vote said shares or appoint a proxy
therefor (CC, Sec. 56).
Nature of the right to vote
Rule in case of pledged or mortgaged shares
One of the rights of a stockholder is the right to
participate in the control and management of the GR: The pledgor or mortgagor shall have the right
corporation that is exercised through his vote. The to attend and vote at meetings of stockholders even
right to vote is a right inherent in and incidental to though their shares are pledged or mortgaged.
the ownership of corporate stock, and such is a
property right (Castillo v. Balinghasay, 440 SCRA XPN: The pledgee or mortgagee has the right to vote
442, 2004). and attend meetings if he is expressly given by the
pledger or mortgagor such right in writing which is
Conditions for the issuance of non-voting shares recorded on the appropriate corporate books (CC,
Sec. 55).
The issuance of non- voting shares is subject to the
following conditions under Section 6 of the CC: RIGHT OF FIRST REFUSAL

1. Only preferred or redeemable shares may be A right that grants to the corporation or another
made non-voting shares; and stockholder the right to buy the shares of stock of
2. There must remain other shares with full voting another stockholder at a fixed price and only valid if
rights. made on reasonable terms and consideration.

Instances when non-voting shares are entitled Provisions in articles of incorporation requiring
to vote (AASI-IMID) stockholders desiring to sell their stocks to offer
them first to the corporation or to the existing
The non-voting shares may still vote in the following stockholders at a given reasonable date before
matters: disposing of them to third persons may be
considered valid and enforceable (SEC Opinion, Feb.
1. Amendment of the articles of incorporation; 23, 1993).
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other Right of first refusal is not a substantive right
disposition of all or substantially all of the under the Corporation Code
corporate property;
4. Incurring, creating or increasing bonded GR: The right of first refusal can only arise by means
indebtedness; of a contractual stipulation, or when it is provided
5. Increase or decrease of capital stock; for in the AOI
6. Merger or consolidation of the corporation with
another corporation or other corporations; XPN: In the case of a close corporation, the right of
7. Investment of corporate funds in another first refusal is required to be found in the AOI.
corporation or business in accordance with the
corporation code; and When only the by-laws provide a right of first
8. Dissolution of the corporation (CC, Sec 6) refusal without the corresponding provision in the
AOI and not printed in the stock certificate, it is null
Treasury shares are not entitled to vote and void. There is no authority to create property
restrictions in by-laws provisions (Hodges v.
Treasury shares shall have no voting right as long as Lezama, G.R. No. L-17327, August 30, 1963).
such shares remain in treasury.
AOI may validly grant a right of first refusal in
Rule in case of joint ownership of stock favor of other stockholders

GR: In case of shares of stock owned jointly by two
or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary.
XPN: If there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any
other person to vote such share or shares. Provided,
that when the shares are owned in an “and/or”
The SEC, as a matter of policy, allows restrictions on
transfer of shares in the AOI if the same is necessary
and convenient to the attainment of the objective for
which the company was incorporated, unless
palpably unreasonable under the circumstances
(SEC Opinion, Feb. 20, 1995).
Pre-emptive right vs. Right of first refusal

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REPRESENTATIVE SUIT
RIGHT OF FIRST
PRE-EMPTIVE RIGHT
REFUSAL A representative suit is one filed by the shareholder
Arises only by virtue individually, or on behalf of a class of shareholders
of contractual to which he or she belongs, for injury to his or her
May be exercised even
stipulations but is interest as a shareholder (Cua v. Tan, GR 182008,
when there is no express
also granted under December 4, 2009).
provision of law
the provisions on
close corporation It is proper where the wrong is done to a group of
Pertains to stockholders, as where preferred stockholders’
unsubscribed portion of rights are violated, a class or representative suit will
Exercisable against
the authorized capital be proper for the protection of all stockholders
another stockholder
stock. A right that may belonging to the same group (Ibid).
of the corporation of
be claimed against the
his shares of stock
corporation. It includes NOTE: Right of pre-emption is personal to each
treasury shares. stockholder. While a stockholder may maintain a
suit to compel the issuance of his proportionate
share of stock, it has been ruled, nevertheless, that
REMEDIAL RIGHTS he may not maintain a representative action on
behalf of other stockholders who are similarly
Actions that the stockholders or members can situated.
bring
Remedies of representative suit and derivative
1. Derivative suit – one brought by one or more suit are mutually exclusive
stockholders or members in the name and on
behalf of the corporation to redress wrongs The two actions are mutually exclusive: i.e., the right
committed against it or to protect or vindicate of action and recovery belongs to either the
corporate rights, whenever the officials of the shareholders (direct action) or the corporation
corporation refuse to sue or are the ones to be (derivative action) (Ibid.).
sued or hold control of the corporation.
DERIVATIVE SUIT
2. Individual suit – an action brought by a
stockholder against the corporation for direct Neither the Corporation Code nor the Securities
violation of his contractual rights as such Regulation Code expressly grant the stockholder the
individual stockholder, such as the right to vote right to institute a derivative suit. It is impliedly
and be voted for, the right to share in the recognized when the said laws make corporate
declared dividends, the right to inspect directors or officers liable for damages suffered by
corporate books and records, and others. the corporation and its stockholders for violation of
their fiduciary duties (Yu v. Yukayguan, 607 Phil.
3. Representative suit – one brought by a person in 581, 610, 2009).
his own behalf and on behalf of all similarly
situated. Requisites for the existence of a derivative suit
(C-SENA)
INDIVIDUAL SUIT
1. Corporate cause of action: the cause of action
When the injury is suffered directly by an individual must devolve upon the corporation itself; the
shareholder as to affect his proprietary rights, as wrongdoing or harm having been caused to the
when his right to vote is unlawfully withheld or his corporation and not to the particular
right to inspect corporate books arbitrarily denied, stockholder brining the suit (Reyes v. Hon. RTC
an action may be brought by the injured stockholder of Makati Br. 142, G.R. No. 165744, August 11,
in his own name and for his own benefit against the 2008).
corporation (Salonga, 1968). 2. Stockholder: the party bringing the suit must be
a stockholder
NOTE: Authorization from the board of directors is a. At the time the acts or transactions subject
not necessary. Since the wrong is done to him of the action occurred; and
personally and not to the other stockholder or the b. at the time the action was filed
corporation, the cause of action belongs to him
alone. NOTE: if the cause of action is continuing in
nature, the only requisite is that the party is a

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stockholder at the time the action was filed payment of the arrearages will be prejudicial to
(Dean Divina’s Lecture, April 29, 2015). the Club as the mortgage on its assets will be
foreclosed and the sale at a lower price is the
3. Exhaustion of all intra-corporate remedies best solution to the problem. Decide the suit and
available under the AOI, By-Laws, laws or rules explain. (2016 Bar)
governing the corporation or partnership to
obtain the relief he desires. A: The derivative suit will not prosper. While it was
4. Not a Nuisance or Harassment suit. filed by a stockholder on behalf of the corporation,
5. Appraisal right is not available (Rule 8 of the the complainant did not allege the other elements of
Interim Rules of Procedure Governing Intra- derivative suit namely:
Corporate Controversies, cited in Yu, et al., v.
Yukayguan, et al., G.R. No. 177549, June 18, 2009) A) Exhaustion of intra- corporate remedies
available under the articles of
Representative Suit V. Derivative Suit incorporation, by- laws, rules and
regulations governing the corporation to
REPRESENTATIVE DERIVATIVE SUIT obtain relief stockholders desires;
SUIT B) It is not a nuisance suit; and
Initiated by the Initiated by the C) Appraisal right is not available.
stockholder under his stockholder on behalf of
own name or on the corporation Q: Ranier Madrid, a shareholder, wrote the
behalf of other Board of Directors of FHGCCI two demand
stockholders letters because of the delay in construction and
Seeks to recover for the asked them to initiate legal actions against
benefit of the FEGDI and FEDI. The Board of Directors,
corporation and its however, failed and/or refused to act on the
whole body of demand letters.Madrid, in a derivative capacity
Seeks vindication for on behalf of petitioner FHGCCI, filed with the
shareholders when
injury to his or her RTC a Complaint for Specific Performance with
injury is caused to the
interest as a Damages. FEGDI argued that there is no cause of
corporation that may
shareholder action and it is not a proper derivative suit as
not otherwise be
redressed because of Madrid on behalf of FHGCCI failed to exhaust all
failure of the remedies available under the articles of
corporation to act incorporation and by-laws and failed to implead
Deals with individual its Board of Directors as indispensable parties.
stockholders or a Deals with corporate Is there compliance with requirements of
class of stockholder’s rights (Ibid.). derivative suit?
rights
A: NO. Madrid, as a shareholder of FHGCCI, failed to
Q: Royal Links Golf Club obtained a loan from a allege with particularity in the Complaint, and even
bank which is secured by a mortgage on a titled in the Amended Complaint, that he exerted all
lot where holes 1, 2, 3 and 4 are located. The reasonable efforts to exhaust all remedies available
bank informed the Board of Directors (Board) under the articles of incorporation, by-laws, or rules
that if the arrearages are not paid within thirty governing the corporation; that no appraisal rights
(30) days, it will extra-judicially foreclose the are available for the acts or acts complained of; and
mortgage. The Board decided to offer to the that the suit is not a nuisance or a harassment suit.
members 200 proprietary membership shares,
which are treasury shares, at the price of For a derivative suit to prosper, the following must
P175,000.00 per share even when the current be present:
market value is P200,000.00.
a) It is minority stockholder suing for and on behalf
In behalf and for the benefit of the corporation, of the corporation must allege in his complaint that
Peter, a stockholder, filed a derivative suit he is suing on a derivative cause of action on behalf
against the members of the Board for breach of of the corporation and all other stockholders
trust for selling the shares at P25,000.00, lower similarly situated who may wish to join him in the
than its market value, and asked for the suit;
nullification of the sales and the removal of the b) Stockholder should have exerted all reasonable
board members. Peter claims the Club incurred efforts to exhaust all remedies available under the
a loss of PS million. The Board presented the articles of incorporation, by-laws, laws or rules
defense that in its honest belief any delay in the governing the corporation or partnership to obtain

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the relief he desires and that such fact is alleged with
particularity in the complaint; and
c) The stockholder is also required to allege,
explicitly or otherwise, the fact that there were no
appraisal rights available for the acts complained of,
as well as a categorical statement that the suit is not
a nuisance or a harassment suit (Forest Hills Golf and
Country Club, Inc. v. Fil- Estate Properties, Inc. G.R.
No. 206649, July 20, 2016, Del Castillo, J.).
Rationale for a derivative suit
Under the CC, where a corporation is an injured
party, its power to sue is lodged with its board of
directors or trustees. However, an individual
stockholder may be permitted to institute a
derivative suit on behalf of the corporation in order
to protect or vindicate corporate rights whenever
the officials of the corporation refuse to sue, or are
the ones to be sued, or hold control of the
corporation (Hi-Yield Realty v. CA, G.R. No. 168863,
June 23, 2009).
Stockholder is not a real party in interest in a
derivative suit
The corporation is the real party-in-interest while
the suing stockholder, on behalf of the corporation,
is only a nominal party (Ibid).
Time when a person must be a stockholder for
him to be justified in filing a derivative suit
He must be a stockholder at the time the cause of
action accrued. If the cause of action is general and
continuing, said person must be a stockholder at the
time of filing of the suit and at the time the cause of
action accrued.
The implicit argument — that a stockholder, to be
considered as qualified to bring a derivative suit,
must hold a substantial or significant block of stock
— finds no support whatever in the law. The 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 (San Miguel Corporation v. Khan, G.R.
No. 85339, August 11, 1989).
Q: A became a stockholder of Prime Real
Estate Corporation (PREC) on July 10, 1991,
when he was given one share by another
stockholder to qualify him as a director. A was
not re-elected director in the July 1, 1992 annual
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meeting but he continued to be a registered
shareholder of PREC.
When he was still a director, A discovered that
on Jan 5, 1991, PREC issued free of charge
10,000 shares to X a lawyer who assisted in a
court case involving PREC.
a. Can A now bring an action in the name
of the corporation to question the issuance
of the shares to X without receiving any
payment?
b. Can X question the right of A to sue him in
behalf of the corporation on the ground that
A has only one share in his name?
c. Can the shares issued to X be considered as
watered stock? (1993 Bar)
A:
a. As a general rule, A cannot bring a derivative
suit in the name of the corporation concerning
an act that took place before he became a
stockholder. However, if the act complained of
is a continuing one, A may do so.
b. NO. In a derivative suit, the action is
instituted/ brought in the name of a
corporation and reliefs are prayed for therein
for the corporation, by a minority stockholder.
The law does not qualify the term
“minority” in terms of the number of shares
owned by a stockholder bringing the action in
behalf of the corporation (SMC v. Khan, G.R. No.
85339, August 11, 1989).
c. NO. Watered shares are those sold by the
corporation for less than the par/book value. In
the instant case, it will depend upon the value of
services rendered in relation to the total par
value of the shares.
Allegation of tort can co-exist with a derivative
suit in the same petition
Personal injury suffered by a stockholder cannot
disqualify him from filing a derivative suit on behalf
of the corporation. It merely gives rise to an
additional cause of action for damages against the
erring directors (Goachan v. Young, G.R. No. 131889,
March 12, 2001).
Jurisdiction over a derivative suit
A derivative suit is an intra-corporate controversy
hence under the jurisdiction of the RTC acting as a
special commercial court.
Q: AA, a minority stockholder, filed a suit against
BB, CC, DD, and EE, the holders of majority
shares of MOP Corporation, for alleged
misappropriation of corporate funds. The
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complaint averred, inter alia, that MOP
Corporation is the corporation in whose behalf
and for whose benefit the derivative suit is
brought. In their capacity as members of the
Board of Directors, the majority stockholders
adopted a resolution authorizing MOP
Corporation to withdraw the suit. Pursuant to
said resolution, the corporate counsel filed a
Motion to Dismiss in the name of the MOP
Corporation. Should the motion be granted or
denied? Reason briefly.
A: The motion to dismiss should be denied. The
requisites for a valid derivative suit exist in this
case. First, AA was exempt from exhausting his
remedies within the corporation and did not have a
demand on the Board of Directors for the latter to
sue. Here, such a demand would be futile, since the
directors who comprise the majority (namely BB,
CC, DD and EE are the ones guilty of the wrong
complained of. Second, AA appears to be a
stockholder at the time of the alleged
misappropriation of corporate funds. Third, the suit
is brought on behalf and for the benefit of MOP
Corporation. In this connection, it was held in
Commart (Phils.) Inc. v. SEC, (G.R. No. 85318, June 3,
1991) that to grant to the corporation concerned the
right of withdrawing or dismissing the suit, at the
instance of the majority stockholders and directors
who themselves are the persons alleged to have
committed the breach of trust against the interests
of the corporation would be to emasculate the right
of the minority stockholders to seek redress for the
corporation. Filing such action as a derivative suit
even by a lone stockholder is one of the protections
extended by law to minority stockholders against
abuses of the majority.
Q: Oscar and Rodrigo C. Reyes are two of the four
children of the spouses Pedro and Anastacia
Reyes. Pedro, Anastacia, Oscar, and Rodrigo
each owned shares of stock of Zenith Insurance
Corporation (Zenith), a domestic corporation
established by their family. Pedro and Anastacia
died. Pedro’s estate was judicially partitioned
among his heirs, however, no similar settlement
and partition appear to have been made with
Anastacia’s estate, which included her
shareholdings in Zenith. Zenith and Rodrigo
filed a complaint with the SEC against Oscar. The
complaint stated that it is a derivative suit
initiated and filed by the complainant Rodrigo to
obtain an accounting of the funds and assets of
Zenith which are now or formerly in the control,
custody, and/or possession of Oscar and to
determine the shares of stock of deceased
spouses Pedro and Anastacia Reyes that were
arbitrarily and fraudulently appropriated by
Oscar. Oscar denied the charge. Furthermore,
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Oscar claimed that the suit is not a bona
fide derivative suit because the requisites
therefor have not been complied with. Is the
complaint filed by Rodrigo a derivative suit?
A: NO. First, Rodrigo is not a shareholder with
respect to the shareholdings originally belonging to
Anastacia; he only stands as a transferee-heir whose
rights to the share are inchoate and unrecorded.
Second, in order that a stockholder may show a right
to sue on behalf of the corporation, he must allege
with some particularity in his complaint that he has
exhausted his remedies within the corporation by
making a sufficient demand upon the directors or
other officers for appropriate relief with the
expressed intent to sue if relief is denied. Lastly, the
Court finds no injury, actual or threatened, alleged
to have been done to the corporation due to Oscar’s
acts. If indeed he illegally and fraudulently
transferred Anastacia’s shares in his own name,
then the damage is not to the corporation but to his
co-heirs; the wrongful transfer did not affect the
capital stock or the assets of Zenith (Oscar C. Reyes
v. RTCof Makati, Branch 142, et al., G.R. No. 165744,
August 11, 2008).
Q: Pursuant to the by-laws of Legaspi Towers
300, Inc. (Legaspi), petitioners Lilia Marquinez
Palanca,et al., the incumbent Board of Directors,
fixed the annual meeting of the members of the
condominium corporation and the election of
the new Board of Directors. Out of a total
number of 5,723 members who were entitled to
vote, 1,358 were supposed to vote through their
respective proxies and their votes were critical
in determining the existence of a quorum. The
Committee on Elections of Legaspi, however,
found most of the proxy votes, at its face value,
irregular, thus, questionable; and for lack of
time to authenticate the same, Palanca, et al.,
adjourned the meeting for lack of quorum.
Despite Palanca et al.'s insistence that no
quorum was obtained during the annual
meeting, Muer, et al.,pushed through with the
scheduled election and were elected as the new
Board of Directors and officers of Legaspi.
Subsequently, they submitted a General
Information Sheet to the Securities and
Exchange Commission (SEC) with the new set of
officers. Palanca, et al., filed a complaint for the
declaration of nullity of elections against Muer,
et al., in a form of a derivative suit. Is the
derivative suit proper?
A: NO. The derivative suit is not proper. The
complaint for nullification of the election is a direct
action by Palanca, et al., who were the members of
the Board of Directors of the corporation before the
election, against Muer, et al., who are the newly-
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elected Board of Directors. The cause of action
devolves on Palanca, et al., not the condominium
corporation, which did not have the right to vote.
Hence, the same is improper for derivative suit
(Legaspi Towers 300, Inc., et al., v. Amelia P. Muer, et
al., G.R. No. 170783, June 18, 2012).
OBLIGATIONS OF A STOCKHOLDER
The following are the obligations of the stockholder:
1. Liability to the corporation for unpaid
subscription (CC, Sec. 67-70);
2. Liability to the corporation for interest on
unpaid subscription if so required by the by
laws (CC, Sec. 66);
3. Liability to the creditors of the corporation for
unpaid subscription (CC, Sec. 60);
4. Liability for watered stock (CC, Sec. 65);
5. Liability for dividends unlawfully paid (CC, Sec.
43); and
6. Liability for failure to create corporation (CC,
Sec. 10) (Sundiang Sr. & Aquino, 2014)
While a stockholder has no personal liability for the
debts of the corporation beyond the amount of his
capital investment, he is personally liable for the
above obligations. In addition, he may become
personally liable for damages or otherwise for any
wrongful disposition of corporate assets, breaches
of fiduciary duties, fraud, gross negligence,
unauthorized acts, violations of law, or improper us
of the corporate form.

STOCKHOLDERS’ MEETINGS
DATE AND PLACE REQUIRED WRITTEN NOTICE
Regular meeting
The notice of meetings shall be in writing, and the
time and place thereof stated therein.
1. Annually on date fixed in the by-laws; or
2. If there is no date in the by-laws – any date in April NOTE: Under the Revised Corporation Code, the
as determined by the board. written notice of regular meetings may be sent
through electronic mail or such other manner as the
NOTE: Under the Revised Corporation Code, if the by- commission shall allow under its guidelines. (Sec.
laws does not fix the date of the meeting, it shall be on 49).
any date after April 15 of every year as may be
determined by the board (Sec. 49). The notice shall be sent to the stockholder:
1. Within the period provided in the by-laws
Venue: In the city or municipality where the principal 2. In the absence of provision in the by-laws – at least
office is located, and if practicable in the principal 2 weeks prior to the meeting.
office of the corporation: Provided, that Metro Manila
shall be considered a city or municipality. Notice may be waived, expressly or impliedly, by any
stockholder or member.
NOTE: Under the Revised Corporation Code, any city
or municipality in Metro Manila, Metro Cebu, Metro NOTE: Under the Revised Corporation Code, the
Davao, and other Metropolitan areas shall be written notice of regular meetings shall be sent to all
considered a city or municipality (Sec. 50). stockholders or members of record at least twenty-
one (21) days prior to the meeting unless otherwise
provided in the bylaws, law, or regulation (Sec. 49).
Special meeting
1. Any time deemed necessary; or
2. As provided in the by-laws The notice of meetings shall be in writing, and the
time and place thereof stated therein.
Venue: In the city or municipality where the principal
office is located, and if practicable in the principal The notice shall be sent to the stockholder:
office of the corporation: Provided, that Metro Manila 1. Within the period provided in the by-laws
shall be considered a city or municipality. 2. If no provision in the by-laws – at least 1 week
prior to the meeting
NOTE: Under the Revised Corporation Code, any city
or municipality in Metro Manila, Metro Cebu, Metro Notice may be waived, expressly or impliedly, by any
Davao, and other Metropolitan areas shall be stockholder or member.
considered a city or municipality (Sec. 50).

Requirements for a valid meeting whether

stockholders/members or the board 1. It must be held in the proper place.

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2. It must be held at the stated date and at the before the Sandiganbayan (Trans Middle
appointed time or at a reasonable time East [Phils.] v. Sandiganbayan, GR 172556,
thereafter. June 9, 2006).
3. It must be called by the proper person:
a. The person or persons designated in the Under the two-tiered test, the government,
by-laws have authority to call stockholders’ through PCGG, may vote sequestered shares if
or members’ meeting; there is a prima facie evidence that the shares
b. In the absence of such provision in the by- are ill-gotten wealth and there is imminent
laws it may be called by a director or danger of dissipation of assets while the case is
trustee or by an officer entrusted with the pending. However, the two-tiered test
management of the corporation; contemplates a situation where the registered
c. A stockholder or member may make the stockholders were in control and had been
call on order of the SEC whenever for any dissipating company assets and the PCGG
cause there is no person authorized to call wanted to vote the sequestered shares to save
a meeting. the company. It does not apply when the PCGG
had voted the shares and is in control of the
4. The special meeting for the removal of directors sequestered corporation (Africa v.
or trustees may be called by the secretary or by Sandiganbayan, G.R. Nos. 172222, 174493 &
stockholder or member: 184636, November 11, 2013, in Divina, 2014).
a. There must be a previous notice;
b. There must be a quorum. XPN to the XPN: The two-tiered test does not
apply in cases involving funds of public
Rules on meeting or voting which are applicable character (public character exception). In such
to certain kinds of shares cases, the government is granted the authority
to vote said shares, namely:
1. Delinquent shares- shall not be entitled to vote.
2. Treasury shares - have no voting rights while a. Where the government shares are taken
they remain in the treasury (CC, Sec. 57). over by private persons or entities who
3. Fractional shares- shall not be entitled to vote. or which registered them in their own
4. Escrow shares - shall not be entitled to vote names; and
before the fulfillment of the condition imposed b. Where the capitalization of shares that
thereon. were acquired with public funds
5. Unpaid shares - if not delinquent, are entitled to somehow landed in private hands
all the rights of a stockholder including the right (Republic vs. Sandiganbayan, G.R. No.
to vote. 107789, April 30, 2003).
6. Sequestered shares
7. Pledgor, mortgagor, or administrator shares (CC,
GR: The registered owner of the shares of a Sec. 55) – pledger or mortgagor has the right to
corporation, even if they are sequestered by the attend and vote at meetings unless pledge or
government through the PCGG, exercises the mortgagee is expressly given such right in
right and the privilege of voting on them. writing, as recorded on the books.
The PCGG as a mere conservator cannot, as a
rule, exercise acts of dominion by voting these Executor, administrators, receivers, and other
shares. legal representatives may attend and vote in
behalf of the stockholder or members without
XPN: Two-tiered test: The registered owner of need of any written proxy. In Gochan v. Young,
sequestered shares may only be deprived of G.R. No. 131889, Mar. 12, 2001, it was held that
these voting rights, and the PCGG authorized to heirs are not prohibited from representing the
exercise the same, only if it is able to establish deceased with regard to shares of stock
that: registered in the name of the latter, especially
when no administrator has been appointed.
a. There is prima facie evidence showing
that the said shares are ill-gotten and 8. Shares jointly owned (CC, Sec. 56) – consent of all
thus belong to the State; and the co-owners is necessary, unless there is a
b. There is an imminent danger of written proxy signed by all the co-owners. If
dissipation, thus necessitating the shares are owned in an “and/or” capacity by the
continued sequestration of the shares holders thereof, any one of the joint owners can
and authority to vote thereupon by the vote or appoint a proxy thereof.
PCGG while the main issue is pending

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WHO CALLS THE MEETING
The “call” for a meeting is exercised by the person
who has the power to call the meeting.
The following persons may exercise the power to
“call” for a meeting:
1. The person or persons designated in the by-
laws to have the authority to call stockholders’/
members’ meeting;
2. In the absence of such provision in the by-laws,
the director/trustee or officer entrusted with
the management of the corporation unless
otherwise provided by law;
3. A stockholder/ member may make the call on
order of the SEC whenever for any cause, there
is no person authorized to call a meeting (CC,
Sec. 50) or the officers authorized fail or refuse
to call a meeting; and
NOTE: SEC may compel the officers of any
corporation registered by it to call meetings of
stockholders/members thereof under its
supervision (PD No. 902-A, Sec. 6 [f])
4. Corporate Secretary or a stockholder/member
for a special meeting intended for the removal
of directors or trustees (CC, Sec. 28).
meeting (People v. Dumlao, GR 168918, March 2,
2009).
To have probative value and credibility, the minutes
must be signed by the corporate secretary,
notwithstanding that the one taking the minutes
was a mere clerk (Union of Supervisors [RB]-NATU v.
Sec. of Labor, supra).
CAPITAL STRUCTURE
SUBSCRIPTION AGREEMENTS
It is a contract for the acquisition of unissued stock
in an existing corporation or a corporation still to be
formed. It is considered as such notwithstanding the
fact that the parties refer to it as purchase or some
other contract (CC,Sec. 60).
Nature of a subscription contract
A subscription contract is indivisible. Consequently,
where stocks were subscribed and part of the
subscription contract price was not paid, the whole
subscription shall be considered delinquent and not
only the shares which correspond to the amount not
paid.

QUORUM NOTE: This is called the Doctrine of Individuality

(Indivisibility) of Subscription. A subscription is
GR: Shall consist of the stockholders representing one entire and indivisible whole contract. It cannot
majority of the outstanding capital stock or a be divided into portions (CC, Sec. 64).
majority of the actual and living members with
voting rights, in the case of non-stock corporation Subscription and purchase of stock
(Tan v. Sycip, G.R. No. 153468, Aug. 17, 2006).
The CC, under sec. 60 in defining subscription,
XPNs: abolished the distinction between subscription and
1. A different quorum may be provided for in the purchase of shares from an existing corporation by
by-laws; and making all such acquisitions a subscription
2. The corporation code provides for certain notwithstanding that the parties denominate it as a
resolutions that must be approved by at least purchase or sale or some other contract.
2/3 of the outstanding capital stock, in which
case, majority of the outstanding capital stock is Subscription vs. Purchase
insufficient to constitute a quorum, presence of
the stockholders representing 2/3 of the SUBSCRIPTION PURCHASE
outstanding capital stock is necessary for such May be made before May be made only after
purpose. or after incorporation incorporation
Buyer does not become
MINUTES OF THE MEETINGS
a stockholder until the
Subscriber becomes a
fulfillment of the terms
The minutes are a brief statement not only of what stockholder even if he
of the sale and
transpired at a meeting, usually of stockholders/ has not fully paid the
registration thereof in
members or directors/ trustees, but also at meeting subscription
the books of the
of an executive committee.
corporation
The minutes are usually kept in a book especially
Cannot be released The corporation may
designed for that purpose, but they may also be kept
from his subscription rescind or cancel the
in the form of memoranda or in any other manner
unless all contract for non-
in which they can be identified as minutes of a

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stockholders agree fulfillment of the Kinds of subscription
thereto and no contract by the buyer
creditor is thereby 1. Pre-incorporation subscription – entered into
prejudiced before incorporation (CC, Sec. 61); and
Corporate creditors 2. Post-incorporation subscription – entered into
may proceed against Creditors may not after incorporation (Sundiang Sr. & Aquino,
the subscriber for his proceed against the 2009).
unpaid subscription buyer for the unpaid
in case the assets of price as there is no Rules governing pre-incorporation contracts
the corporation are privity of contract
not sufficient to pay between them GR: A pre-incorporation subscription agreement is
their claims irrevocable for a period of six (6) months from the
In purchase amounting date of subscription.
Not covered by the to more than 500 pesos,
Statute of Frauds the Statute of Frauds XPNs:
shall apply 1. If all of the other subscribers consent to the
Subscription price are revocation,
Purchase price does not 2. If the incorporation of said corporation fails to
considered assets of
become assets of the materialize within said period or within a
the corporation,
corporation unless fully longer period as may be stipulated in the
hence, creditors may
paid contract of subscription.
go after them
Stock option vs. Warrant
XPN to XPN: No pre-incorporation subscription
STOCK OPTION WARRANT may be revoked after the submission of the AOI to
A type of security the Securities and Exchange Commission (CC, Sec.
which entitles the 61).
holder the right to
subscribe to a pre- Payment of a subscription contract cannot be
determined number of condoned by a corporation
unissued capital stock
of a corporation A corporation has no power to release an original
(subscription warrant), subscriber to its capital stock from the obligation of
or to purchase a pre- paying for his shares, without a valuable
A privilege granted to a determined number of consideration for such release. This is in violation of
party to subscribe to a issued or existing the trust fund doctrine (PNB v Bitulok Sawmill Inc,
certain portion of the shares in the future G.R. Nos. L-24177-85, June 29, 1968).
unissued capital stock (covered warrant).
of a corporation within NOTE: A warrant is Stockholder is entitled to the rights pertaining
a certain period and detachable if it may be to shares of stock subscribed although not fully
under the terms and sold, transferred or paid
conditions of the grant assigned to any person
exercisable by the by the warrant holder As long as the shares are not considered delinquent,
grantee at anytime separate from and stockholders are entitled to all rights granted to it
within the period independent of the whether or not the subscribed capital stocks are
granted. corresponding fully paid.
beneficiary securities,
or shares of stock or Q: FLADC, which was owned by the Tius,
other securities of the encountered dire financial difficulties. It was
issuer which form the heavily indebted to PNB for P190 million. Thus,
basis of the the construction of the Masagana Citimall was
entitlement in a threatened with stoppage and incompletion. To
warrant. It is non- prevent foreclosure of the mortgage on the two
detachableif it may not lots where the mall was being built, the Tius
be sold etc. invited the Ongs to invest in FLADC. Under the
(SEC Rules, in De Leon, 2010) Pre-Subscription Agreement they entered into,
the Ongs and the Tius agreed to maintain equal
Subscription is an offer to acquire a specified shareholdings in FLADC. Accordingly, the Ongs
number of unissued shares of an existing paid P100 million in cash for their subscription
corporation or one still to be formed. to 1,000,000 shares of stock while the Tius

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committed to contribute to FLADC a four-storey
building and two parcels of land respectively to
cover their additional 549,800 stock
subscription therein. The business harmony
between the Ongs and the Tius in FLADC,
however, was short-lived because the Tius,
rescinded the Pre-Subscription Agreement. The
Tius accused the Ongs of violation of the terms
of their agreement. Because of this, the Tius filed
a case at SEC, seeking confirmation of their
rescission of the Pre-Subscription Agreement.
The SEC granted the same. Could the Tius legally
rescind the Pre-Subscription Agreement?
A: NO. When a subscriber assigned properties and
infused capital to the corporation upon invitation of
a majority stockholder and in exchange for shares of
stocks under a pre-subscription agreement, the
agreement cannot be rescinded since the subject
matter of the contract was the unissued shares of
the Corporation allocated to the subscriber. Since
these were unissued shares, the Pre-Subscription
Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the
Corporation Code: “Any contract for the acquisition
of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a
subscription within the meaning of this Title,
notwithstanding the fact the parties refer to it as a
purchase or some other contract.” A subscription
contract necessarily involves the corporation as one
of the contracting parties since the subject matter of
the transaction is property owned by the
corporation - its shares of stock. Thus, the
subscription contract was one between the
subscriber and the corporation and not between the
stockholders.
The trust fund doctrine provides that subscriptions
to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for
the satisfaction of the claims. This doctrine is the
underlying principle in the procedure for the
distribution of corporate capital only in three
instances:
1. Amendment of the articles of incorporation to
reduce the authorized capital stock;
2. Purchase of redeemable shares by the
corporation regardless of the existence of
unrestricted retained earnings; and
3. Dissolution and eventual liquidation of the
corporation.
Furthermore, the doctrine is articulated in Section
41 of the Corporation Code on the power of the
corporation to acquire its own shares and in Section
122 on the prohibition against the distribution of
corporate assets and property unless the stringent
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requirements are complied with (Ong, et al. v. Tiu, et
al., G.R. Nos. 144476 & 144629, Apri 8, 2003).
CONSIDERATION FOR SHARES OF STOCK
Valid considerations in a subscription
agreement
1. Actual cash paid to the corporation;.
2. Property, tangible or intangible (i.e. patents or
copyrights), provided:
a. The property is actually received by the
corporation
b. The property is necessary or convenient for
its use and lawful purposes
c. It must be subject to a fair valuation equal
to the par or issued value of the stock
issued
d. The valuation thereof shall initially be
determined by the incorporators; and
e. The valuation is subject to the approval by
the SEC.
3. Labor or services actually rendered to the
corporation.
4. Prior corporate obligations or indebtedness.
5. Amounts transferred from unrestricted
retained earnings to stated capital (in case of
declaration of stock dividends).
6. Outstanding shares in exchange for stocks in
the event of reclassification or conversion. (CC,
Sec. 6)
NOTE: Promissory notes or future services are not
valid considerations.
In view of nos. 1 and 2 of sec 62, payment of shares
of stock must be actually received by the
corporation. Hence, receivables cannot be treated as
cash actually received. They may, however, be
considered as property payment subject to
verification by SEC and the condition that it be held
in escrow until actual payment of the amount.
NOTE: Under the Revised Corporation Code, shares
of stock in another corporation and/or other
generally accepted form of consideration are valid
considerations (Sec. 61, par. (g) and (h))
Amount of consideration
Shares of stock shall not be issued for a
consideration less than the par or issued price
thereof, except treasury shares so long as the price
is reasonable.
Persons required to pay in full their
subscription upon incorporation
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1. Non‐resident foreign subscribers upon
incorporation must pay in full their
subscriptions unless their unpaid subscriptions
are guaranteed by a surety bond or by an
assumption by a resident stockholder through
an affidavit of liability.
2. In case of no‐par value shares, they are deemed
fully paid and non‐assessable (CC, Sec. 6).
NOTE: The issued price of no-par value shares may
be fixed in the AOI or by the BOD pursuant to
authority conferred upon it by the AOI or the by-
laws, or in the absence thereof, by the stockholders
representing at least a majority of the outstanding
capital stock at a meeting duly called for the purpose
(CC, Sec. 62).
SHARES OF STOCK
Stock or share of stock is one of the units in which
the capital stock is divided. It represents the interest
or right which the owner has —
1. In the management of the corporation in which
he takes part through his right to vote (if voting
rights are permitted for that class of stock by
the AOI);
2. In a portion of the corporate earnings, if and
when segregated in the form of dividends; and
3. Upon its dissolution land winding up, in the
property and assets of the corporation
remaining after the payment of corporate debts
and liabilities to creditors (De Leon, 2010, citing
11 Fletcher, 1971).
Q: In order to comply with the 60% capital
requirement for ownership by Filipinos of
certain corporations, what does the term capital
refer to?
A. The term “capital” refers to shares with voting
rights, and with full beneficial ownership, which
must be owned and held by citizens of the
Philippines.
Rationale: The right to vote in the election of
directors, coupled with full beneficial ownership of
stocks, translates to effective control of a
corporation.
Legal title without beneficial title of stocks is not
sufficient to meet the ownership requirement
Mere legal title is insufficient to meet the 60%
Filipino-owned “capital” required in the
Constitution. Full beneficial ownership of 60% of
the outstanding capital stock, coupled with 60% of
the voting rights, is required. The legal and
beneficial ownership of 60% of the outstanding
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capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional
mandate. Otherwise, the corporation is “considered
as non-Philippine nationals. Full beneficial
ownership of the stocks, coupled with appropriate
voting rights, is essential”.
NOTE: Since the constitutional requirement of at
least 60% Filipino ownership applies not only to
voting control of the corporation but also to the
beneficial ownership of the corporation, it is
therefore imperative that such requirement apply
uniformly and across the board to all classes of
shares, regardless of nomenclature and category,
comprising the capital of a corporation.
Under the Corporation Code, capital stock consists
of all classes of shares issued to stockholders, that
is, common shares as well as preferred shares,
which may have different rights, privileges or
restrictions as stated in the articles of
incorporation. The Corporation Code allows denial
of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in
specific corporate matters. Thus, common shares
have the right to vote in the election of directors,
while preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the
right to vote in the election of directors, are entitled
to vote on certain corporate matters.
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of
the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section
11, Article XII of the Constitution must apply not
only to shares with voting rights but also to shares
without voting rights (This is because when only
preferred shares without voting rights are issued,
the requirement of full beneficial ownership will be
used as the standard). Preferred shares, denied the
right to vote in the election of directors are anyway
still entitled to vote on the eight specific corporate
matters under Sec, 6. Thus, if a corporation, engaged
in a partially nationalized industry, issues a mixture
of common and preferred non-voting shares, at
least 60 percent of the common shares and at least
60 percent of the preferred non-voting shares must
be owned by Filipinos. Of course, if a corporation
issues only a single class of shares, at least 60
percent of such shares must necessarily be owned
by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other
class of shares. This uniform application of the 60-
40 ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional
command that the ownership and operation of
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public utilities shall be reserved exclusively to
corporations at least 60 percent of whose capital is
Filipino-owned.
Applying uniformly the 60-40 ownership
requirement in favor of Filipino citizens to each
class of shares, regardless of differences in voting
rights, privileges and restrictions, guarantees
effective Filipino control of public utilities, as
mandated by the Constitution. Moreover, such
uniform application to each class of shares insures
that the “controlling interest” in public utilities
always lies in the hands of Filipino citizens. This
addresses and extinguishes Pangilinan’s worry that
foreigners, owning most of the non-voting shares,
will exercise greater control over fundamental
corporate matters requiring two-thirds or majority
vote of all shareholders (Heirs of Gamboa v. Teves,
G.R. No. 176579, October 9, 2012).
NATURE OF SHARES OF STOCK
The ownership of share of stock confers no
immediate legal right or title to any of the property
of the corporation. Each share merely represents a
distinct undivided share or interest in the common
property of the corporation.
The interest over the share is purely inchoate, or a
mere expectancy of a right in the management of the
corporation and to share in the profits thereof and
in the properties and assets thereof on dissolution,
after payment of the corporate debts and
obligations. Further, the stockholder’s interest in
the corporate property is merely equitable or
beneficial in nature; hence he cannot be said to be a
co-owner of the corporate property (De Leon, 2006).
Shares of stocks are personal property
Shares of stock are personal property. They are
incorporeal in nature. Except treasury stock which
belongs to the Corporation (NCC, Art. 417 and 2095).
Share of stock does not constitute an
indebtedness of the corporation to the
shareholder
They are in the nature of choses in action but are not
in a strict sense. They do not constitute an
indebtedness of the corporation to the shareholder
and are therefore, not credits as to make the
stockholder a creditor of the corporation (De Leon,
2010).
The board of directors may issue additional
shares of stock without approval of the
stockholders.
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A stock corporation is expressly granted the power
to issue or sell stocks. The power to issue shares of
stock in a corporation is lodged in the board of
directors and no stockholders’ meeting is required
to consider it because additional issuances of shares
of stock do not need approval of the stockholders.
The only requirement is the board resolution
approving the additional issuance of shares. The
corporation shall also file the necessary application
with the SEC to exempt these from the registration
requirements under the Revised Securities Act
(now the Securities Regulation Code) (Majority
Stockholders of Ruby Industrial Corp. v. Lim and the
Minority Stockholders of Ruby Industrial Corp.,
supra).
WATERED STOCK
A watered stock is a stock issued in exchange for
cash, property, share, stock dividends, or services
lesser than its par value or issued value (CC, Sec. 65).
Watered Stocks include stocks:
1. Issued without consideration (bonus share);
2. Issued for a consideration other than cash, the
fair valuation of which is less than its par or
issued value;
3. Issued as stock dividend when there are no
sufficient retained earnings to justify it; and
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or
issued value (discount share).
NOTE: Watered stocks can either be par or no par
value shares.
Reason behind the prohibition on the issuance
of watered stocks
It is to protect persons who may acquire stock and
the creditors of the corporation particularly those
who may become such on the faith of its outstanding
capital stock being fully paid. The prohibition
secures equality among subscribers and prevents
discriminations against those who have paid in full
the par or issued value of their shares (De Leon,
supra).
Not all exchanges of stocks worth less than their
value are considered watered stock
The watered stocks refer only to original issue of
stocks but not to a subsequent transfer of such
stocks by the corporation, for then it would no
longer be an “issue” but a sale thereof (De
Leon,2010, citing Rochelle Roofing Co. vs. Burley, 115
NE 478).
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Treasury shares are not subject to the a. Objection must be directed to the issuance
prohibition on the issuance of watered stocks of the watered stocks;
b. In writing;
Treasury shares are not original issuances. They are c. File the same with the corporate secretary;
shares of stocks which have been issued and fully and
paid for, but subsequently reacquired by the issuing d. Such objection must be done before the sale
corporation by purchase, redemption, donation, or of stocks (CC, Sec. 65).
through some other lawful means (CC, Sec. 9). Since
they do not lose their status as issued shares, they Trust fund doctrine for liability for watered
cannot be treated as new issues when disposed of or stock
reissued.
The subscribed capital stock of the corporation is a
Limitation on the re-disposal of treasury shares trust fund for the payment of debts of the
corporation which the creditors have the right to
Treasury shares may again be disposed of for a look up to satisfy their credits, and which the
reasonable price fixed by the BOD. Since they are corporation may not dissipate. The creditors may
not subject to the prohibition on the issuance of sue the stockholders directly for the latter’s unpaid
watered stock, they may be sold for less than their subscription.
par or issued value as long as the price for re-
disposal is reasonable. There is a violation of the trust fund doctrine
when stocks of the corporation are issued less
The issuance of watered stock cannot be ratified than the par value
by the stockholders
GR: The trust fund doctrine is violated where stocks
It is not merely ultra vires, but is illegal per se as it is are issued by the corporation for a consideration
a violation of Sec. 62, CC. which is less than its par value.

Liability of directors for watered stocks XPN: Trust fund doctrine is not violated in case
treasury shares are reacquired and subsequently
Any director or officer of a corporation shall be re-issued for a lesser consideration by the
solidarily liable with stockholder concerned to the corporation. The only limitation for the reissuance
corporation and its creditors for difference between of treasury shares is that their price must be
the fair value received at the time of the issuance of reasonable.
the stock and the par or issued value of the same, if:
SITUS OF SHARES OF STOCK
1. He consents to the issuance of stocks for
consideration less than its par or issued value; GR: The situs of shares of stock is the country where
2. He consents to the issuance of stocks for a the corporation is domiciled (Wells Fargo Bank v.
consideration in any form other than cash, CIR, G.R. No. L-46720, June 28, 1940).
valued in excess of its fair value; or
3. Who, having knowledge thereof, does not The residence of the corporation is the place
forthwith express his objection in writing and where the principal office of the corporation is
file the same with the corporate secretary. (CC, located as stated in its AOI even though the
Sec. 65) corporation has closed its office therein and
relocated to another place (Hyatt Elevators and
NOTE: The solidary liability of the directors Escalators Corp. v. Goldstar Elevator Phils., Inc.,
emanates from the fiduciary character of the supra.).
position of director or corporate officer.
XPN: In property taxation –the situs of intangible
Defenses that can be invoked in order that a property, such as shares of stocks, is at the domicile
director or an officer can escape liability for the or residence of the owner.
issuance of watered stocks
XPN to the XPN:
1. The director or officer did not consent and did 1. When a nonresident alien has shares of stock in
not have knowledge in the issuance of the a domestic corporation, then the situs will be in
watered stock. the Philippines; and
2. The director or officer objected to its issuance, 2. For purposes of the estate tax, the gross estate
provided: of a resident decedent, whether citizen or alien,
or a citizen decedent, whether resident or

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nonresident, includes his intangible personal Limitations on no par value shares (5DP - B2tip -
property wherever situated (De Leon, 2010). AP)

CLASSES OF SHARES OF STOCK 1. Shares which have no par value, cannot have an
issued price of less than P5.00.
Kinds or classifications of shares 2. The entire consideration for its issuance
constitutes capital so that no part of it should be
1. Par value shares Distributed as dividends.
2. No par value shares 3. They cannot be issued as Preferred stocks.
3. Common shares 4. They cannot be issued by Banks, Building and
4. Preferred shares loan association, Trust companies, Insurance
5. Redeemable shares companies, and Public utilities.
6. Treasury shares 5. The Articles of incorporation must state the fact
7. Founder’s share that it issued no par value shares as well as the
8. Voting shares number of said shares
9. Non-voting shares 6. Once issued, they are deemed fully Paid and
10. Convertible shares non-assessable (CC, Sec. 6).
11. Watered stock
12. Fractional share 3. Common shares
13. Shares in escrow
14. Over-issued stock These are ordinarily and usually issued stocks
15. Street certificate without extraordinary rights and privileges, and
16. Promotion share entitle the shareholder to a pro rata division of
profits. It represents the residual ownership
Who may classify shares interest in the corporation. The holders of this kind
of share have complete voting rights and they
1. Incorporators – the classes and number of cannot be deprived of the said rights except as
shares which a corporation shall issue are first provided by law.
determined by the incorporators as stated in
the articles of incorporation filed with the SEC. 4. Preferred shares
2. Board of directors and stockholders – after the
corporation comes into existence, classification These entitle the shareholder to some priority on
of shares may be altered by the board of distribution of dividends and assets over those
directors and the stockholders by amending the holders of common shares. Preferred shares may be
articles of incorporation pursuant to Sec. 16. issued only with a stated par value (CC, Sec. 6).

1. Par value shares Kinds of preferred shares

Shares with a value fixed in the articles of
incorporation and the certificates of stock. The par
value fixes the minimum issue price of the shares
(CC, Sec. 62).
Rule on the issuance of shares less than its par
value
GR: A corporation cannot issue shares at less than
its par value.
XPN: The prohibition applies only to original
issuance of shares and not to the subsequent sale of
treasury shares and sale of shares made by
stockholders.
2. No par value shares
These are shares having no stated value in AOI.
1. Preferred shares as to assets –gives the holder
preference in the distribution of the assets of
the corporation in case of liquidation.
2. Participating preferred shares – Entitled to
participate with the common shares in excess
distribution
3. Non-participating preferred shares – Not
entitled to participate with the common shares
in excess distribution.
4. Preferred shares as to dividends–entitled to
receive dividends on said share to the extent
agreed upon before any dividends at all are paid
to the holders of common stock.
5. Cumulative preferred shares – If a dividend is
omitted in any year, it must be made up in a
later year before any dividend may be paid on
the common shares in the later year.
6. Non-cumulative preferred shares – There is no
need to make up for undeclared dividends

Holders of preferred shares are not creditors

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Holders of preferred shares cannot compel the
corporation to give them dividends. The preference
only applies once dividends are declared.
Preferred cumulative participating share of
stock
This is a kind of share which gives the holder
preference in the payment of dividends ahead of
common stockholders and to be paid the dividends
due for prior years and to participate further with
common stockholders in dividend declaration.
5. Redeemable shares
These are shares of stocks issued by a corporation
which said corporation can purchase or take up
from their holders upon expiry of the period stated
in certificates of stock representing said shares (CC,
Sec. 8).
NOTE: Under the Revised Corporation Code for
Redeemable shares, their redemption shall now be
subject to the rules and regulations that may be
issued by SEC, in addition to what may be stipulated
in the AOI and Certificate of Stock.
Kinds of redeemable shares
1. Compulsory - the corporation is required to
redeem the shares.
2. Optional - the corporation is not mandated to
redeem the shares.
Limitations on redeemable shares (ATVI)
1. Issuance of redeemable shares must be
expressly provided in the Articles of
incorporation;
2. The Terms and conditions affecting said shares
must be stated both in the articles of
incorporation and in the certificates of stock
3. Redeemable shares may be deprived of Voting
rights in the articles of incorporation, unless
otherwise provided in the Code (CC, Sec. 6 [6])
4. Redemption cannot be made if it will cause
Insolvency of the corporation.
Reissuance of redeemed shares
Redeemable shares, once redeemed are retired
unless reissuance is expressly allowed in the AOI.
Q: Planters Bank issued preferred redeemable
shares with a feature that entitles them to be
preferred in the payment of dividends.
Subsequently, the bank experienced liquidity
problems. The Central Bank ruled that the bank
has a reserve deficiency. Despite of the
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condition, one of the stockholders holding the
preferred shares filed an action against the
corporation to redeem his shares and pay the
dividends due. Will the suit prosper?
A: NO. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
Furthermore, the declaration of dividends is
dependent upon the availability of surplus profit or
unrestricted retained earnings, as the case may be.
Shareholders, both common and preferred, are
considered risk takers who invest capital in the
business and who can look only to what is left after
corporate debts and liabilities are fully paid
(Republic Planters Bank v. Judge Agana, G.R. No.
51765. March 3, 1997).
6. Treasury shares
Shares that have been earlier issued as fully paid
and have thereafter been acquired by the
corporation by purchase, donation, and redemption
or through some lawful means (CC, Sec. 9).
NOTE: Treasury shares are not retired shares. They
do not revert to the unissued shares of the
corporation but are regarded as property acquired
by the corporation which may be reissued or resold
at a price to be fixed by the Board of Directors (SEC
Rules Governing Redeemable and Treasury Shares,
CCP No. 1-1982).
Other means in which a corporation may
acquire its own shares
1. To collect or compromise unpaid indebtedness
to the corporation;
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares;
4. Redemption
5. Close corporation.
Limitations on treasury shares
1. They may be re-issued or sold again as long as
it is for a reasonable price fixed by the BOD.
2. Cannot participate in dividends.
3. It has no voting right.
4. It cannot be represented during stockholder’s
meetings.
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5. The amount of URE equivalent to the cost of of the
treasury shares being held shall be restricted Corporation.
from being declared and issued as dividends. Applicability
Must comply Is an exception
of the trust
NOTE: When treasury shares are sold below its par with the trust to the trust
fund
or issued value, there can be no watering of stock fund doctrine fund doctrine
doctrine
because such watering of stock contemplates an
original issuance of shares. 7. Founders' shares

Treasury shares distributed by way of dividends Shares classified as such in the articles of
incorporation and which may be given special
They can be distributed only as property dividends. preference in voting rights and dividend payments.
They cannot be declared as stock or cash dividends
because they are not considered part of earned or NOTE: Where the exclusive right to vote and be
surplus profits. The distribution of cash or stock voted for in the election of directors is granted, such
dividends out of treasury shares would be right must be for a limited period not exceeding 5
converting the corporation into both a debtor and years subject to approval of the SEC, the period to
creditor for the same amount at the same time, or commence from the date of said approval (CC, Sec.
requiring it to take money or stock from one of its 7).
pockets and putting it in another, which is absurd.
Treasury shares may be declared as property NOTE: Under the Revised Corporation Code,
divided to be issued out of the retained earnings Founder’s shares given the exclusive right to vote
previously used to support their acquisition and be voted for are not allowed to exercise that
provided that the amount of the said retained right in violation of the Anti-Dummy Law and the
earnings has not been subsequently impaired by Foreign Investment Act.
losses (SEC Opinion, July 17, 1984).
8. Voting shares
Note: Since a treasury share is a fully paid share re-
acquired by the corporation, it is not outstanding Shares with a right to vote. If the stock is originally
and may be re-issued and resold. It cannot receive issued as voting stock, it may not thereafter be
dividends before the resale, because the deprived of the right to vote without the consent of
corporation cannot grant dividends to itself. the holder.
(CIR vs Manning 66 SCRA 14.)
9. Non-voting shares
Treasury shares vs. Redeemable shares
Shares without right to vote. The law only
BASIS TREASURY REDEEMABLE authorizes the denial of voting rights in the case of
SHARES SHARES redeemable shares and preferred shares, provided
Shares so that there shall always be a class or series of shares
acquired by which have complete voting rights (CC, Sec. 6).
the Issued by the
corporation corporation Instances when holders of non-voting shares are
through when allowed to vote
Description
purchase, expressly so
donation, provided in These redeemable and preferred shares, when such
redemption or the AoI. voting rights are denied, shall nevertheless be
any other entitled to vote on the following fundamental
lawful means. matters:
Redeemable
shares may be 1. Amendment of articles of incorporation;
Can only be
acquired even 2. Adoption and amendment of by-laws;
acquired in
without 3. Sale, lease, exchange, mortgage, pledge or other
the presence
Manner of unrestricted disposition of all or substantially all of the
of
acquisition retained corporate property;
Unrestricted
earnings for as 4. Incurring, creating or increasing bonded
retained
long as it will indebtedness;
earnings
not result to 5. Increase or decrease of capital stock;
the insolvency 6. Merger or consolidation of the corporation with
another corporation or other corporations;

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7. Investment of corporate funds in another
corporation or business in accordance with this
Code; and
8. Dissolution of the corporation (CC, Sec. 6).
10. Convertible shares
Shares which are changeable by the stockholder
from one class to another (such as from preferred to
common) at a certain price and within a certain
period.
GR: Stockholder may demand conversion at his
pleasure.
XPN: Otherwise when restricted by the articles of
incorporation.
NOTE: In the absence of express provision in the
AOI as to their convertibility feature, preferred
shares cannot be converted into common. The
terms of the preferred share contract cannot be
changed without the consent of the stockholders.
The conversion of no par value shares to par value
is allowed by SEC provided there would be no
change in the stockholder’s percentage interest in
the total assets of the corporation.
11. Fractional share
A fractional share is a share of equity that is less
than one full share.
12. Shares in escrow
Subject to an agreement by virtue of which the share
is deposited by the grantor or his agent with a third
person to be kept by the depositary until the
performance of certain condition or the happening
of a certain event contained in the agreement.
13. Over-issued stock
It is a stock issued in excess of the authorized capital
stock. Stocks which are issued in this manner are
null and void.
14. Street certificate
It is a stock certificate endorsed by the registered
holder in blank and the transferee can command its
transfer to his name from issuing corporation.
15. Promotional share
This is a share issued to promoters or those in some
way interested in the company, for incorporating
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the company, or for services rendered in launching
or promoting the welfare of the company.
16. Watered stock
Shares issued below its par value or issued value.
NOTE: Watered stocks pertain only to original
issuance of shares.
A corporation can designate other classes of
stocks
There can be other classifications as long as they are
indicated in the AOI, stock certificate and not
contrary to law.
PAYMENT OF BALANCE OF SUBSCRIPTION
Time when the balance of the subscription
should be paid:
1. On the date specified in the subscription
contract, without need of demand or call;
2. If no date of payment has been specified, on the
date specified on the call made by the BOD (CC,
Sec. 67);
3. If no date of payment has been specified on the
call made, within 30 days from the date of call;
and
4. When insolvency supervenes upon a
corporation and the court assumes jurisdiction
to wind it up, all unpaid subscriptions become
payable on demand, and are at once
recoverable, without necessity of any prior call.
Accrual of interest on unpaid balance
Unpaid balance will accrue interest if so required by
the by‐laws 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 (CC,
Sec. 66).
The above interest is different from the interest
contemplated by Sec. 67, the unpaid balance
involved in which, will only accrue interest, by way
of penalty, on the date specified in the contract of
subscription or on the date stated in the call made
by the board.
NOTE: Interest contemplated in Sec. 66 pertains to
moratory interest which is the interest on account of
subscription in an installment basis, while Sec. 67
speaks of compensatory interest which is the
interest on account of delay
Moratory vs. Compensatory interest
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Compensatory SEC opined on July 21, 1976 that the following are
Moratory Interest
interest the requisites for a valid call:
(CC, Sec. 66)
(CC, Sec. 67)
Interest which accrues Interest on unpaid 1. It must be made in the manner prescribed by
by way of penalty, on subscription by reason law;
the date specified in of amortization/ 2. It must be made by the BOD; and
the contract of installments. It can be 3. It must operate uniformly upon all the
subscription or on the collected only if shareholders.
date stated in the call stipulated and for the
made by the board. The rate specified in the The call of the board of directors is not always
stockholder liable for contract and fixed by necessary to collect payment for unpaid
interest at the legal the by-laws. If the rate subscription
rate on such balance, is silent the legal rate
unless a different rate shall be followed. The necessity for calls depends upon the provisions
of interest is provided of the contract of subscription. When no time is
in the by-laws, fixed for payment, the subscription is payable only
computed from such upon call by the BOD which may be made at any
date until full payment. time the board may decide (De Leon, supra).

Effect of failure to pay the subscription on the
date it is due
It shall render the entire balance due and payable
and shall make the shareholder liable for
compensatory interest at the legal rate on such
balance, unless a different rate of interest is
provided in the by‐laws.
Remedies of corporations to enforce payment of
stocks
1. Extra-judicial sale at public auction (CC, Sec. 67)
2. Judicial action (CC, Sec. 70)
However, a call is not necessary where:
1. The subscription contract specifies the date of
payment; or
2. The corporation becomes insolvent (Sundiang
Sr. & Aquino, 2009)
3. The subscriber becomes insolvent (De Leon,
supra)
NOTICE REQUIREMENT
The notice of the call must be served on the
stockholders concerned in the manner prescribed
in the call, which may either be by registered mail
and/or personal delivery and publication.

CALL BY BOARD OF DIRECTORS Notice of call is necessary to bind the stockholders

Call for the payment by the board of directors
for unpaid subscription
A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and
payable and the same or such percentage thereof
shall be collected, together with all accrued interest,
on a specified date and that if no payment is made
within 30 days from said date, all stocks covered by
said subscription shall thereupon become
delinquent and shall be subject to public auction
sale.
(Ibid., citing Baltazar v. Lingayen Gulf Electric Power,
G.R. No. L-16236, June 30, 1965).
SALE OF DELINQUENT SHARES
If within 30 days from expiry of the date of payment
or from the date stated in the call made by the board,
and no payment is made, all stocks covered by said
subscription shall thereupon become delinquent
and shall be subject to delinquency sale unless the
BOD orders otherwise (CC, Sec. 67).
Effects of stock delinquency

Unpaid claim 1. Upon the stockholder

a. Accelerates the entire amount of the unpaid
It refers to any unpaid subscription, and not to any subscription
indebtedness which a subscriber or stockholder b. Subjects the shares to interest expenses
may owe the corporation arising from any other and costs
transaction (Sundiang Sr. & Aquino, 2009, citing c. Disenfranchises the shares from any right
China Bank v. CA, G.R. No. 117604, March 26, 1997). that inheres to a stockholder, except the
right to dividends (CC, Sec. 71) .
Requisites for a valid call

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NOTE: Dividends shall be applied to any
amount due on said shares, or, in the case
of stock dividends, to be withheld by the
corporation until full payment of the
delinquent shares (CC, Sec. 43).
2. Upon the director owning delinquent shares
a. If the delinquent stockholder is a director,
the director shall continue to be a director
but he cannot run for re-election (Sundiang
Sr. & Aquino, 2009).
b. A delinquent stockholder seeking to be
elected as director may not be a candidate
for, not be duly elected to, the board.
Status of the stockholder from delinquency date
before auction sale
GR: All the rights of the stockholder are suspended.
XPN: Right to dividends.
With respect to dividends, Section 43 states that
cash dividends should be applied against unpaid
subscription while stock dividends should be
withheld until full payment of the subscription.
Q: Ace Cruz subscribed to 100,000 shares of
stock of JP Development Corporation, which has
a par value of P 1 per share. He paid P25,000.00
and promised to pay the balance before
December 31, 2008. JP Development
Corporation declared cash dividends on October
15, 2008 payable on December 1, 2008.
a. For how many shares is Ace Cruz entitled to
be paid cash dividends? Explain.
b. On December 1, 2008, can Ace Cruz compel
JP Development Corporation to issue to him
the stock certificate corresponding to the
P25,000 paid by him? (2008 Bar)
A:
a. Ace is entitled to the whole amount of his shares
which is 100,000. A contract of subscription is
an indivisible contract. If only partial payment
for the subscription was made, it cannot be the
basis for the amount of cash dividend in favor of
the stockholder. Cash dividends due on
delinquent stocks shall first be applied to the
unpaid balance on the subscription plus cost
and expenses. (Sec. 43) Stocks become
delinquent 30 days from the due date specified
in the contract of subscription or in the date
stated in the call made by the board. (Sec 67) In
this case, the cash dividend is not yet
delinquent. Ace Cruz, therefore can claim the
entire cash dividend payable on December 1,
2008.
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b. NO. No certificate of stock shall be issued to a
subscriber until the full amount of subscription
together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
(Sec 64) Clearly, since Ace Cruz did not pay the
full subscription yet, the certificate of stock
shall not be issued to him.
Call by resolution of the Board of Directors
Stocks become delinquent when the unpaid
subscription and accrued interests thereon are not
paid within 30 days from their due date as specified
in the subscription contract or in the call by the
board of directors.
The delinquency is automatic after said 30 day
period and does not need a declaration by the board
making the stock delinquent.
Notice of sale
The notice of sale and copy of the board resolution
ordering the sale shall be:
1. Sent to every delinquent stockholder either
personally or by registered mail or;
2. Published once a week for 2 consecutive weeks
in a newspaper of general circulation in the
province or city where the principal office of the
corporation is located (CC, Sec. 68).
Procedure for the sale of delinquent stocks
1. Resolution – the board shall issue resolution
ordering the sale of delinquent stock.
2. Notice – notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered
mail.
3. Publication – the notice shall furthermore be
published once a week for two consecutive
weeks in a newspaper of general circulation in
the province or city where the principal office of
the corporation is located
4. Sale – the delinquent stock shall be sold at the
public auction to be held not less than 30 days
nor more than 60 days from the date stocks
become delinquent.
5. Transfer – the stock so purchased shall be
transferred to such purchaser in the books of
the corporation and a certificate for such stock
shall be issued in his favor.
6. Credit remainder – the remaining shares, if any,
shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to
the issuance of a certificate of stock covering
the same (CC, Sec. 68; Aquino, 2014).
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Discontinuance or cancellation of delinquency Prescription period of the action to question a
sale delinquency sale

Delinquency sale may be discontinued or cancelled For stock corporations, the action prescribes 6
if the delinquent stockholder pays the unpaid months from such sale. However, in case of non-
balance plus interest, costs and expenses on or stock corporations, the applicable period is 4 years
before the date specified for the sale or when the under the Civil Code.
BOD orders otherwise (CC, Sec. 68).
CERTIFICATE OF STOCK
Winning bidder in a delinquency sale
A certificate of stock is a written instrument signed
1. The person participating in the delinquency by the proper officer of a corporation stating or
sale who offers to pay the full amount of the acknowledging that the person named therein is the
balance of the subscription together with the owner of a designated number of shares of its stock.
accrued interest, costs of advertisement and It indicates the name of the holder, the number, kind
expenses of sale, for the smallest number of and class of shares represented, and the date of
shares;. issuance.
2. If there is no bidder as mentioned above, the
corporation, subject to the provisions of Sec. 68 It is not stock in the corporation but is merely
of CC, may bid for the same, and the total evidence of the holder’s interest and status in the
amount due shall be credited as paid in full in corporation.
the books of the corporation. The purchase by
the corporation must be made out of net NOTE: Under the Revised Corporation Code, the SEC
earnings in view of the trust fund doctrine. may require corporations whose securities are
Thereafter, the reacquired shares shall be traded in trading markets and which can reasonably
considered as treasury shares (CC, Sec. 41; De demonstrate their ability to do so, to issue their
Leon, 2010). securities or shares of stock in uncertified or in
scripless form in accordance with the rules imposed
NOTE: The board is not bound to accept the highest by SEC.
bid unless the contrary appears. The bidder is the
one making the offer to purchase, which the Shares of stock vs. Certificates of stock
corporation is free to accept or reject (Ibid.)
CERTIFICATE OF
SHARE OF STOCK
Q: What happens to the remaining shares, if any, STOCK
were not sold? Evidence of the holder’s
ownership of the stock
A: The remaining shares, if any, shall be credited in Unit of interest in a
and of his right as a
favor of the delinquent stockholder who shall corporation
shareholder and of his
likewise be entitled to the issuance of a certificate of extent specified therein.
stock covering such shares (CC, Sec. 68). It is an incorporeal or It is concrete and
intangible property tangible
Rule on questioning the sale of delinquent share It may be recognized
in public auction by the corporation It may be issued only if
even if the the subscription is fully
GR: The sale at public auction of delinquent share is subscription is not paid.
absolute and not subject to redemption. fully paid.

XPN: An action may be filed to question the sale, the
requisites for which are:
1. There should be allegation and proof of
irregularity or defect in the notice of sale or
in the sale itself.
2. The party filing the action must first pay the
party holding the stock the sum for which
the stock was sold with legal interest from
the date of sale.
3. The action is filed within 6 months from the
date of sale (CC, Sec. 69).
NATURE OF THE CERTIFICATE
A certificate of stock is a prima facie evidence of
ownership and evidence can be presented to
determine the real owner of the shares (Bitong vs.
CA, supra).
It is not essential to the existence of a share of stock
or the creation of the relation of the shareholder
with the corporation (Tan v. SEC, G.R. No. 95696,
March 3, 1992).

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A certificate of stock has a value separate and
distinct from the value of the shares represented.
UNCERTIFICATED SHARES
An uncertificated share is a subscription duly
recorded in the corporate books but has no
corresponding certificate of stock yet issued.
Stockholder may alienate his shares even if
there is no certificate of stock issued by the
corporation
The absence of a certificate of stock does not
preclude the stock holder from alienating or
transferring his shares of stock.
Transfers of fully paid subscription but the
corporations has not yet issued a certificate of
stock
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or
stockholder executing a contract of sale or deed of
assignment covering the number of shares sold and
submitting said contract or deed to the corporate
secretary for recording.
Transfers of subscription not fully paid
In case of subscription not fully paid, the
corporation may record such transfer, provided that
the transfer is approved by the board of directors
and the transferee executes a verified assumption of
obligation to pay the unpaid balance of the
subscription.
NEGOTIABILITY
Stock certificate is not negotiable
Although a stock certificate is sometimes regarded
as quasi-negotiable, in the sense that it may be
transferred by delivery, it is well-settled that the
instrument is NON-NEGOTIABLE, because the
holder thereof takes it without prejudice to such
rights or defenses as the registered owner or
creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations
imposed by the principles governing estoppels
(Republic v. Sandiganbayan,G.R. Nos. 107789 &
147214, April 30, 2003).
Certificates of stock may be issued only to
registered owners of stock. The issuance of “bearer”
stock certificates is not allowed under the law (SEC
Opinion No. 05-02, Jan. 31, 2005).
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Q: A is the registered owner of Stock Certificate
No. 000011. He entrusted the possession of said
certificate to his best friend B who borrowed the
said endorsed certificate to support B's
application for passport (or for a purpose other
than transfer). But B sold the certificate to X, a
bona fide purchaser who relied on the endorsed
certificates and believed him to be the owner
thereof. Can A claim the shares of stocks from X?
Explain. (2001 Bar)
A: NO. Since the shares were already transferred to
"B", "A" cannot claim the shares of stock from "X".
The certificate of stock covering said shares have
been duly endorsed by "A" and entrusted by him to
"B". By his said acts, "A" is now estopped from
claiming said shares from "X", a bona fide purchaser
who relied on the endorsement by “A” of the
certificate of stock.
Requirements for valid transfer of stocks
The following are the requirements for valid
transfer of stocks:
1. If represented by a certificate, the following
must be strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate
c. To be valid to third parties and to the
corporation, the transfer must be recorded
in the books of the corporation (Rural Bank
of Lipa v. CA, G.R. No. 124535, Sepember 28,
2001).
2. If NOT represented by a certificate (such as
when the certificate has not yet been issued or
where for some reason is not in the possession
of the stockholder):
a. By means of deed of assignment; and
b. Such is duly recorded in the books of the
corporation. (Sundiang Sr. & Aquino, 2009)
Effect of the non-payment of Documentary
Stamp Tax
No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any
share of stock shall be registered in the books of the
corporation unless the receipts of payment of the
tax herein imposed is filed with and recorded by the
stock transfer agent or secretary of the corporation
(Revenue Regulations No. 6-2008, Sec. 11).
Stockholder may bring suit to compel the
corporate secretary to register valid transfer of
stocks
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It is the corporate secretary’s ministerial duty and
obligation to register transfers of stocks provided
all the requirements for a valid transfer had been
complied with.
Remedies where corporation refuses to transfer
certificate of stocks
1. Petition for mandamus
In case of wrongful refusal of the corporate
secretary to record the transfer, specific
performance and mandamus are the common
remedies. Remedy of mandamus is available if
the following requisites are present:
a. Due application therefor has been made;
b. Said application has been denied;
c. There are no unpaid claims against the
stock by the corporation;
d. An ordinary action for damages against
the corporation would be inadequate;
and
e. An action in the nature of a suit in equity
to secure a decree ordering the transfer
would also be inadequate [Hager v.
Bryan, 19 Phil. 138 (1912)].
NOTE: However, by the weight of authority, it is
held that mandamus will not lie in ordinary
cases to compel a corporation or its officers to
transfer stock on its books and issue new
certificates to the transferee.
2. Suit for specific performance of an express or
implied contract
3. May sue for damages where specific
performance cannot be granted
NOTE: There must be a special power of attorney
executed by the registered owner of the share
authorizing transferor to demand transfer in the
stock and transfer book (Ponce v. Alsons Cement, G.R.
No. 139802, December 10, 2002).
The law does not prescribe a period within which
the registration of the transfer of shares should be
effected. Hence, the action to enforce the right does
not accrue until there has been a demand and a
refusal concerning the transfer.
Valid refusal by the corporation to register the
transfer of shares
The corporation may refuse to register the transfer
of shares if it has an existing unpaid claim over the
shares to be transferred. The “unpaid claim” refers
to the unpaid subscription on the shares transferred
and not to any other indebtedness that the
transferor may have to the corporation (CC, Sec. 63).
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NOTE: If the contract of subscription is still not fully
paid, the consent of the corporation must be
obtained first since there would be a change of
debtor. Hence, the consent of the creditor
(corporation) is necessary.
Kind of transfer that requires registration in the
books of the corporation
Only absolute transfers are required to be
registered in the books of the corporation. Hence,
registration in the stock and transfer book is not
necessary if the conveyance is by way of chattel
mortgage. However, registration must be had with
the Register of Deeds (Chua Guan v. Samahan,
supra.).
Validity of a transfer that is not recorded
If the transfer is not recorded, it is valid but only
insofar as the parties to the transfer are concerned.
To bind the corporation, the deed affecting the
transfer must be duly recorded in the corporate
books (CC, Sec. 63).
Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and
Nicolas Jomouad, ex-officio sheriff. Said action
stemmed from an earlier case for collection of
sum of money, filed by the spouses Atinon
against Jaime Dico. In that case the trial court
rendered judgment ordering Dico to pay the
spouses Atinon. After said judgment became
final and executory, the sheriff proceeded with
its execution. In the course thereof, the
Proprietary Ownership Certificate (POC) in the
Cebu Country Club, which was in the name of
Dico, was levied on and scheduled for public
auction. Claiming ownership over the subject
certificate, Garcia filed the action for injunction
to enjoin the spouses Antinon from proceeding
with the auction.Garcia contends that the
subject stock of certificate, albeit in the name of
Dico, cannot be levied upon the execution to
satisfy his judgment debt because even prior to
the institution of the case for collection of sum of
money against him, the spouses Atinon had
knowledge that Dico already conveyed back the
ownership of the subject certificate to Garcia
and that Dico executed a deed of transfer
covering the subject certificate in favor of
Garcia.
Is a bona fide transfer of the shares of a
corporation, not registered or noted in the
books of the corporation, valid as against a
subsequent lawful attachment of said shares,
regardless of whether the attaching creditor had
actual notice of said transfer or not?
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A: NO. A transfer of shares not registered in the
books of the corporation is not valid as against
subsequent attachment of the shares. All transfers
of shares not so entered in the books of the
corporation are invalid as to attaching or execution
creditors of the assignors, as well as to the
corporation and to subsequent purchasers in good
faith, and, indeed, as to all persons interested,
except the parties to such transfers. Hence, the
transfer of the subject certificate made by Dico to
Garcia was not valid as to the spouses Atinon, the
judgment creditors, as the same still stood in the
name of Dico, the judgment debtor, at the time of the
levy on execution (Nemesio Garcia v. Nicolas
Jomouad, et al., G.R. No. 133969, January 26, 2000).
Q: Fil-Estate Golf and Development, Inc. (FEGDI)
is a stock corporation whose primary business
is the development of golf courses. Fil-Estate
Land, Inc. (FELI) is also a stock corporation, but
is engaged in real estate development.
FEGDIwas the developer of the Forest Hills Golf
and Country Club (Forest Hills) and, in
consideration for its financing support and
construction efforts, was issued several shares
of stock of Forest Hills.
FEGDI sold on installment, to RS Asuncion
Construction Corporation (RSACC) one common
share of Forest Hills. Prior to the full payment of
the purchase price, RSACC sold the share to
Vertex Sales and Trading, Inc. (Vertex). RSACC
advised FEGDI of the sale to Vertex and FEGDI, in
turn, instructed Forest Hills to recognize Vertex
as a shareholder. For this reason, Vertex
enjoyed membership privileges in Forest Hills.
Despite Vertex’s full payment, the share
remained in the name of FEGDI.As the demands
to issue certificate in its name went unheeded,
Vertex filed a Complaint for Rescission with
Damages and Attachment against FEGDI, FELI
and Forest Hills. It averred that the petitioners
defaulted in their obligation as sellers when
they failed and refused to issue the stock
certificate covering the subject share despite
repeated demands.
Is the delay in the issuance of the stock
certificate a substantial breach of the sale which
entitles Vertex entitled to the rescission
thereof?
A: YES. Section 63 of the Corporation Code provides,
among others, that shares of stock may be
transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-
in-fact or other person legally authorized to make
the transfer.
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In this case, Vertex fully paid the purchase price by
February 11, 1999 but the stock certificate was only
delivered on January 23, 2002 after Vertex filed an
action for rescission against FEGDI.
Under these facts, considered in relation to the
governing law, FEGDI clearly failed to deliver the
stock certificates, representing the shares of stock
purchased by Vertex, within a reasonable time from
the point the shares should have been delivered.
This was a substantial breach of their contract that
entitles Vertex the right to rescind the sale under
Article 1191 of the Civil Code. It is not entirely
correct to say that a sale had already been
consummated as Vertex already enjoyed the rights
a shareholder can exercise. The enjoyment of these
rights cannot suffice where the law, by its express
terms, requires a specific form to transfer
ownership.
Mutual restitution is required in cases involving
rescission under Article 1191 of the Civil Code; such
restitution is necessary to bring back the parties to
their original situation prior to the inception of the
contract. Accordingly, the amount paid to FEGDI by
reason of the sale should be returned to Vertex (Fil-
Estate Golf and Development, Inc. and Fil-Estate
Land, Inc. v. Vertex Sales and Trading, Inc., G.R. No.
202079, June 10, 2013).
Q: May Forest Hills appeal the CA decision which
ordered the recisision of the sale?
A: NO. It was not a party to the sale even though the
subject of the sale was its share of stock. The
corporation whose shares of stock are the subject
of a transfer transaction (through sale, assignment,
donation, or any other mode of conveyance) need
not be a party to the transaction, as may be inferred
from the terms of Section 63 of the Corporation
Code. However, to bind the corporation as well as
third parties, it is necessary that the transfer is
recorded in the books of the corporation. In the
present case, the parties to the sale of the share
were FEGDI as the seller and Vertex as the buyer
(after it succeeded RSACC). As party to the sale,
FEGDI is the one who may appeal the ruling
rescinding the sale.
The remedy of appeal is available to a party who
has "a present interest in the subject matter of the
litigation and is aggrieved or prejudiced by the
judgment. A party, in turn, is deemed aggrieved or
prejudiced when his interest, recognized by law in
the subject matter of the lawsuit, is injuriously
affected by the judgment, order or decree." The
rescission of the sale does not in any way prejudice
Forest Hills in such a manner that its interest in the
subject matter – the share of stock – is injuriously
UNIVERSITY OF SANTO TOMAS
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The Corporation Code
affected (Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., G.R. No. 202205, March 6,
2013).
Validity of stock transfer
1. As between the parties, the requisite for a valid
transfer is merely the delivery of the certificate
indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the
transfer.
2. As against third persons and the corporation, the
transfer of shares must be entered and noted
upon the books of the corporation so as to show
the names of the parties to the transaction, the
date of the transfer, the number of the
certificate, and the number of shares
transferred.
Effects of an unregistered transfer of shares
1. It is valid and binding as between the transferor
and the transferee.
2. It is invalid or ineffective, as to the corporation,
as against corporate creditors, as to the
attaching or executing creditors of the
transferor, subsequent purchasers in good faith
without notice of the transfer, and as to all
persons interested except the parties to such
transfers.
ISSUANCE
Issuance of certificate of stock
It may only be issued until the full amount of the
stockholder’s subscription together with the
interest and expenses (in case of delinquent shares)
if due has been paid (CC, Sec. 64).
Requisites for the issuance of the certificate of
stock
1. The certificate must be signed by the president
or vice-president, countersigned by the
corporate secretary or assistant secretary
(Bitong v. CA, G.R. No. 123553, July 13, 1998).
NOTE: Unless it complies with the foregoing, it
is not deemed issued.
2. The certificate must be sealed with the seal of
the corporation.
3. The certificate shall be issued in accordance
with the by-laws.
4. The certificate must be delivered.
5. The par value as to par value shares, or full
subscription as to no par value shares must be
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fully paid, the basis of which is the doctrine of
indivisibility of subscription.
6. The original certificate must be surrendered
where the person requesting the issuance of a
certificate is a transferee from the stockholder
(CC, Sec. 64).
Full payment
Rule: Sec 64 prohibits the issuance of certificate of
stock to a subscriber who has not paid “the full
amount of his subscription together with interest
and expenses (in case of delinquent shares), if any is
due.
NOTE: The provision enunciates the doctrine that a
subscription is one, entire and indivisible contract,
and therefore, it cannot be divided into portions so
that the stockholder shall not be entitled to the
certificate of stock until he has paid the full amount
of his subscription together with interest and
expenses, if any is due.
Payment pro-rata
In the case of Baltazar v. Lingayen Gulf Electric Co.,
14 SCRA 522 (1965), the Court ruled that, unless
prohibited by the by-laws, certificates of stock may
be issued for less than the number of shares
subscribed provided the par value of each of the
stocks represented by said certificate has been fully
paid.
NOTE: This provides a contrary view that a
subscription is one, entire and indivisible contract.
In other words, in the absence of provisions in the
by-laws to the contrary, a corporation may apply
payments made by subscribers on account of their
subscriptions, either as: (a) full payment for the
corresponding number of shares, the par value of
which is covered by such payment, or (b) as
payment pro rata to each and all the entire number
of shares subscribed for. This rule applies to all
kinds and classes of stock corporations. The two
alternatives cannot be availed of at the same time
(SEC Opinion, Feb. 7, 1968).
LOST OR DESTROYED CERTIFICATES
Procedure for the issuance of a new stock
certificate in lieu of those which have been lost,
stolen or destroyed
1. The registered owner of a certificate of stock in
a corporation or his legal representative shall
file with the corporation an affidavit in
triplicate setting forth:
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a. If possible, the circumstances as to how the
certificate was lost, stolen or destroyed;
b. The number of shares represented by such
certificate;
c. The serial number of the certificate and the
name of the corporation which issued the
same.
He shall also submit such other information and
evidence which he may deem necessary.
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, the latter shall publish a notice in a
newspaper of general circulation published in
the place where the corporation has its
principal office, once a week for three (3)
consecutive weeks at the expense of the
registered owner of the Certificate of Stock.
Contents of notice:
a. Name of the corporation;
b. Name of the registered owner;
c. Serial number of the certificate of stock;
and
d. Number of share represented by the
certificate of stock.
3. After the expiration of one (1) year from the
date of the last publication, if no contest has
been presented to said corporation regarding
said certificate of stock, the corporation shall
cancel in its books the certificate of stock which
has been lost, stolen or destroyed and issue in
lieu thereof new certificate of stock.
After the expiration of the 1 year period to
contest, such right shall be barred unless the
registered owner files a bond or other security
in lieu thereof as may be required, effective for
a period of 1 year, for such amount and in such
form and with such sureties as may be
satisfactory to the BOD, in which case, a new
certificate may be issued even before the
expiration of the 1 year period provided herein.
4. Provided that if a contest has been presented to
said corporation or if an action is pending in
court regarding the ownership of said
certificate of stock which has been lost, stolen
or destroyed, the issuance of the new certificate
of stock in lieu thereof shall be suspended until
the final decision by the court regarding the
ownership of said certificate of stock which has
been lost, stolen or destroyed (CC, Sec. 73).
Oppositions on the issuance of new certificates
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If there are oppositions on the issuance of new
certificates, the corporation may file an interpleader
proceeding to compel the parties to litigate among
themselves.
Liability of the corporation for the issuance of
new certificates of stock in case of lost or
destroyed certificate
GR: No action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described (safe
harbor provision).
XPN: Where there is fraud, bad faith, or negligence
on the part of the corporation and its officers. (ibid)
Q: A stockholder claimed that his stock
certificate was lost. After going through with the
procedure for the issuance of lost certificate,
and no contest was presented within 1 year from
the last publication, the corporation issued a
new certificate of stock in lieu of the supposed
lost certificate. The stockholder immediately
sold his shares and endorsed the replacement
certificate to a buyer. It turned out that the
original certificate was not lost, but sold and
endorsed to another person.
a. May the corporation be made liable by the
aggrieved party?
b. Who will have a better right over the shares,
the endorsee of the original certificate or the
endorsee of the replacement certificate?
A:
a. NO. The corporation cannot be made liable.
Except in cases of fraud, bad faith, or negligence
on the part of the corporation and its officers,
no action may be brought against any
corporation which has issued certificates of
stock in lieu of those lost, stolen, or destroyed
pursuant to the procedure prescribed by law.
b. The endorsee of the replacement certificate has
a better right to the shares. After expiration of 1
year from the date of the last publication, and
no contest has been presented to said
corporation regarding said certificate, the right
to make such contest has been barred and said
corporation already cancelled in its books the
certificate which have been lost, stolen, or
destroyed and issued in lieu thereof new
certificate.
Q: Juan was a stockholder of X Co. He owned a
total of 500 shares evidenced by Cert of Stock No
1001. He sold the shares to Pedro. After getting
paid, Juan indorsed and delivered said
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Certificate of Stock No 1001 to Pedro. The
following day, Juan went to the offices of the
corporation and claimed that his Certificate of
Stock No 1001 was lost and that, despite diligent
efforts, the certificate could not be located. The
formalities prescribed by law for the
replacement of the lost certificate were
complied with. Eventually X Co issued in
substitution of the lost certificate, Cert of Stock
No 2002. Juan forthwith transferred for valuable
consideration the new certificate to Jose who
knew nothing of the previous sale to Pedro. In
time, the corporation was confronted with the
conflicting claims of Jose and Pedro. The BOD of
X Co invited you to enlighten them on these
questions; viz:
a. If a suit were to be initiated in order to
resolve the controversy between Pedro and
Jose, should the matter be submitted to the
SEC or to the regular courts?
b. Between Jose and Pedro, whom should the
corporation so recognize as the rightful
stockholder? How would you respond to the
above queries? (1997 Bar)
A:
a. The jurisdiction of the matter belongs to the
regular courts. Under section 5.2 of the SRC as
amended, the jurisdiction for intra-corporate
controversies was transferred from the SEC to
the regular courts.
b. The corporation should recognize both Pedro
and Jose as rightful stockholders if there is no
over-issuance of shares resulting from the two
transactions without prejudice to the right of
the corporation to claim against Juan for the
value of the shares sold to Jose.
STOCK AND TRANSFER BOOK
CONTENTS
1. All stocks in the name of the stockholders
alphabetically arranged
2. Amount paid and unpaid on all stocks and the
date of payment of any installment
3. Alienation, sale or transfer of stocks
4. Other entries as the by-laws may prescribe
(Sundiang Sr. & Aquino, 2009)
WHO MAY MAKE VALID ENTRIES
Entries in stock and transfer books
The obligation and duty to make proper entries in
stock and transfer books falls on the corporate
secretary. If the corporate secretary refuses to
comply, the stockholder may rightfully bring suit to
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compel performance. The stockholder cannot take
the law on to his hands; otherwise such entry shall
be void (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5,
1997).
Probative value of the stock and transfer book
The stock and transfer book is the best evidence of
the transactions that must be entered or stated
therein. However, the entries are considered prima
facie evidence only and may be subject to proof to
the contrary (Bitong vs. CA, supra).
DISPOSITION AND ENCUMBRANCE OF SHARES
SALE OF SHARES
Registration by the corporation of the transfer
of shares in case of alienation
As between the parties to the contract of sale,
registration of the transfer of shares is not required.
However, until the shares are fully paid, such
transfer cannot be recorded in the books of the
corporation. Consequently, the transferee will not
be considered as a stockholder.
Reasons for the recording of the alienation of
shares
1. To enable the corporation to know at all times
their actual stock holders;
2. To afford the corporation the opportunity to
object or refuse its consent to the transfer in
case it has any claim against the stock; and
3. To avoid fictitious and fraudulent transfer.
ALLOWABLE RESTRICTIONS ON
THE SALE OF SHARES
Requisites for a restriction to be valid
1. Restrictions are provided in the articles of
incorporation;
2. It must be printed at the back of the certificate
of stock; and
3. Must not be more onerous than the right of first
refusal
Corporation can provide regulations to the
sale/transfer of the shares of stockholders
Corporation can provide regulations to the
sale/transfer of the shares of stockholders but the
authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict
the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to
the formalities and procedure to be followed in
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effecting transfer (Thomson v. CA, G.R. No. 116631,
October 28, 1998).
A stockholder can transfer his shares without
being fully paid
The incomplete payment of the subscription does
not preclude the subscriber from alienating his
shares of stock. However, the transfer shall be valid
only between the parties. The corporation has the
right to refuse from recording the sale in its books.
A transferee of the partially paid shares cannot
compel the corporation to record the transfer of
shares in its books, even though he has no
knowledge that they are not fully paid
Shares of stock against which the corporation holds
any unpaid claim shall not be transferable in the
books of the corporation. Hence, a transferee of the
partially paid shares cannot compel the corporation
to record the transfer of shares in its books, even
though he has no knowledge that they are not fully
paid (CC, Sec. 63).
Stockholder cannot sell a portion of the shares
not fully paid
A stockholder who has not paid the full amount of
his subscription cannot transfer a portion of his
subscription in view of the indivisible nature of the
subscription contract (Villanueva, 2009).
Liability of the transferee for the balance of the
purchase price in case the stockholder on record
fails to pay the same
In case the stockholder on record fails to pay the pay
the balance of the purchase price, he is still liable for
the balance of the purchase price. Unless the
transfer of the shares is recorded, the stockholder is
still the owners of the shares as far as the
corporation is concerned.
REASON: The subscriber is as much bound to pay
his subscription as he would be to pay any other
debt (Nava v. Peers Marketing Corp., G.R. No. L-28120
November 25, 1976).
Q: Po subscribed to 80 shares of Peers
Marketing Corporation at one hundred pesos a
share with a total value of 8,000 pesos. Po
initially paid 2,000 pesos (25% of the amount of
subscription). Without paying the full
subscription price, Po sold to Nava 20 of his 80
shares. Nava requested the officers of the
corporation to register the sale in the books of
the corporation. The request was denied
because Po has not paid fully the amount of his
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subscription. Can Nava compel the corporation
to register the sale?
A: NO. The corporation has a claim on the said
shares for the unpaid balance of Po's subscription. A
stock subscription is a subsisting liability from the
time the subscription is made. The subscriber is as
much bound to pay his subscription as he would be
to pay any other debt (Ibid).
Sale of full paid shares
Sale of fully paid shares is allowed even without the
consent of the corporation as long as the requisites
for the valid transfer of shares are complied.
Q: Four months before his death, PX assigned
100 shares of stock registered in his name in
favor of his wife and his children. They then
brought the deed of assignment to the proper
corporate officers for registration with the
request for the transfer in the corporation's
stock and transfer books of the assigned shares,
the cancellation of the stock certificates in PX's
name, and the issuance of new stock certificates
in the names of his wife and his children as the
new owners. The officers of the Corporation
denied the request on the ground that another
heir is contesting the validity of the deed of
assignment. May the Corporation be compelled
by mandamus to register the shares of stock in
the names of the assignees? (2004 Bar)
A: YES. The corporation may be compelled by
mandamus to register the shares of stock in the
name of the assignee. The only legal limitation
imposed by Section 63 of the Corporation Code is
when the Corporation holds any unpaid claim
against the shares intended to be transferred. The
alleged claim of another heir of PX is not sufficient
to deny the issuance of new certificates of stock to
his wife and children. It would be otherwise if the
transferee's title to the shares has no prima facie
validity or is uncertain.
Recording of a deed of assignment with the SEC
without the transfer of shares does not bind the
corporation and third persons
The recording of a deed of assignment does not give
rise to any legal benefit to the corporation or any
person (Sec Memo Circular No. 17, Series of 2004).
REQUISITES OF A VALID TRANSFER
If represented by a certificate, the following must be
strictly complied with:
1. Indorsement by the owner and his agent;
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2. Delivery of the certificate;
3. To be valid to third parties and to the
corporation, the transfer must be recorded
in the books of the corporation (Rural Bank
of Lipa v. CA, G.R. No. 124535, Sepember 28,
2001); and
4. No shares of stock against which the
corporation holds any unpaid claim shall be
transferrable (CC, Sec. 63).
NOTE: Unpaid claim refers to claim arising from
unpaid sunscription, and not to any indebtedness
which a stockholder or subscriber may owe to the
corporation arising from any other transaction
(China Banking Corp. v. CA and Valley Golf and
Country Club, G.R. No. 117604, March 26, 1997).
If NOT represented by a certificate (such as when
the certificate has not yet been issued or where for
some reason is not in the possession of the
stockholder):
1. By means of deed of assignment; and
2. Such is duly recorded in the books of the
corporation (Sundiang Sr. & Aquino, 2009)
INVOLUNTARY DEALINGS WITH SHARES
It refers to such writ, order or process issued by a
court of record affecting shares of stocks which by
law should be registered to be effective, and also to
such instruments which are not the willful acts of
the registered owner and which may have been
executed even without his knowledge or against his
consent.
Examples of involuntary dealings of a share
1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks
Involuntary dealings must be registered
It is the act of registration which creates a
constructive notice to the whole world of such
instrument or court writ or process and is the
operative act that conveys ownership (Aquino,
2007).
DISSOLUTION
AND LIQUIDATION
Dissolution
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It is the extinguishment of the franchise of a
corporation and the termination of its corporate
existence (Sundiang Sr. & Aquino, 2009).
De jure and de facto dissolution
De jure dissolution –dissolution in law adjudged
and determined by judicial sentence or brought
about by an act of or with the consent of the
sovereign power or which results from the
expiration of the charter period of corporate life.
De facto dissolution- takes place in substance and
in fact when the corporation by reason of
insolvency, cessation of business, or otherwise
suspends all its operations and goes into liquidation
still retaining its primary franchise to be a
corporation.
Two legal steps in corporate dissolution
1. The termination of the corporate existence at
least as far as the right to go on doing ordinary
business is concerned;
2. The winding up of its affairs, the payment of its
debts, and the distribution of its assets among
the shareholders or members and other
persons interested. After winding up, the
existence of the corporation is terminated for
all purposes.
Effects of the dissolution of a corporation
1. Corporation ceases as a body corporate to
continue the business for which it was
established (CC, Sec. 122).
2. The assets of the corporation will then be
liquidated and legal title to the remaining
corporate properties are transferred to the
stockholders who become co-owners thereof
3. The Corporation continues as a body corporate
for 3 years only for the purpose of winding up
or liquidation.
4. A dissolved corporation cannot be revived.
However, those interested may reincorporate
by refilling a new AOI and by-laws (Rebollido vs.
CA, G.R. No. 81123, February 28, 1989).
Q: Vitaliano Aguirre, II, one of the original
subscribers of FQB+7, filed a complaint for
intra-corporate dispute against Nathaniel et. al
upon learning that they have filed, as corporate
officers of FQB+7, a GIS which showed a different
set of Directors and Subscribers from that of the
AoI. In response, Nathaniel, et al. filed a petition
for certiorari with the CA for the annulment of
the proceedings in the RTC claiming that the SEC
had already revoked FQB+7’s certificate of
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registration almost a year before Aguirre filed
his complaint with the RTC.
The CA dismissed the complaintbecause the
corporation has lost its juridical personality. As
such the trial court does not have jurisdiction to
entertain an intra-corporate dispute when the
corporation is already dissolved.
Is the case an intra-corporate dispute and is thus
under the jurisdiction of the RTC?
A: YES. The Court finds and so holds that the case is
essentially an intra-corporate dispute. It obviously
arose from the intra-corporate relations between
the parties, and the questions involved pertain to
their rights and obligations under the Corporation
Code and matters relating to the regulation of the
corporation. The Court further holds that the nature
of the case as an intra-corporate dispute was not
affected by the subsequent dissolution of the
corporation. Section 145 preserves a corporate
actor’s cause of action and remedy against another
corporate actor. In so doing, Section 145 also
preserves the nature of the controversy between
the parties as an intra-corporate dispute.
The dissolution of the corporation simply prohibits
it from continuing its business. However, despite
such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution
does not automatically convert the parties into total
strangers or change their intra-corporate
relationships. Neither does it change or terminate
existing causes of action, which arose because of the
corporate ties between the parties. Thus, a cause of
action involving an intra-corporate controversy
remains and must be filed as an intra-corporate
dispute despite the subsequent dissolution of the
corporation (Aguirre v. FQB+7 Inc., GR No. 170770,
January 9 2013, Del Castillo, J.).
Q: Alabang Development Corporation (ADC),
developer of Alabang Hills Village, filed with the
RTC a complaint for injunction against Alabang
Hills Village Association, Inc. (AHVAI) and its
president, Rafael Tino, alleging that AHVAI
started the construction of a multi-purpose hall
and a swimming pool on one of the parcels of
land still owned by ADC, without the latter’s
consent and approval.
AHVAI claimed that ADC had no legal capacity to
sue since its existence as a registered corporate
entity was revoked by the SEC on May 26, 2003.
Does the ADC has the capacity to file the
complaint?
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A: NO. In the instant case, there is no dispute that
ADC's corporate registration was revoked on May
26, 2003. Based on Section 122 of the Corporation
Code, it had three years, or until May 26, 2006, to
prosecute or defend any suit by or against it. The
subject complaint, however, was filed only on
October 19, 2006, more than three years after such
revocation.
In the present case, ADC filed its complaint not only
after its corporate existence was terminated but
also beyond the three-year period allowed by
Section 122 of the Corporation Code. Thus, it is clear
that at the time of the filing of the subject complaint
ADC lacks the capacity to sue as a corporation. To
allow ADC to initiate the subject complaint and
pursue it until final judgment, on the ground that
such complaint was filed for the sole purpose of
liquidating its assets, would be to circumvent the
provisions of Section 122 of the Corporation Code
(Alabang Development Corp. v. Alabang Hills Village
Association and Rafael Tinio, G.R. No. 187456, June 2,
2014).
Procedure for dissolution of a corporation sole
In case of a corporation sole, by submitting to the
SEC for approval, a verified declaration of
dissolution which will set forth the following:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious
denomination, sect or church; and
4. The names and addresses of the persons who
are to supervise the winding up of the affairs of
the corporation.
Upon approval of such declaration of dissolution by
the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
except for the purpose of winding up its affairs (CC,
Sec. 115).
Dissolution by merger or consolidation
Upon issuance of SEC of a Certificate of Merger or
Consolidation, the corporate existence of the
absorbed corporation and the constituent
corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
thereafter be conducted (CC, Sec. 80).
MODES OF DISSOLUTION
The following are the modes of dissolution of the
corporation:
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1. Voluntary
a. By the vote of the BOD/ BOT and the
stockholders/ members where no
creditors are affected (CC, Sec. 118);
b. By the judgment of the SEC after hearing of
petition for voluntary dissolution, where
creditors are affected (CC, Sec. 119);
c. By amending the AOI to shorten the
corporate term (CC, Sec. 120);
d. In case of a corporation sole, by submitting
to the SEC a verified declaration of the
dissolution for approval (CC, Sec. 115); and
e. Merger or consolidation
2. Involuntary
a. By expiration of corporate term provided
for in the AOI (CC, Sec. 11)
b. By legislative enactment
c. By failure to formally organize and
commence the transaction of its business
within 2 years from the date of
incorporation (CC, Sec. 22)
d. By order of the SEC on grounds under
existing laws (CC, Sec. 121)
e. Judicial decree on Quo Warranto
Proceeding (CC, Sec. 20)
NOTE: Methods effecting dissolution as prescribed
by statute are exclusive, and a corporation cannot
be dissolved except in the manner prescribed by law
(De Leon, 2010).
The requirements for dissolution mandated by the
CC should be strictly complied with (Vesaga vs. CA,
G.R. No. 142924, December 5, 2001).
NOTE: Piercing the veil of corporate fiction is not
one of the causes by which a corporation may be
dissolved.
Q: AAA Corporation is a bank. The operations of
AAA Corporation as a bank were not doing well.
So, to avert any bank run, AAA Corporation, with
the approval of the Monetary Board, sold all its
assets and liabilities to BBB Banking
Corporation which includes all deposit
accounts. In effect then, BBB Corporation will
service all deposits of all depositors of AAA
Corporation.
a. Will the sale of all assets and liabilities of
AAA Corporation to BBB Banking
Corporation automatically dissolve or
terminate the corporate existence of AAA
Corporation? Explain your answer.
b. What are the legal requirements in order
that a corporation may be dissolved? (2012
Bar)
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A:
a. NO. AAA Corporation is an artificial being
created by law and has a legal personality of its
own. A corporation does not owe its existence
upon the presence of assets and properties. It
can only be dissolved in cases provided for by
law. As such, AAA Corporation will subsist
regardless of the sale of all of its assets and
liabilities to another corporation.
b. A corporation may be dissolved voluntarily, by
shortening of the corporate term and through
involuntary dissolution. In voluntary
dissolution, the action for dissolution must be
approved by majority of the directors or
trustees and 2/3 of the stockholders
representing the outstanding capital stock or
members, publication requirement and filed
with SEC which will issue certificate of
dissolution. If there are creditors affected, there
must be a hearing to hear the objections and
claims of the creditors. In case of shortening of
corporate term, through amendment of the AOI.
In involuntary dissolution, through filing of a
verified complaint with the SEC based on any
ground provided by law or rules.
VOLUNTARY
Procedure of dissolution of a corporation where
no creditors are affected (Meet-NAC-PA)
1. A MEETing must be held on the call of directors
or trustees
2. Notice of the meeting
a. Given to each stockholder or member
either by registered mail or by personal
delivery at least thirty (30) days prior to
the said meeting.
b. Published for three (3) consecutive weeks
in a newspaper published in the place
where the principal office of said
corporation is located and if no newspaper
is published in such place, then in a
newspaper of general circulation in the
Philippines.
3. Resolution to dissolve must be Approved by
majority vote of the board of directors or
trustees and adopted by the affirmative vote of
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of members.
4. Copy of the resolution is then certified by the
majority of Board of directors or trustees and
countersigned by the secretary of the
Corporation.
5. Petition for dissolution together with the
signed and countersigned copy of the resolution
is then filed with the SEC.
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6. Approval of SEC of the petition and issuance of
certificate of dissolution. (CC, Sec. 118)
NOTE: Under the RCC, it is now required that
majority vote of the board, and majority vote of the
stockholders, member to approve the dissolution.
The New Code now likewise provides that a verified
request for dissolution to be filed with the SEC
providing details of dissolution and submit certial
documents showing compliance with the
requirements. The request shall be approved by the
the SEC within 15 days from receipt, and dissolution
shall take effect only upon issuance of a certificate
of dissolution. Banks, preneed, insurance and trust
companies, and other similar financial
intermediaries require favorable recommendation
of the appropriate government agency prior to the
filing.
Procedure of dissolution of a corporation where
creditors are affected (APSIVECSO – CPUPOOJ)
1. Approval of the stockholders representing at
least 2/3 of the outstanding capital stock or by
at least two-thirds (2/3) of the members at a
meeting of its stockholders or members called
for that purpose.
2. Filing of Petition for dissolution with SEC,
petition must be: (SiVeCS)
a. SIgned by a majority of its board of
directors or trustees or other officers
having the management of its affairs;
b. VErified by its president or secretary or one
of its directors or trustees;
c. Set forth all Claims and demands against it;
d. State that its dissolution was approved by
the required votes of Stockholders or
members.
3. SEC shall issue an Order reciting the purpose of
the petition and fix a date when objections
thereto may be filed by any person. Said date
must not be less than thirty (30) days nor more
than sixty (60) days after the entry of the order.
4. Copy of the order shall be:
a. PUblished at least once a week for three (3)
consecutive weeks in a newspaper of
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and
b. POsted for three (3) consecutive weeks in
three (3) public places in such municipality
or city.
5. After expiration of the time to file objections
and upon prior 5-day notice to hear the
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objections, SEC shall proceed to hear the
petition and try any issue made by the
Objections file.
6. If no objection is sufficient and the material
allegations of the petition are true, it shall
render Judgment dissolving the corporation
and directing such disposition of its assets as
justice requires, and may appoint a receiver to
collect such assets and pay the debts of the
corporation.
NOTE: Under the RCC, only majority of the board are
qualified to sign. And the new code includes
additional matters to be included in the petition.
Specifically, it should state the reason for the
dissolution the form, manner and time of the
metting when votes were cast. The corporation
must submit to the SEC, a copy of the resolution
authorizing dissolution certified by the majority of
the board and countersigned by the secretary, and
list of all creditors. To do away with confusion, the
new code states that dissolution takes effects upon
issuance of a certificate of dissolution by the SEC
Creditor’s consent is not necessary for
dissolution
Consent of creditors is not necessary to approve
dissolution for the reason that liquidation
proceedings will be conducted to protect their
interest.
Procedure for dissolving the corporation by
shortening of the corporate term (ASAF)
1. Amending the Articles of Incorporation
pursuant to Sec. 16:
a. Approved by majority vote of the board of
directors or trustees
b. Ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding
capital stock or by at least two-thirds (2/3)
of the members in case of non-stock
corporations.
2. Copy of the amended AOI shall be submitted
with the SEC.
3. Approval of SEC of the amended AOI.
4. As an additional requirement, the SEC requires
to submit the final audited Financial statement
not older than 60 days before the application
for shortening the corporate term (CC, Sec. 120
in relation to Sec. 16)
NOTE: Under the RCC the dissolution now takes
effect from the expiration of the shortened terms
stated in the approved articles, without any further
proceedings, And to prevent confusion, the new
code now specifically provides that in case of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
expiration of corporate term dissolution
automatically takes effect in the day following the
last day of the corporate term as stated in the
aritcles without need for issuance by the SEC of a
certificate of dissolution.
Q: The Securities and Exchange Commission
approved the amendment of the articles of
incorporation of GHQ Corporation shortening
its corporate life to only 25 years in accordance
with Sec. 120 of the Corporation Code. As
shortened, the corporation continued its
business operations until May 30, 1997, the last
day of its corporate existence. Prior to said date,
there were a number of pending civil actions, of
varying nature but mostly money claims filed by
creditors, none of which was expected to be
completed or resolved within five years from
May 30, 1997. If the creditors had sought your
professional help at that time about whether or
not their cases could be pursued beyond May 30,
1997, what would have been your advice? (2000
Bar)
A: The cases can be pursued even beyond May 30,
1997, the last day of the corporate existence of GHQ
Corporation. The corporation is not actually
dissolved upon the expiration of its corporate term.
There is still the period for liquidation or winding
up.
Q: X Corporation shortened its corporate life by
amending its articles of incorporation. It has no
debts but owns a prime property located in
Quezon City. How would the said property be
liquidated among the five stockholders of said
corporation? Discuss two methods of
liquidation. (2001 Bar)
A: The prime property of X Corporation can be
liquidated among the five stockholders after the
property has been conveyed by the corporation to
the five stockholders, by dividing or partitioning it
among themselves in any two of the following ways:
1. By physical division or partition based on the
proportion of the values of their stockholdings;
or
2. By selling the property to a third person and
dividing the proceeds among the five
stockholders in proportion to their
stockholdings; or
3. After the determination of the value of the
property, by assigning or transferring the
property to one stockholder with the obligation
on the part of said stockholder to pay the other
four stockholders the amount/s in proportion
to the value of the stockholding of each.
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INVOLUNTARY
Expiration of corporate term
The corporation shall exist within the period stated
in the AOI not exceeding 50 years unless sooner
legally dissolved (CC, Secs. 19, 22, 117-122, 144, 145)
or unless its registration is revoked upon any of the
grounds provided by law (CC, Sec. 6, PD 902-A & Sec.
22). In the absence of any express stipulation, it shall
exist for a period not exceeding fifty (50) years from
the date of incorporation. After the term had
expired without extension, the corporation is
dissolved.
NOTE: UNDER THE RCC, A corporation shall have
perpetual existence unless its articles of
incorporation provides otherwise or unless the
corporation, upon a vote of its stockholders
representing a majority of its outstanding capital
stock, notifies the Commission that it elects to retain
its specific corporate term pursuant to its articles of
incorporation (Sec. 10 of R.A. 11232) or unless its
registration is revoked upon any of the grounds
provided by law.
Q: XYZ Corporation entered into a contract of
lease with ABC, Inc., over a piece of real estate
for a term of 20 years, renewable for another 20
years, provided that XYZ's corporate term is
extended in accordance with law. Four years
after the term of XYZ Corporation expired, but
still within the period allowed by the lease
contract for the extension of the lease period,
XYZ Corp. notified ABC, Inc., that it is exercising
the option to extend the lease. ABC, Inc., objected
to the proposed extension, arguing that since
the corporate life of XYZ Corp. had expired, it
could no longer opt to renew the lease. XYZ Corp.
countered that withstanding the lapse of its
corporate term it still has the right to renew the
lease because no quo warranto proceedings for
involuntary dissolution of XYZ Corp. has been
instituted by the Office of the Solicitor General.
Is the contention of XYZ Corp. meritorious?
Explain briefly. (2004 Bar)
A: NO. XYZ Corporation’s contention is not
meritorious XYZ Corp. was dissolved ipso facto upon
the expiration of its original term. It ceased to be a
body corporate for the purpose of continuing the
business for which it was organized, except only for
purposes connected with its winding up or
liquidation. Extending the lease is not an act to wind
up or litigate XYZ’s affairs. It is contrary to the idea
of winding up the affairs of the corporation (PNB v.
CFI of Rizal, G.R. No. 63201, May 27, 1992).
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NOTE: (UNDER THE REVISED CORPO) Provided
that the original corporate term was retained by the
corporation despite the fact the law now provides
for a perpetual existence, the doctrine still stands.
Remedy in case the stockholders want to still
continue the business of the corporation after
its term expired
The remedy of the stockholders is reincorporation.
Amending the articles of the incorporation to
extend the corporate term is not an available
remedy as the corporation has ceased to exist.
There is nothing to prevent the stockholders from
conveying their shareholdings toward the creation
of a new corporation to continue the business of the
old. Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate
anew.
It is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be
created as long as the stockholders have given their
consent (Chung Ka Bio v IAC, G.R. No. 71837, July 26,
1988).
NOTE: UNDER THE RCC A corporation whose term
has expired may apply for a revival of its corporate
existence, together with all the rights and privileges
under its certificate of incorporation and subject to
all of its duties, debts and liabilities existing prior to
its revival. Upon approval by the Commission, the
corporation shall be deemed revived and a
certificate of revival of corporate existence shall be
issued, giving it perpetual existence, unless its
application for revival provides otherwise.
Non-use of corporate charter or continuous
inoperation of a corporation
To “formally organize” as used in reference to
corporations means:
1. Election of officers, providing for the
subscription;
2. Payment of the capital stock;
3. Adoption of by-laws; and
4. Such other similar steps as are necessary to
endow the legal entity with the capacity to
transact the legitimate business for which it
was created (Benguet Consolidated Mining Co. v
Pineda, G.R. No. L-7231, March 28, 1956).
Effect of failure of a corporation to formally
organize
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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 (CC, Sec 22).
NOTE: UNDER THE REVISED CORPO If a
corporation does not formally organize and
commence its business within five (5) years from
the date of its incorporation, its certificate of
incorporation shall be deemed revoked as of the day
following the end of the five (5)-year period. (Sec.
21 R.A. No. 11232)
Effect of continuous inoperation for a period of
ar least five (5) years
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 (CC, Sec. 22).
NOTE: The provision shall not apply if the failure to
organize, commence the transaction of its business
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.
NOTE: UNDER THE RCC However, if a corporation
has commenced its business but subsequently
becomes inoperative for a period of at least five (5)
consecutive years, the Commission may, after due
notice and hearing, place the corporation under
delinquent status.
Legislative dissolution
A corporation created by special law can be
dissolved by an enactment of special law or
expiration of its charter.
Limitations:
1. Under the constitution, the amendment,
alteration or repeal of the corporate franchise
of a public utility shall be made only “when the
common good so requires.”
2. Section 145.
3. It cannot impair the obligations of existing
contracts between the corporation and third
persons, or take away vested rights of its
creditors. However, if effected because the
common good so requires, there is no
impairment.
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The Corporation Code
Dissolution by the SEC on grounds underexisting
laws
A corporation may be dissolved by the Securities
and Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on
the grounds provided by existing laws, rules and
regulations (CC, Sec. 121).
The following are some of the grounds, which may
result to the issuance of a dissolution order by the
SEC after conduct of appropriate proceedings:
1. Violations of the Corporation committed by the
corporation. Such violations are generally
penalized by Sec. 144 as the Code did not
specifically penalize the same.
2. Deadlocks in a close corporation (CC, Sec. 104)
3. Mismanagement of a close corporation (CC, Sec.
105)
4. On any of the following grounds, wherein the
SEC retains its power to suspend or revoke,
after proper notice and hearing, the franchise or
certificate of registration of the corporations,
partnerships or associations: (FMI-DBR)
a. Fraud or misrepresentation in
procuring its Certificate of
Registration;
b. Serious Misrepresentation as to what
the corporation can do or is doing to
the great prejudice of or damage to the
general public;
c. continuous Inoperation for a period of
at least 5 years (Sec. 22, CC);
d. Refusal to comply or Defiance with any
lawful order, rules or regulations of
SEC restraining commission of acts
which would amount to a grave
violation of its franchise;
e. Failure to file By-laws within the
required period. However, SEC must
give the corporation the opportunity to
explain such failure;
f. Failure within the prescribed period to
submit required Reports in
appropriate forms as determined by
the SEC (e.g. General Information
Sheet, Financial Statements) (De Leon,
2010).
NOTE: All actions filed with the SEC must be
prosecuted and defended in the name of the real
party-in-interest (SEC Rules of Procedure, Rule III,
Sec. 2).
METHODS OF LIQUIDATION
Liquidation
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Process by which all the assets of the corporation
are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors and
the remaining balance if any is to be distributed to
the stockholders (Sundiang Sr. & Aquino, 2014).
Method of liquidation
1. By the corporation itself or its board of
directors or trustees (CC , Sec. 122 [1])
2. By conveyance to a trustee within a three-year
period (CC, Sec. 122[2]; Board of Liquidators v.
Kalaw, G.R. No. L-18805, Aug. 14, 1967)
3. By a management committee or rehabilitation
receiver appointed by SEC (CC, Sec. 119)
4. By liquidation after three years
Approval of the SEC is not required in order to
liquidate and distribute the assets of a dissolved
corporation
The liquidation and distribution of the assets of a
dissolved corporation is a matter of internal
concern of the corporation and falls within the
power of the directors and stockholders or duly
appointed liquidation trustee (SEC Opinion, July 23,
1996).
Q: Lucia prayed before the RTC-Iriga to annul
the extrajudicial partition and deed of mortgage
executed by her childrenover the estate of her
deceased husband, having been executed
without her knowledge and consent. She also
prayed for damages.
After the case was set for pre-trial, RBCI filed a
motion to withdraw after being informed that
the PDIC would handle the case as RBCI had
already been closed and placed under the
receivership of the former. Consequently, the
lawyers of PDIC took over the case of RBCI.
May Lucia’s petition proceed independently of
the liquidation proceedings of RBCI?
A: NO. After the Monetary Board has declared that a
bank is insolvent and has ordered it to cease
operations, the Board becomes the trustee of its
assets for the equal benefit of all the creditors,
including depositors. The assets of the insolvent
banking institution are held in trust for the equal
benefit of all creditors, and after its insolvency, one
cannot obtain an advantage or a preference over
another by an attachment, execution or otherwise.
Thus, to allow Lucia’s case to proceed
independently of the liquidation case, a possibility
of favorable judgment and execution thereof against
the assets of RBCI would not only prejudice the
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other creditors and depositors but would defeat the
very purpose for which a liquidation court was
constituted as well. It would be more in keeping
with law and equity if Lucia’s case is consolidated
with the liquidation case in order to expeditiously
determine whether she is entitled to recover the
property subject of mortgage from RBCI and, if so,
how much she is entitled to receive from the
remaining assets of the bank (Barrameda v. Rural
Bank of Canaman, Inc., G.R. No. 176260, November,
24 2010, in Divina 2014).
Period of Liquidation
The period of liquidation is three (3) years.
Corporation in the process of liquidation does
not have legal authority to engage in any new
business
A corporation in the process of liquidation has no
legal authority to engage in any new business, even
if the same is in accordance with the primary
purpose stated in its article of incorporation.
Suits brought against the corporation within the
3-year period but remained pending beyond
said period
Pending actions against the corporation are not
extinguished. They may still be prosecuted against
the corporation even beyond said period.
The creditors of the corporation who were not paid
within the 3-year period may follow the property of
the corporation that may have passed to its
stockholders unless barred by prescription or
laches or disposition of said property in favor of a
purchaser in good faith.
Suits not brought against the corporation within
the 3-year period
Suits not brought against the corporation within the
3-year period may still be prosecuted against the
corporation, since there is nothing in Sec. 122, par.
1 which bars action for the recovery of the debts of
the corporation against the liquidator thereof after
the lapse of the winding up period of 3 years
(Republic of the Philippines vs. Marsman Dev. Co., G.R.
No. L-175109, April 27, 1972).
Right of the corporation to appeal a judgment is
not extinguished by the expiration of the 3-year
period
Corporations whose certificate of registration was
revoked by the SEC may still maintain actions in
court for the protection of its rights which includes
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the right to appeal (Paramount Insurance Corp. v.
A.C. Ordonez Corp., G.R. No. 175109, August 6, 2008).
Liquidation is not necessary in case a
corporation is dissolved by merger and
consolidation
In case of merger or consolidation, the surviving or
the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
all receivables due on whatever account, including
subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to,
or due to each constituent corporation, shall be
deemed transferred to and vested in such surviving
or consolidated corporation without further act or
deed (CC, Sec 80).
Distribution of the corporation’s assets prior to
dissolution
GR: A corporation cannot distribute its assets prior
to dissolution. This will violate the trust fund
doctrine (CC,Sec. 122).
XPNs:
1. Decrease of Capital Stock (CC,Sec. 38)
2. Redemption of Redeemable Shares (CC, Sec. 8)
4. Reacquisition of shares which are considered as
treasury shares (CC, Sec. 9)
5. Acquisition of own shares (CC, Sec. 41)
6. Declaration of dividends (CC, Sec. 43)
7. Purchase of shares of any stockholder in case of
deadlocks in a close corporation (CC, Sec. 10)
8. Withdrawal of a stockholder in a close
corporation (CC, Sec 105)
9. Upon lawful dissolution and after payment of all
debts and liabilities (CC, Sec. 122)
Order of distribution of assets in case of
liquidation (CreSt-PreComE)
1. Payment of claims of CREditors who are not
stockholders (based on preference or
concurrence of credits).
2. Payment of claims of STockholders who are
creditors of the corporation, as to the amount of
their claim as creditors.
3. Residual Balance shall be distributed
proportionately:
a. Holders of PREferred stock, if any; then
to the
b. Holders of COMmon stock
4. If the creditor or stockholder cannot be found,
their claims or shares shall be Escheated in
favor of the city or municipality where the asset
is located.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
BY THE CORPORATION ITSELF
Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is
terminated in any other manner:
1. Shall nevertheless be continued as a body
corporate for 3 years after the time when it
would have been so dissolved;
2. For the purpose of
a. Prosecuting and defending suits by or
against it;
b. Enabling it to settle and close its affairs;
c. To dispose of and convey its property;
and
d. to distribute its assets
3. But NOT for the purpose of continuing the
business for which it was established (CC, Sec.
122 [1]).
NOTE: Sec 122 authorizes the dissolved
corporation’s board of directors to conduct its
liquidation within 3 years from its dissolution.
Jurisprudence has even recognized the board’s
authority to act as trustee for persons in interest
beyond the said 3 year period [Aguirre v. FQB+7 Inc.,
688 SCRA 242 (2013)].
BY CONVEYANCE TO A TRUSTEE
WITHIN A 3-YEAR PERIOD
At anytime during the 3-year period for liquidation,
said corporation is authorized and empowered to
convey all of its property to trustees for the benefit
of its stockholders, members, creditors and other
persons in interest.
From and after any such conveyance by the
corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in
interest, all interest which the corporation had in
the property terminates, the legal interest vests in
the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons
in interest (par. [2], Sec. 122, CC).
Meaning of trustee
The word “trustee” as used in the law must be
understood in its general concept. It has been held
that a counsel who prosecuted and defended the
interest of a corporation and who in fact appeared
in behalf of the corporation before and after its
dissolution by amendment of its articles of
incorporation may be considered a trustee of the
corporation at least with respect to the matter in
litigation only. The purpose in the transfer of the
assets of the corporation to a trustee upon its
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dissolution is more for the protection of its creditors
and stockholders. The appointment of said counsel
can be considered a substantial compliance [Gelano
v. CA, 103 SCRA 90 (1981)].
Period of existence of the trusteeship
Where no time limit has been fixed with respect to
the existence of the trusteeship, the trustee has
authority to close the affairs of the corporation even
after the expiration of the statutory 3-year period
and claims not barred by the statute of limitations
can be presented and allowed until the liquidation
is terminated (National Abaca & Other Fibers Corp.
v. Pore, G.R. No. L-16779, August 16, 1979).
Suits brought by the corporation within the 3-
year period but remained pending beyond said
period
A corporation that has a pending action and which
cannot be terminated within the 3 year period after
its dissolution is authorized under Sec. 122 of the CC
to convey all its property to a trustee to enable it to
prosecute and defend suits by or against the
corporation beyond the 3-year period. The trustee
may commence a suit which can proceed to final
judgment even beyond the 3-year period. The
director may be permitted to continue as trustees to
complete the liquidation (Clemente v. CA, G.R. No.
82407, March 27, 1995).
Suits brought by the corporation beyond the 3-
year period are not barred
The trustee of a dissolved corporation may
commence a suit which can proceed to final
judgment even beyond the 3-year period. The
expiration of 3 years after the dissolution of a
corporation does not affect its right to enforce a
favorable judgment, because under Sec. 145 of the
CC, no right or remedy in favor or against any
corporation shall be removed or impaired either by
subsequent dissolution of said corporation or by
any subsequent amendment or repeal of the CC or
any part thereof (Knecht v. United Cigarette Corp.,
G.R. No. 139370, July 4, 2002).
Q: The corporation, once dissolved, thereafter
continues to be a body corporate for three years
for purposes of prosecuting and defending suits
by and against it and of enabling it to settle and
close its affairs, culminating in the final
disposition and distribution of its remaining
assets. If the 3 year extended life expires
without a trustee or receiver being designated
by the corporation within that period and by
that time (expiry of the 3 year extended term),
the corporate liquidation is not yet over, how, if
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at all, can a final settlement of the corporate
affairs be made? (1997 Bar)
A: The liquidation can continue with the winding up.
The members of the BOD can continue with the
winding of the corporate affairs until final
liquidation. They can act as trustees or receivers for
this purpose.
Where no receiver or trustee has been designated
after dissolution:
1. The board of directors or trustees itself may be
permitted to so continue as “trustees” by legal
implication.
2. In the absence of the BoD or BoT, those having
a pecuniary interest in the corporate assets,
stockholders or creditors, may make a proper
representations with SEC for working out a final
settlement of the corporate concerns [Clemente
v CA, 242 SCRA 717 (1995)].
3. The only surviving stockholder or director (SEC
Opinion No. 10-96, Jan 29 2010)
4. The counsel who prosecuted and defended the
interest of the corporation (Reburiano v CA, G.R.
No. 102965, January 21, 1999).
BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
Liquidation by a receiver
In the case of a dissolution order where creditors
are affected, the SEC may appoint a receiver to take
charge of the liquidation of the corporation (CC, Sec.
119).
NOTE: Thus, the appointment of receiver is
addressed to the sound discretion of the court or the
SEC.
Appointment of receiver for a going corporation
The appointment of a receiver for a going
corporation is a last resort remedy, and should not
be employed when another remedy is
available. Relief by receivership is an extraordinary
remedy and is never exercised if there is an
adequate remedy at law or if the harm can be
prevented by an injunction or a restraining
order. Bad judgment by directors, or even
unauthorized use and misapplication of the
company’s funds, will not justify the appointment of
a receiver for the corporation if appropriate relief
can otherwise be had (Rev. Ao-As v. CA, G.R. No.
128464, June 20, 2006).
Even without dissolution, the court has authority to
appoint a receiver for a corporation to protect and
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preserve its properties for the use and benefit of its
creditors and others who may have similar interests
in the property as where there is already a final and
executory judgment against the corporation, which
is in a precarious financial condition [Central
Sawmills, Inc. v Alto Surety and Ins. Co., 27 SCRA 247
(1969)].
Where corporate directors are guilty of breach of
trust, minority stockholders may ask for
receivership [Chase v. CFI, 18 SCRA 602 (1966)].
The corporation, through its president cannot
condone penalties and charges after it had been
placed under receivership
The appointment of a receiver operates to suspend
the authority of a corporation and of its directors
and officers over its property and effects, such
authority being reposed in the receiver (Yam v. CA,
G.R. No. 104726, February 11, 1999).
Q: ASB Realty, being the owner of the property
by virtue of a Deed of Assignment, entered a
Contract of Lease with Leonardo Umale. Upon
expiration of the contract, Umale continued
occupying the premises. ASB Realty served
Umale a Notice of Termination of Lease and
Demand to Vacate. Umale failed to comply with
the demand of vacating the premises and paying
his arrears. ASB Realty filed an unlawful
detainer case. Umale admitted occupying the
property but challenged the personality of ASB
Realty to sue and recover the property. He
claimed that ASB Realty being placed under
receivership, it is the rehabilitation receiver
that has the power to take possession, control,
and custody of the assets under the Interim
Rules of Procedure on Corporate Rehabilitation.
Can ASB Realty, a corporation under
rehabilitation, sue in its own name and recover
property unlawfully withheld?
A: YES. Being placed under corporate rehabilitation
and having a receiver appointed to carry out the
rehabilitation plan do not ipso facto deprive a
corporation and its corporate officers of the power
to recover its unlawfully detained property.
Rehabilitation is for effecting a feasible and viable
rehabilitation by preserving a floundering business
as a going concern. This concept of preserving the
corporation’s business as a going concern while it is
undergoing rehabilitation is called debtor-in-
possession or debtor-in-place wherein the debtor
corporation remains in control of its business and
properties, subject only to the monitoring of the
appointed rehabilitation receiver. The receiver
does not take over the control and management of
the debtor corporation being tasked only to monitor
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

The Corporation Code
the successful implementation of the rehabilitation
plan (Umale v. ASB Realty Corporation, G.R. No.
181126, June 15, 2011, Del Castillo, J.).
Corporate Rehabilitation
It refers to the restoration of the debtor to a
condition of successful operation and solvency, if it
is shown that its continuance of operation is
economically feasible and its creditors can recover
by way of the present value of payments projected
in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated [Sec.
4(gg), FRIA].
Nature of Rehabilitation proceedings
Rehabilitation proceedings are summary and non-
adversarial in nature, and do not contemplate
adjudication of claims that must be threshed out in
ordinary court proceedings.
The jurisdiction of the rehabilitation court is over
claims against the debtor that is under
rehabilitation, not over claims by the debtor against
its own debtors or against third parties. The
corporation under rehabilitation must file a
separate action against its debtors/insurers to
recover whatever claim it may have against them
(Steel Corp. v. Mapfre Insular Insurance Corp., G.R.
No. 201199, October 16, 2013, in Divina, 2014).
Stay order and appointment of rehabilitation
receiver
Under Section 6(c) of PD 902-A, receivers may be
appointed whenever:
1) Necessary in order to preserve the rights of
the parties-litigants; and/or
2) Protect the interest of the investing public
and creditors.
The stay order and appointment of a
rehabilitation receiver is an "extraordinary,
preliminary, ex parte remedy." The effectivity
period of a stay order is only "from the date of its
issuance until dismissal of the petition or
termination of the rehabilitation proceedings." It is
not a final disposition of the case. It is an
interlocutory order defined as one that "does not
finally dispose of the case, and does not end the
Court’s task of adjudicating the parties’ contentions
and determining their rights and liabilities as
regards each other, but obviously indicates that
other things remain to be done by the Court."
The Interim Rules does not require a hearing before
the issuance of a stay order. What it requires is an
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initial hearing before it can give due course to or
dismiss a petition. Nevertheless, while the Interim
Rules does not require the holding of a hearing
before the issuance of a stay order, neither does it
prohibit the holding of one. Thus, the trial court has
ample discretion to call a hearing when it is not
confident that the allegations in the petition are
sufficient in form and substance, for so long as this
hearing is held within the five (5)-day period from
the filing of the petition — the period within which
a stay order may issue as provided in the Interim
Rules (Pryce Corp. v. China Banking Corp., G.R. No.
172302, February 18, 2014, in Divina, 2014).
FRIA is prospective in application
Sec. 146 of the FRIA, which makes it applicable to
“all further proceedings in insolvency, suspension of
payments and rehabilitation cases x x x except to the
extent that in the opinion of the court their
application would not be feasible or would work
injustice,” still presupposes a prospective
application. The wording of the law clearly shows
that it is applicable to all further proceedings. In no
way could it be made retrospectively applicable to
the Stay Order issued by the rehabilitation court in
2002. At the time of the issuance of the Stay Order,
the rules in force were the 2000 Interim Rules of
Procedure on Corporate Rehabilitation. Under those
rules, one of the effects of a Stay Order is the stay of
the "enforcement of all claims, whether for money
or otherwise and whether such enforcement is by
court action or otherwise, against the debtor, its
guarantors and sureties not solidarily liable with
the debtor. Nowhere in the Interim Rules is the
rehabilitation court authorized to suspend
foreclosure proceedings against properties of third-
party mortgagors (Situs Development Corp., et al. v.
Asiatrust Bank, et al., G.R. No. 180036, January 16,
2013).
NOTE: FRIA took effect on July 18, 2010.
Execution of rehabilitation plan
The Interim Rules on Corporate Rehabilitation
provides for means of execution of the
rehabilitation plan, which may include, among
others, the conversion of the debts or any portion
thereof to equity, restructuring of the debts, dacion
en pago, or sale of assets or of the controlling
interest. The restructuring of the debts of PALI is
part and parcel of its rehabilitation (Puerto Azul
Land, Inc. v. Pacific Wide Realty Development Corp.,
G.R. No. 184000, September 17, 2014).
Q: Spouses Rodil are the owners and sole
proprietors of St. Michael Diagnostic and Skin
Care Laboratory Services and Hospital. With a
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vision to upgrade the hospital, Sps. Rodil
purchased two (2) parcels of land adjoining
their existing property and incorporated
SMMCI, with which entity they planned to
eventually consolidate St. Michael Hospital’s
operations. To finance the construction, they
obtained a loan from BPI secured by their
personal assets. Due to mismanagement in the
construction, loan was not paid and debt
became due. Nevertheless, using hospital-
generated revenues, Sps. Rodil were still able to
purchase new equipment and machinery for St.
Michael Hospital. Later on, BPI Family
demanded immediate payment of the entire
loan obligation and, soon after, filed a petition
for extrajudicial foreclosure of the real
properties covered by the mortgage. On the
other hand, SMMCI filed a Petition for Corporate
Rehabilitation. It was averred that St. Michael
Hospital was operating profitably. Further,
there are several persons who approached Sps.
Rodil signifying their interest to invest in the
corporation. Moreover there are group of
medical doctors are willing to infuse capital to
the corporation for SMMCI to conclude pending
negotiations for investments. This was
supported by a feasibility study conducted by a
CPA in that upon merging St. Michael and SMMCI,
the company will attain operational feasibility
and profitability
1. Will the petition for rehabilitation be
granted
2. Whether the CA correctly affirmed SMMCI’s
Rehabilitation Plan as approved by the RTC.
A:
1. No. Restoration is the central idea behind the
remedy of corporate rehabilitation. In common
parlance, to “restore” means “to bring back to or put
back into a former or original state.” Rehabilitation
assumes that the corporation has been operational
but for some reasons like economic crisis or
mismanagement had become distressed or
insolvent, i.e., that it is generally unable to pay its
debts as they fall due in the ordinary course of
business or has liability that are greater than its
assets. In this case, it cannot be said that the
petitioning corporation, SMMCI, had been in a
position of successful operation and solvency at the
time the Rehabilitation Petition was filed on August
11, 2010. While it had indeed “commenced
business” through the preparatory act of opening a
credit line with BPI Family to finance the
construction of a new hospital building for its future
operations, SMMCI itself admits that it has not
formally operated nor earned any income since its
incorporation. This simply means that there exists
no viable business concern to be restored. While the
Court recognizes the financial predicaments of
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upstart corporations under the prevailing economic
climate, it must nonetheless remain forthright in
limiting the remedy of rehabilitation only to
meritorious cases.
2. NO. SMMCI’s Rehabilitation Plan which is an
indispensable requisite in corporate rehabilitation
proceedings failed to comply with the fundamental
requisites outlined in Section 18, Rule 3 of the Rules,
particularly, that of a material financial
commitment to support the rehabilitation and an
accompanying liquidation analysis. In this case,
aside from the harped on merger of St. Michael
Hospital with SMMCI, the only proposed source of
revenue the Rehabilitation Plan suggests is the
capital which would come from SMMCI’s potential
investors, which negotiations are merely pending.
Further, SMMCI likewise failed to include any
liquidation analysis in its Rehabilitation Plan thus,
prevents the Court from ascertaining if the
petitioning debtor’s creditors can recover by way of
the present value of payments projected in the plan,
more if the debtor continues as a going concern than
if it is immediately liquidated. Accordingly, it is
insufficient to decree SMMCI’s rehabilitation. It is
well to emphasize that the remedy of rehabilitation
should be denied to corporations that do not qualify
under the Rules. (BPI FAMILY SAVINGS BANK, INC. V
ST. MICHAEL MEDICAL CENTER, INC.G.R. No.
205469, March 25, 2015)
Rules of Court applies in cases of appeals and
reviews
Under Rule 3, Section 5 of the Rules of Procedure on
Corporate Rehabilitation, the review of any order or
decision of the rehabilitation court or on appeal
therefrom shall be in accordance with the Rules of
Court, unless otherwise provided (Robinson's Bank
Corp v. Gaerlan, et al., G.R. No. 195289, September 24,
2014).
Cram-down clause
Section 23.Approval of the Rehabilitation Plan.– The
court may approve a rehabilitation plan over the
opposition of creditors, holding a majority of the
total liabilities of the debtor if, in its judgment, the
rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly
unreasonable (Sec. 23, Rule 4, Interim Rules of
Procedure on Corporate Rehabilitation).
This provision, which is currently incorporated in
the FRIA, is necessary to curb the majority creditors’
natural tendency to dictate their own terms and
conditions to the rehabilitation, absent due regard
to the greater long-term benefit of all stakeholders.
Otherwise stated, it forces the creditors to accept
the terms and conditions of the rehabilitation plan,
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preferring long-term viability over immediate but
incomplete recovery (BPI v. Sarabia Manor Hotel,
G.R. no. 175844, July 29, 2013).
Q: APECfiled a Petition for Corporate
Rehabilitation. Marcelo, the rehabilitation
receiver, submitted an Alternative
Rehabilitation Plan (ARP) which provides for
the implementation of “swap” of open-ended
education plans to a fixed-value pre-need plan
as well as tuition support depending on the
prevailing market rate of the NAPOCOR Bonds
and Peso-Dollar exchange rates. The plan was
approved. In the meantime, the value of the
Philippine Peso strengthened and appreciated.
Because of this, Marcelo filed a Modified
Rehabilitation Plan (MRP) which includes the
suspension of the tuition support and
converting Philippine Peso Liabilities to U.S.
Dollar liabilities by assigning to each planholder
a share of the remaining asset. The
Rehabilitation Court approved the MRP despite
opposition, in view of the “cram down” power of
the Rehabilitation Court. Marilyn Victorio-
Aquino, a planholder, questioned this approval
before the Court of Appeals for the MRP forced
the creditors to reduce their claims against
APEC and it reduces the original amount which
she was to receive under the ARP. The CA
dismissed the petition. Was the Court correct in
approving the MRP?
A: YES. The “cram-down” power of the
Rehabilitation Court has long been established and
even codified under Section 23, Rule 4 of the Interim
Rules. Such prerogative was carried over in the
Rehabilitation Rules, which maintains that the court
may approve a rehabilitation plan over the
objection of the creditors if, in its judgment, the
rehabilitation of the debtors is feasible and the
opposition of the creditors is manifestly
unreasonable. The required number of creditors
opposing such plan under the Interim Rules (i.e.,
those holding the majority of the total liabilities of
the debtor) was, in fact, removed. Petitioner’s
outright censure of the concept of the cram-down
power of the rehabilitation court cannot be
countenanced. To adhere to the reasoning of
petitioner would be a step backward — a futile
attempt to address an outdated set of challenges. It
is undeniable that there is a need to move to a
regime of modern restructuring, cram-down and
court supervision in the matter of corporation
rehabilitation in order to address the greater
interest of the public (Victorio-Aquino v. Pacific
Plans Inc., G.R. No. 193108, December 10, 2014).
Confirmation of Rehabilitation Plan by the court
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Notwithstanding the rejection of the Rehabilitation
Plan by the creditors, the court may confirm the
Rehabilitation Plan if all of the following
circumstances are present:
1. The Rehabilitation Plan complies with the
requirements specified in this Act;
2. The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
3. The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan;
and
4. The Rehabilitation Plan would likely provide
the objecting class of creditors with
compensation which has a net present value
greater than that which they would have
received if the debtor were under liquidation
(Sec. 64, FRIA).
A corporation’s material financial commitment
is significant for purposes of rehabilitation
A material financial commitment becomes
significant in gauging the resolve, determination,
earnestness and good faith of the distressed
corporation in financing the proposed
rehabilitation plan. This commitment may include
the voluntary undertakings of the stockholders or
the would-be investors of the debtor-corporation
indicating their readiness, willingness and ability to
contribute funds or property to guarantee the
continued successful operation of the debtor
corporation during the period of rehabilitation
(Philippine Bank of Communications v. Basic
Polyprinters and Packaging Corp., G.R. No. 187581,
October 20, 2014).
Claims against the corporation are suspended
during rehabilitation
The suspension of all actions and/or claims against
a corporation under rehabilitation does not only
cover cases which are pending in court. The
automatic suspension of an action for claims
embraces all phases of the suit, that is, the entire
proceedings of an action or suit and not just the
payment of the claims.
The actions that were suspended cover all claims
against a distressed corporation whether for
damages founded on a breach of contract of
carriage, labor cases, collection suits or any other
claims of a pecuniary nature. A claim arising from
illegal dismissal is a claim covered by the
suspension order issued by the SEC, as it is one for
pecuniary consideration.
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Furthermore, jurisprudence is settled that the
suspension of proceedings referred to in the law
uniformly applies to “all actions for claims” filed
against a corporation xxx under management or
receivership, without distinction, except only those
expenses incurred in the ordinary course of
business (Molina v. Pacific Plans, Inc., G.R.
No. 165476, August 15, 2011, in Divina, 2014).
The stay order is effective on all creditors of the
corporation without distinction, whether secured
or unsecured (Veterans Philippine Scout Security
Agency, Inc. v. First Dominion Prime Holdings, Inc.,
G.R. No. 190907, August 23, 2012, in Divina, 2014).
Claims which are not suspended during
rehabilitation
a. Criminal actions
The suspension of claims in corporate rehabilitation
does not extend to criminal actions against the
distressed corporations or its directors and officers.
It would be absurd for one who has engaged in
criminal conduct to escape punishment simply
because the corporation of which he is director or
officer filed a petition for rehabilitation. The
prosecution of the officers of the corporation has no
bearing on the pending rehabilitation of the
corporation (Panlilio v. RTC, Branch 51, City of
Manila, GR No. 173846, February 2, 2011, in Divina,
2014).
b. Return of the subject of writ of replevin
The return of the car subject of the writ of replevin
is correct notwithstanding the pendency of the
rehabilitation proceedings. This is the necessary
consequence of the dismissal of the replevin case for
failure to prosecute without prejudice. Upon the
dismissal of the replevin case, the writ of seizure,
which is merely ancillary in nature, became functus
officio and should have been lifted. There was no
adjudication on the merits, which means that there
was no determination of the issue who has the
better right to possess the subject car. Returning
the seized vehicle is not an enforcement of a claim
against the distressed corporation which must be
suspended by virtue of the stay order issued by the
rehabilitation court. The issue in a replevin case is
who has a better right of possession. So long as the
respondent is not interposing a monetary claim,
respondent’s prayer for the return of the car subject
of the replevin suit is not in any way violative of the
Rules on Corporate Rehabilitation (Advent Capital
and Medical Corp. v. Young, G.R. No. 183018, August
3, 2011, in Divina, 2014).
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The prevailing rule now categorically provides that
awards for moral damages, exemplary damages,
and attorney’s fees in intra-corporate controversies
are not immediately executor (Heirs of Santiago
Divinagracia v. Ruiz, G.R. No. 172023, July 7, 2010, in
Divina, 2014).
Qualifications under the Rules must be strictly
complied with
It is well to emphasize that the remedy of
rehabilitation should be denied to corporations that
do not qualify under the Rules. Neither should it be
allowed to corporations whose sole purpose is to
delay the enforcement of any of the rights of the
creditors, which is rendered obvious by: (a) the
absence of a sound and workable business plan; (b)
baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or
complete lack thereof for the execution of the
business plan. Unfortunately, these negative
indicators have all surfaced to the fore, much to
SMMCI’s chagrin. In one case, not only has SMMCI
failed to show that it has formally began its
operations which would warrant restoration, but
also it has failed to show compliance with the key
requirements under the Rules, the purpose of which
are vital in determining the propriety of
rehabilitation. Thus, for all the reasons hereinabove
explained, the Court is constrained to rule in favor
of BPI Family and hereby dismiss SMMCI’s
Rehabilitation Petition (BPI Family Savings Bank,
Inc. v. St. Michael Medical Center, Inc., G.R. No.
205469, March 25, 2015).
Right of the creditor-mortgagee to foreclose
corporate property
The court has already settled and upheld the right of
the secured creditor to foreclose the mortgages in
its favor during the liquidation of a debtor
corporation.
The creditor-mortgagee has the right to foreclose
the mortgage over a specific real property whether
or not the debtor-mortgagor is under insolvency or
liquidation proceedings. The right to foreclose such
mortgage is merely suspended upon the
appointment of a management committee or
rehabilitation receiver or upon the issuance of a stay
order by the trial court. However, the creditor-
mortgagee may exercise his right to foreclose the
mortgage upon the termination of the rehabilitation
proceedings or upon the lifting of the stay order
(Yngson, Jr. [in his capacity as Liquidator of Arcam &
Company, Inc.] v. Philippine National Bank, G.R. No.
171132, August 15, 2012, in Divina, 2014).
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The Corporation Code
The Stay Order cannot suspend foreclosure
proceedings already commenced over properties
belonging to third party mortgagors. The Stay Order
can only cover those claims directed against
petitioner corporations or their properties, against
petitioners’ guarantors, or against petitioners’
sureties who are not solidarily liable with them.
Likewise, the enforcement of the mortgage lien
cannot be considered as a claim against a guarantor
or a surety not solidarily liable with the debtor
corporations. While the third party mortgagors also
executed Continuing Guaranty and Comprehensive
Surety undertakings in favor of the bank, the latter
did not proceed against them as individual
guarantors or sureties. Rather, by initiating
extrajudicial foreclosure proceedings, the bank was
directly proceeding against the property mortgaged
to them by the spouses as security (Situs
Development Corporation, et al. v. Asiatrust Bank, et
al., G.R. No. 180036, July 25, 2012).
Considering that Metrobank acquired ownership
over the mortgaged properties upon the expiration
of the redemption period on 6 February 2002, TCEI
is also out on a limb in invoking the Stay Order
issued by the Rehabilitation Court on 8 October
2002 and the approval of its rehabilitation plan. An
essential function of corporate rehabilitation is,
admittedly, the Stay Order which is a mechanism of
suspension of all actions and claims against the
distressed corporation upon the due appointment
of a management committee or rehabilitation
receiver. The Stay Order issued by the
Rehabilitation Court cannot, however, apply to the
mortgage obligations owing to Metrobank which
had already been enforced even before TCEI’s filing
of its petition for corporate rehabilitation on 1
October 2002. In Equitable PCI Bank, Inc v. DNG
Realty and Development Corporation, the Court
upheld the validity of the writ of
possessionprocured by the creditor despite the
subsequent issuance of a stay order inthe
rehabilitation proceedings instituted by the debtor
(Town and Country Enterprises Inc v. Quisumbing,
G.R. No. 173610, October 1, 2012, in Divina, 2014).
Q: PA Assurance (PA) was incorporated in 1980
to engage in the sale of pre-need educational
plans. It sold open-ended educational plans
which guaranteed the payment of tuition and
other fees to planholders irrespective of the cost
at the time of availment. It also engaged in the
sale of fixed value plans which guaranteed the
payment of a pre-determined amount to
planholders. In 1982, PA was among the
country’s top corporations. However, it
subsequently suffered financial difficulties.
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On September 8, 2005, PA filed a Petition for
Corporate Rehabilitation before the RTC of
Makati City. On October 17, 2005, ten (10) plan
holders filed an Opposition and Motion to
Exclude Planholders from Stay Order on the
ground that planholders are not creditors as
they (planholders) have a trust relationship
with PA. Are the planholders correct? (2014
Bar)
A: NO. Under the 2000 Interim Rules of Corporate
Rehabilitation, claim shall include all claims or
demands of whatever nature or character against a
debtor or its property, whether for money or
otherwise. Creditor shall mean any holder of a
claim. Hence, the claim of the policyholders for
payment of tuition fees from (PA Assurance) CAP is
included in the definition of “claims” under the
Interim Rules.
What is to be determined at this point is whether or
not claims arising from the pre-need contracts
between the policyholders and (PA Assurance) CAP
can be stayed under Section 6, Rule 4 of the Interim
Rules or Section 6(c) of P.D. No. 902-A.
It does not provide that a claim arising from a pre-
need contract is an exception to the power of the
trial court to stay enforcement of all claims upon the
finding that the petition for rehabilitation is
sufficient in form and substance.
The foregoing provision echoes the provision in
Section 6(c) of the governing law, P.D. No. 602-A, as
amended by P.D. No. 1758, which mandates that
upon appointment of a management committee,
rehabilitation receiver, board or body, x x x all
actions for claims against corporations,
partnerships or associations under management or
receivership pending before any court, tribunal,
board or body shall be suspended accordingly.
The Interim Rules of Procedure on Corporate
Rehabilitation of 2000 has been amended by the
Rules of Procedure on Corporate Rehabilitation of
2009, which took effect on January 16, 2009. Under
the 2009 Rules of Procedure, the power of the RTC
to issue a Stay Order when it finds the petition for
rehabilitation to be sufficient in form and substance
is contained in Section 7, Rule 3, [17] which likewise
does not exempt claims arising from pre-need
contracts from the Stay Order (Abrera, et al., v. Hon.
Barza and College Assurance Plan, G.R. No. 171681,
September 11, 2009).
Q: DNG Realty And Development Corporation
(DNG) obtained a loan from petitioner Equitable
PCI Bank (EPCIB) secured by a real estate
mortgage over DNG’s property. When DNG
defaulted payment, EPCIB foreclosed the
mortgage and bought the property at public
auction. The sheriff issued a certificate of sale in
favor of EPCIB.
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Months later, DNG filed a petition for
rehabilitation with the SEC, and SEC issued a
stay order. Afterwards, the Registry of Deeds
issued a title in favor of EPCIB, prompting DNG
to seek the annulment of the foreclosure
proceedings. To gain possession of the property,
PCIB filed an Ex-Parte Petition for Issuance of
Writ of Possession before the RTC, which later
directed the issuance of a writ of possession.
Did the foreclosure sale and writ of possession
in favor of EPCIB affect the Stay Order? (2014
Bar)
A: NO. Since the foreclosure of respondent DNG's
mortgage and the issuance of the certificate of sale
in petitioner EPCIB's favor were done prior to the
appointment of a Rehabilitation Receiver and the
Stay Order, all the actions taken with respect to the
foreclosed mortgage property which were
subsequent to the issuance of the Stay Order were
not affected by the Stay Order. After the redemption
period expired without DNG redeeming the
foreclosed property, EPCIB becomes the absolute
owner of the property and it was within its right to
ask for the consolidation of title and the issuance of
new title in its name as a consequence of ownership;
thus, it is entitled to the possession and enjoyment
of the property (Equitable PCI Bank, Inc. v. DNG
Realty and Development Corp., G.R. No. 168672,
August 8, 2010).
LIQUIDATION AFTER 3 YEARS
If the 3-year extended life has expired without a
receiver or trustee having been expressly
designated by the corporation within that period:
1. The BOD/BOT itself may be permitted to so
continue as ‘trustees” by legal implication to
complete the liquidation;
2. Still, in the absence of BOD/BOT, those having a
pecuniary interest in the corporate assets,
including not only the stockholders but likewise
the creditors of the corporation, acting for and
in its behalf, may make proper representations
with the SEC which has primary and sufficiently
broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate
concerns;
3. The only surviving stockholder or director of a
corporation whose term of existence has
expired may act as trustee-in-liquidation after
the 3-year period to liquidate has expired
without the appointment of a trustee-in-
liquidation; or
4. The counsel who prosecuted and defended the
interest of the corporation and who, in fact,
appeared in behalf of the corporation, may be
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considered a trustee of the corporation at least
with respect to the matter in litigation only (De
Leon, supra, pgs. 768-769, citing: Sec. 145, CC;
Clemente vs. CA, supra; SEC Opinion No. 10-96,
January 29, 2010, Reburiano vs. CA, G.R. No.
102965, January 21, 1999).
OTHER CORPORATIONS
CLOSE CORPORATION
A close corporation is one which AOI provides that:
1. All of 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 of the issued stock of all classes shall be
subject to one or more specified restrictions on
transfer permitted by the provisions on close
corporations; and
3. The corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class.
4. Notwithstanding the foregoing, a corporation
shall be deemed NOT 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 within the
meaning of this Code.
Note: Stockholders of close corporations are
personally liable for corporate torts unless the
corporation has obtained adequate liability
insurance (sec. 100 (5) CC)
NON-STOCK CORPORATION
DEFINITION
It is one where no part of its income is distributable
as dividends to its members, trustees or officers.
Any profit which it may obtain as an incident to its
operations shall whenever necessary or proper, be
used in furtherance of the purpose or purposes for
which it was organized (CC, Sec. 87).
Foundation
A foundation is a non-stock, non-profit corporations
with funds established to maintain or aid charitable,
religious, educational, athletic, cultural, literary,
scientific, social welfare or similar activities
primarily through extending grants or endowments.
A foundation, as distinguished from an ordinary
non-stock corporation requires a minimum capital
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The Corporation Code
of 1 million Pesos (SEC Memo. Circular No. 1 Series of
2004).
Characteristics of a non-stock corporation
1. It does not have capital stock divided into
shares.
2. No part of its income during its existence is
distributable as dividends to its members,
trustees, or officers.
3. As a general rule, it is not empowered to engage
in business with the object of making income or
profits directly or indirectly. However, it is not
prohibited to make income or profits as an
incident to its operation (CC, Sec. 87).
4. There is non-transferability of membership (CC,
Sec. 90).
5. The right to vote of members may be limited,
broadened, or even denied in the AOI or the by-
laws (CC, Sec. 89).
6. Non-stock corporations may, through their
articles of incorporation or their by-laws
designate their governing boards by any name
other than as BOT (CC, Sec. 138).
7. By-laws may provide that the members may
hold their meetings at any place even outside
the place where the principal office of the
corporation is located, provided that such place
is within the Philippines (CC, Sec. 93).
A non-stock corporation is not allowed to
distribute any of its assets or any incidental
income or profit made by the corporation
during its existence.
8. Non-availability of conversion into stock
corporation (SEC Opinion, February 24, 1989).
Q: Adventist University of the Philippines (AUP)
is a non-stock, non-profit educational
institution. Petonillo Barayuga was appointed
by the AUP’s Board of Trustees as its President
in 2001. AUP subsequently amended its By-Laws
to state that members of the Board of Trustees
were to serve a term of office of only two years;
and the officers, who included the President,
were to be elected from among the members of
the Board of Trustees during their
organizational meeting, which was held during
Stock Corporation vs. Non-stock Corporation
STOCK- CORPORATION
Existence of Has capital stock divided into shares (CC,
Capital Stock Sec. 3)
Purpose Organized for profit.
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the election of the Board of Trustees every two
years.
In 2003, the Board voted to remove Barayuga as
president. This prompted Barayuga to file a
petition for injunction with damages against
AUP, contending among others, that the Board
relieved him of the presidency without valid
grounds despite his five-year term. The RTC
ruled in favor of Barayuga. The CA, on the other
hand, ruled in favor of AUP.
Can an officer-elect of a non-stock educational
corporation occupying a hold-over capacity be
removed without cause upon the appointment
of his or her successor?
A: YES. Although setting the term of the members of
the Board of Trustees at five years, Sec. 108, par 2
contains a proviso expressly subjecting the duration
to what is otherwise providedin the AOI or by-laws
of the educational corporation. That contrary
provision controls on the term of office.
In light of the amended By-Laws of AUP the
members of the Board of Trustees were to serve a
term of office of only two years; and the officers,
who included the President, were to be elected from
among the members of the Board of Trustees during
their organizational meeting, which was held during
the election of the Board of Trustees every two
years. Naturally, the officers, including the
President, were to exercise the powers vested by
Section 2 of the amended By-Laws for a term of only
two years, not five years.
Ineluctably, Barayuga, having assumed as President
of AUP on January 23, 2001, could serve for only two
years, or until January 22, 2003. By the time of his
removal for cause as President on January 27, 2003,
he was already occupying the office in a hold-over
capacity, and could be removed at any time, without
cause, upon the election or appointment of his
successor. His insistence on holding on to the office
was untenable, therefore, and with more reason
when one considers that his removal was due to the
loss of confidence on the part of the Board of
Trustees (Barayuga v. Adventist University of the
Philippines, G.R. No. 168008, August 17, 2011).
NON-STOCK CORPORATION
No capital stock.
Non-stock corporations has capital is in the
form of contributions or donations.
Not organized for profit.
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Profits are not distributed to members. Any
Profits are distributed to the
Distribution of profit earned by the non-stock corporation is
stockholders through dividends (CC, Sec.
Profit used for the furtherance of the purpose or
3)
purposes for which it is organized. (CC, Sec. 87)
Not less than 5 but not more than 15.
Number of Not less than 5 and may be more than 15 except
Directors or Except corporation sole and banks (in Non-stock educational institutions (maximum
Trustees case of merger or consolidation) which of 15 trustees).
can have a maximum of 21 directors
Term of one year until their successors
Term of Office Subject to the provision in AOI and By-laws, 3
are elected and qualified, subject to the
of Directors years on a staggered basis.
provisions of AOI and By-laws
Election of Officers are elected by the BOD and not Members may directly elect officers. (CC,Sec.
Officers by the stockholders 92)
Stockholders meeting shall be held in city
May be held at any place outside the principal
or municipality where the principal
Place of place of business of the corporation provided it
office of the corporation is located or at
meeting shall be within the Philippines. (CC, Sec. 93)
the principal office of the corporation.
(CC,Sec. 51)
Stockholders can resort to cumulative
voting.
No cumulative voting unless allowed by AOI.
Only preferred and redeemable shares
Right to vote may be limited, broadened or
can be denied the right to vote except
Right to vote denied by the AOI and by-laws. (CC, Sec. 89)
those matters in Sec. 6.
Regional or district voting of trustees is
Voting of directors may be made only
allowed.
through general voting. Regional or
district voting of directors is not allowed.
Transferability Shares may be transferred by the Membership is personal in character and is not
of Shares/ stockholder with or without the consent transferable unless allowed by the AOI or by-
Membership of the corporation. laws. (CC, Sec. 90)
Membership shall be terminated in the manner
Right to expel Stockholders may be expelled only for
and for the causes provided in the articles of
members grounds provided by law.
incorporation or the by-laws. (CC, Sec. 91)
Assets of stock corporation shall be
Assets of non-stock corporation shall be
distributed in the following order:
distributed as follows:
1. Payment of claims of creditors
1.Payment of claims of creditors who are
2. Assets held on condition of return or
Distribution of not stockholders (based on preference of
subject to limitation of use shall be
Assets in case credit)
returned, transferred or conveyed.
of dissolution 2.Payment of claims of stockholders as
3. Distribution to member based on
creditors
distributive rights stated in AOI or by-law.
3.Residual balance is distributed
4. In case of default, distribution pursuant to
proportionately to preferred shares, if
Plan of Distribution of Assets.
any, then to common stock.

Conversion 2. A non-stock corporation can be converted into

1. A non-stock corporation cannot be converted
into a stock corporation through mere
amendment of its AOI. This would violate
Section 87 which prohibits distribution of
income as dividends to members. Giving the
members shares is tantamount to distribution
of its assets or income (Sundiang Sr. & Aquino,
2014 citing SEC Opinion, March 1995).
a stock corporation only if the members
dissolve it first and then organize a stock
corporation. However, there is a resulting new
corporation (Sundiang Sr. & Aquino, 2014 citing
SEC Opinion, May 13, 1992).
3. A stock corporation may be converted into a
non-stock corporation by mere amendment
provided all the requirements are complied
with. Its rights and liabilities will remain
(Sundiang Sr. & Aquino, 2014).

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The Corporation Code
Termination of Membership
The power to admit members pertains to the Board
in the absence of any contrary provisions on the AOI
and by-laws. Consistently, it is also the Board who
has the power to terminate membership.
1. Standards - A non-stock corporation is
authorized to terminate the membership in
accordance with the standards fixed in the AIO
or the by-laws (CC, Sec. 91).
2. When property rights are involved - Membership
may involve property rights. Example:
Membership in a golf club where the purchase
of the share is a sine qua non (Valley Golf &
Country Club Inc. v. Caram, G.R. No. 158805, April
16, 2009).
3. Lien – Non-payment of dues may be a ground
for termination or suspension of membership.
The AOI or the by-laws of a non-stock
corporation may provide that unpaid dues shall
constitute a lien on the member’s share.
However, Section 68 of the Corporation Code
does not apply if the membership shares are
sold under the provisions that provide for the
constitution of lien (Calatagan Golf & Country
Club Inc. V. Caram, G.R. No. 165443, April 16,
2009);
4. Notice - For the termination of membership to
be valid, there should be reasonable notice to
the member concerned and he must be given a
fair opportunity to be heard in his defense;
5. Effect of death of a member - Membership in and
all rights arising from a non-stock corporation
are personal and non-transferable, unless the
AOI or the by-laws of the corporation provide
otherwise. Deceased members who are
dropped from the membership roster in the
manner and for the cause provided for in the
by-laws are not to be counted in determining
the requisite vote in corporate matters or the
requisite quorum for the annual member’s
meeting (Tan v. Sycip, G.R. No. 153468, August
17, 2006).
PURPOSES
Purposes for which a non-stock corporation
may be organized
Non-stock corporations may be formed or
organized for: (CREP-CFLSS-CS)
1. Charitable,
2. Religious,
3. Educational,
4. Professional,
5. Cultural,
6. Fraternal,
7. Literary,
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8. Scientific,
9. Social,
10. Civic service, or
11. Similar purposes, like trade, industry,
agriculture and like chambers, or any
combination thereof. (CC, Sec. 88) (RCC, Sec. 87)
NOTE: A non-stock corporation organized to
promote educational objectives may not be an
educational corporation as contemplated in Secs.
106 to 108, CC.
The formation of a non-stock corporation for
political purpose is not allowed
Political purpose is not included on the purposes for
which a non-stock corporation may be established.
SEC may reject the AOI if the purpose of the
corporation is to engage in election campaign or
partisan political activity (SEC Opinion, April 10,
1985).
TREATMENT OF PROFITS
Non-stock corporationmay earn profit
Mere intangible or pecuniary benefit to the
members does not change the nature of the
corporation. The fact that a non‐stock corporation
earns a profit does not make it a profit‐making
corporation where such profit or income is used for
purposes set forth in its articles of incorporation
and is not distributed to its incorporators, members
or officers.
DISTRIBUTION OF ASSETS UPON DISSOLUTION
Order of distribution of assets on dissolution of
non-stock corporations
1. All liabilities of the corporation shall be paid or
adequate provision thereof shall be made;
2. Assets held upon a condition requiring return,
transfer or conveyance upon, and which
condition occurs by reason of the dissolution,
shall be returned, transferred or conveyed;
3. Assets received and held by the corporation
subject to limitations permitting their use only
for charitable, religious, benevolent,
educational or similar purposes shall be
transferred or conveyed to one or more
corporations, societies or organizations
engaged in activities in the Philippines
substantially similar to those of the dissolving
corporation.
4. All other assets shall be distributed to the
members as provided by the articles of
incorporation or the by-laws.
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5. In the absence of provision in the AOI or by- 2. Principle of reciprocity - It allows Filipino
laws, distribution may be made in accordance citizens to do business in the foreign state or
to a plan of distribution adopted by the board of country. This is merely prescribed as a
trustees by majority vote and by at least 2/3 of requirement to secure a license and not an
the members (CC, Sec. 94). essential element of being a foreign corporation
(De Leon, 2010).
The assets of a non-stock corporation undergoing
the process of dissolution for reasons other than Jurisdiction over a foreign corporation
those set forth in Section 139 of this Code shall
be applied and distributed to such enumeration. IF THE FOREIGN IF THE FOREIGN
(Revised Corporation Code, Sec. 93) CORPORATION IS CORPORATION IS
THE PLAINTIFF THE DEFENDANT
A non-stock corporation cannot offset unused 1.GR: Voluntary
contributions of members against the balance of appearance of the
receivables from the same members corporation by
interposing a
The unused contributions of members cannot be defense
offset against the balance of receivables because 1. Voluntary
this would amount to distribution of the capital of appearance before the
XPN: A special
the corporation. Members of non-stock corporation local courts by the
appearance to file a
are not entitled to distribution of capital. They are filing of an action by a
motion to dismiss
only entitled to distribution of capital upon licensed corporation
based on lack of
dissolution when it is provided for in the articles of jurisdiction
incorporation or by-laws (SEC Opinion, November 2. If the foreign
27, 1985). corporation is a co-
2. Service of summons
plaintiff with a
to a foreign
FOREIGN CORPORATIONS domestic corporation
corporation which has
and latter filed a suit
transacted business in
A foreign corporation is done, formed, organized or here in the Philippines.
the Philippines
existing under any laws other than those of the whether licensed or
Philippines and whose laws allow Filipino citizens registered
and corporations to do business in its own country 3. Service of summons
or State (CC, Sec. 123). to its resident agent in
an isolated transaction.
Features that make a foreign corporation within
the coverage of the law BASES OF AUTHORITY OVER FOREIGN
CORPORATION
1. Place of incorporation - The corporation must
be formed, organized, or existing under foreign The following are the two bases of authority
law. (jurisdiction) over foreign corporations:

Due to the enactment of RA 7042, the control
test is now used in the determination of
nationality of the corporation in case of
nationalized or partly nationalized activities.
However, this does not preclude the use of
other tests in determining the nationality of the
corporation. In fact, as per SEC Opinion on Nov.
28, 2009, the SEC opined that the grandfather
rule can be useful when a corporation’s
economic activity is strictly limited by law to
Filipino citizens, such as certain types of retail
trading and mass media. Further, according to
the commission, the control test, which is more
liberal, is applied for corporations intending to
engage in commerce where 60%-40% equity
ratio is allowed by law.
1. A corporation may give actual consent to
judicial jurisdiction manifested normally by
compliance with the State’s foreign corporation
qualification requirements (licensing
requirements and other requisites to lawfully
transact business in the Philippines); and
2. A corporation, even though not qualified (not
licensed), by engaging in sufficient activity
(doing business) within the State, established
judicial jurisdiction over the foreign
corporation (Foreign Corporations: The
Interrelation of Jurisdiction and Qualification,
Indiana Law Journal, Article 4, Vol. 33, Issue 3,
retrieved on April 29, 2013).
Consent

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The Corporation Code
Through compliance with the Philippines’ legal
requirements to lawfully engage in business within
the country’s territory, the foreign corporation
gives its actual consent to be subjected to the
jurisdiction of the Philippines (Ibid).
By securing a license, which is a legal requirement
to lawfully engage in business in the Philippines, the
foreign entity would be giving assurance that it will
abide by the decisions of our courts, even if adverse
to it (Eriks PTE, Ltd. v. CA, GR 118843, February 6,
1997).
Foreign corporations shall not be permitted to
transact or do business in the Philippines until they
have secured a license for that purpose from the
SEC and certificate of authority from the
appropriate government agency (CC, Sec. 123).
XPN: Isolated Transactions – where a foreign
corporation had no intention to engange
continuously in the transaction is not doing in the
Philippines and need not get a license.
Doctrine of “Doing Business” in the Philippines
Q: When is a foreign corporation deemed to be
“doing business in the Philippines?” (1998, 2016
Bar)
A: Under the Foreign Investment Act (R.A. No.
7402),a foreign corporation is “deemed doing
business in the Philippines” if it is continuing the
body or substance of the business or enterprise for
which it was organized. It is the intention of an
entity to continue the body of its business in the
country. The grant and extension of 90-day credit
terms of a foreign corporation to a domestic
corporation for every purchase shows an intention
to continue transacting with the latter.
Jurisdictional tests of “doing or transacting
business” in the Philippines for foreign
corporations
1. Twin Characterization Test
a. Continuity Test –implies a continuity of
commercial dealings and arrangements,
and contemplates to some extent the
performance of acts or works or the
exercise of some functions normally
incident to and in progressive prosecution
of, the purpose and object of its
organization.
b. Subsequent Test – a foreign corporation is
doing business in the country if it is
continuing the body or substance of the
enterprise of business for which it was
organized (Sundiang Sr. & Aquino, 2009).
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2. Contract Test - Whether the contracts entered
into by the foreign corporation, or by an agent
acting under the control and direction of the
foreign corporation, are consummated in the
Philippines.
NOTE: Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign
corporation to secure a Philippine business license
(B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing
Industries, Inc., G.R. No. 147905, May 28, 2007).
Q: What is the legal test for determining if an
unlicensed foreign corporation is doing
business in the Philippines? (2002 Bar)
A: The test is whether or not the unlicensed foreign
corporation has performed an act or acts that imply
a continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of
some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of
the purpose and object of the business corporation.
Q: Steelcase is a foreign corporation existing
under the laws of Michigan, USA, and engaged in
the manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Steelcase and DISI orally entered into a
dealership agreement whereby Steelcase
granted DISI the right to market, sell, distribute,
install, and service its products to end-user
customers within the Philippines. The business
relationship continued smoothly until it was
terminated after the agreement was breached
with neither party admitting any fault. Steelcase
filed a complaint for sum of money against DISI
alleging, among others, that DISI had an unpaid
account of US$600,000.00.
DISI alleged that the complaint failed to state a
cause of action and to contain the required
allegations on Steelcase’s capacity to sue in
the Philippines despite the fact that Steelcase
was doing business in the Philippines without
the required license to do so. Consequently, it
posited that the complaint should be dismissed
because of Steelcase’s lack of legal capacity to
sue in Philippine courts. Is Steelcase doing
business in the Philippines without the required
license?
A: NO. The appointment of a distributor in
the Philippines is not sufficient to constitute “doing
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business” unless it is under the full control of the
foreign corporation. If the distributor is an
independent entity which buys and distributes
products, other than those of the foreign
corporation, for its own name and its own account,
the latter cannot be considered to be doing business
in the Philippines. It should be kept in mind that the
determination of whether a foreign corporation is
doing business in the Philippines must be judged in
light of the attendant circumstances.
It is undisputed that DISI was founded in 1979 and
is independently owned and managed by the
spouses Leandro and Josephine Bantug. In addition
to Steelcase products, DISI also distributed products
of other companies including carpet tiles,
relocatable walls and theater settings. The
dealership agreement between Steelcase and DISI
had been described by the owner himself a buy and
sell arrangement. This clearly belies DISI’s assertion
that it was a mere conduit through which Steelcase
conducted its business in the country. From the
preceding facts, the only reasonable conclusion that
can be reached is that DISI was an independent
contractor, distributing various products of
Steelcase and of other companies, acting in its own
name and for its own account (Steelcase, Inc., v.
Design InternationalSelections, Inc., G.R. No. 171995,
April 18, 2012).
Q: Chito Santos is a director of both Platinum
Corporation and Kwik Silver Corporation. He
owns 1% of the outstanding capital stock of
Platinum and 40% of Kwik. Platinum plans to
enter into a contract with Kwik that will make
both companies earn very substantial profits.
The contract is presented at the respective
board meetings of Platinum and Kwik.
a. In order that the contract will not be
voidable, what conditions will have to be
complied with? Explain.
b. If these conditions are not met, how may this
contract be ratified? Explain (1995 Bar)
A:
a. Under Section 32 of BP 68, the law provides
that: 1) the presence of such director or trustee
in the board meeting in which the contract ws
approved was not necessary to constitute a
quorum for such meeting; 2) the vote of such
director or trustee was not necessary for the
approval of the contract; 3) the contract is fair
and reasonable under the circumstances; and
4) in case of an officer, the contract has been
previously authorized by the board of directors.
In the case at bar, Chito must make sure that the
following conditions be met for in order that the
contract will not be voidable.
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b. Under Section 32 of BP 68, the law provides that
where any of the first two conditions set forth
in the preceding paragraph is absent, in the case
of a contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least 2/3 of the
outstanding capital stock or of at least 2/3 of
the members in a meeting called for the
purpose. Provided, that full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting. Provided,
however, that the contract is fair and
reasonable under the circumstances.
NOTE: See Section 33 on interlocking directors.
NECESSITY OF A LICENSE TO DO BUSINESS
The purpose of the law in requiring that a foreign
corporation doing business in the Philippines be
licensed to do so is to subject such corporation to
the jurisdiction of the courts. The object is not to
prevent foreign corporation from performing single
acts but to prevent it from acquiring a domicile for
the purpose of business without taking steps
necessary to render it amenable to suits in local
courts (Marshall-Wells Co. vs. Elser & Co, G. R. No.
22015, September 1, 1924).
Further, the following are considered objectives of
the statutory provisions prescribing regulation of
foreign corporations:
1. To place the foreign corporations under the
jurisdiction of the court;
2. To place them in the same footing as domestic
corporation; and
3. To protect the public in dealing with the said
corporation.
A corporation engaged in exporting goods to the
Philippines is not required to obtain a license
If a foreign corporation does not transact such kind
of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no
jurisdiction to require such foreign corporation to
secure a Philippine business license. Actual
transaction of business within the Philippine
territory is an essential requisite for the Philippines
to acquire jurisdiction over a foreign corporation
and thus require the foreign corporation to secure a
Philippine business license (B. Van Zuiden Bros., Ltd.
v. GTVL Manufacturing Industries, Inc., G.R. No.
147905, May 28, 2007).
Q: Cargill is a corporation organized and existing
under the laws of the State of Delaware, United
States of America. Cargill and Northern
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Mindanao Corporation (NMC) executed a
contract whereby NMC agreed to sell to Cargill
molasses provided that Cargill would open a
Letter of Credit with the BPI. The amended
contract required NMC to put up a performance
bond which represents the value of 10,500
metric tons of molasses. The performance bond
was intended to guarantee NMC’s performance
to deliver the molasses during the
prescribedshipment periods according to the
terms of the amended contract. In compliance
with the terms of the third amendment of the
contract, respondent Intra Strata Assurance
Corporation (Intra Strata) issued a performance
bond to

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guarantee NMC’s delivery of the 10,500 tons of
molasses, and a surety bond. NMC was only able
todeliver 219.551 metric tons of molasses out of
the agreed 10,500 metric tons. Thus, Cargill sent
demand letters to NMC claiming payment under
the performance and surety bonds. When NMC
refused to pay, Cargill filed a complaint for sum
of money against NMC and Intra Strata. Does
Cargill, an unlicensed foreign corporation, has
legal capacity to sue before Philippine courts?
A: YES, it has the capacity to sue. In this case, Cargill
and NMC amended their contract three times to give
a chance to NMC to deliver to Cargill the molasses,
considering that NMC already received the
minimum price of the contract. There is no showing
that the transactions between Cargill and NMC
signify the intent of Cargill to establish a continuous
business or extend its operations in the Philippines.
An exporter in one country may export its products
to many foreign importing countries without
performing in the importing countries specific
commercial acts that would constitute doing
business in the importing countries. The mere act of
exporting from one’s own country, without doing
any specific commercial act within the territory of
the importing country, cannot be deemed as doing
business in the importing country. The importing
country does not require jurisdiction over the
foreign exporter who has not yet performed any
specific commercial act within the territory of the
importing country. Without jurisdiction over the
foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do
business in the importing country (Cargill, Inc., v.
Intra Strata Assurance Corp., G.R. No. 168266, March
15, 2010).
Requisites for issuance of a license
The foreign corporation must submit to SEC the
following:
1. Copy of its articles of incorporation and by-
laws, certified in accordance with law and their
translation to an official language of the
Philippines, if necessary;
2. The application, which shall be under oath.;
3. Attached to the application for license shall be a
duly executed certificate under oath by the
authorized official or officials of the jurisdiction
of its incorporation, attesting to the fact that:
a. The laws of the country or state of the
applicant allow Filipino citizens and
corporations to do business therein.
NOTE: This oath of reciprocity is one of
the requirements to secure a license
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under Sec. 123, CC, which defines a
foreign corporation.
b. The applicant is an existing corporation
in good standing.
c. If such certificate is in a foreign language,
a translation thereof in English under
oath of the translator shall be attached
thereto.
4. Statement under oath by the President or other
person authorized by the Corporation showing
to the satisfaction of the SEC and other
governmental agency in the proper cases that
the:
a. applicant is solvent and in sound financial
condition
b. the assets and liabilities of the corporation
as of the date not exceeding one (1) year
immediately prior to the filing of the
application.
5. An agreement or stipulation stating the
designated resident agent who will receive
summons and other legal processes for the
corporation together with a Special Power of
Attorney;
6. An agreement that if it ceases to transact
business or if there is no more resident agent,
summons shall then be served through SEC; and
7. Deposit securities for the benefit of present and
future creditors, within 60 days after the
issuance of license.
NOTE: Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them.
The AOI and by-laws of a licensed and registered
foreign corporation is valid despite the fact that
said AOI and by-laws are not approved by SEC
Since the SEC will grant a license only when the
foreign corporation has complied with all the
requirements of law, it follows that when it decides
to issue such license, it is satisfied that the
applicant's by-laws, among the other documents,
meet the legal requirements. This, in effect, is an
approval of the foreign corporation’s by-laws
(Citibank v. Chua, G.R. no. 102300, March 17, 1993).
Resident Agent
1. An individual, who must be of good moral
character and of sound financial standing,
residing in the Philippines; or
2. A domestic corporation lawfully transacting
business in the Philippines (CC, Sec. 127).
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A resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in the
Philippines: Provided, That an individual resident
agent must be of good moral character and of sound
financial standing: Provided, further, That in case
of a domestic corporation who will act as a
resident agent, it must likewise be of sound
financial standing and must show proof that it is
in good standing as certified by the Commission.
(RCC, Sec. 144)
Purpose of appointing a resident agent
The appointment of a resident agent is required for
the purpose of accepting and receiving, on behalf of
the foreign corporation:
1. Notice affecting the corporation pending the
establishment of its local office and
2. Summons and other legal processes in all
proceedings for or against the corporation.
Effect of service of summons and notices to the
resident agent
Service upon any agent of a foreign corporation,
whether or not engaged in business in the
Philippines, constitutes personal service upon the
corporation (CC, Sec. 128; Facilities Management
Corp. v. Dela Rosa, G.R. No. L-38649, March 26, 1979).
As a condition to the issuance of the license for a
foreign corporation to transact business in the
Philippines, such corporation shall file with the
Commission a written power of attorney
designating a person who must be a resident of
the Philippines, on whom summons and other
legal processes may be served in all actions or
other legal proceedings against such
corporation, and consenting that service upon such
resident agent shall be admitted and held as valid as
if served upon the duly authorized officers of the
foreign corporation at its home office. (RCC, Sec.
145)
Resident agent cannot sign the certificate of
non-forum shopping
While a resident agent may be aware of the actions
filed against the principal, he may not be aware of
the actions initiated by the principal, therefore he
cannot sign the certificate of non-forum shopping
that is a requirement for filing of an initiatory
pleading in court (Expert Travel & Tours Inc. v. CA,
G.R. No. 152392, May 26, 2005).
Replacement of a resident agent
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SEC requires the submission of:
1. A duly authenticated copy of board resolution
or a certification from the authorized officer of
the company formally revoking his
appointment as a resident agent of the
corporation; and
2. Accompanied by a duly authenticated written
power of attorney designating the substitute or
the new resident agent.
NOTE: The appointment of a resident agent of a
foreign corporation is revocable at any time at the
instance of the corporation (SEC Opinion, Sept. 4,
1990).
Duty of the resident agent in case it changes its
address
It shall be his or its duty to immediately notify in
writing the SEC of the new address (CC, Sec. 128).
Instances when service of summons or other
legal processes made upon the SEC instead of a
resident agent
1. If a foreign corporation, previously granted a
license, ceases to transact business in the
Philippines.
2. A foreign corporation without any resident
agent in the Philippines on whom any summons
or other legal processes may be served (CC, Sec.
128).
Effect of service made upon the SEC
Such service made upon the SEC shall have the same
force and effect as if made upon the duly authorized
officers of the corporation at its home office (CC, Sec.
128).
Whenever such service shall be made upon the SEC,
it must, within 10 days thereafter, transmit by mail
a copy of such summons or other legal process to the
corporation at its home or principal office. The
sending of such copy by the Commission shall be a
necessary part of and shall complete such service.
PERSONALITY TO SUE
GR: Only foreign corporations that have been issued
a license to operate a business in the Philippines
have the personality to sue (CC, Sec.133).
No foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
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corporation may be sued or proceeded against
before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Philippine laws. (RCC, Sec. 150)
XPN: Under the rule on estoppel, a party is estopped
to challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence.
A foreign corporation which is not licensed to do
business in the Philippines is not absolutely
incapacitated from filing a suit in local courts
Only when that foreign corporation is “transacting”
or “doing business” in the country will a license be
necessary before it can institute suits. It may,
however, bring suits on isolated business
transactions, which is not prohibited under
Philippine law. Thus, a foreign insurance company
may sue in Philippine courts upon the marine
insurance policies issued by it abroad to cover
international-bound cargoes shipped by a
Philippine carrier, even if it has no license to do
business in this country. It is the act of engaging in
business without the prescribed license which bars
a foreign corporation from access to our courts
(Aboitiz Shipping Corp. vs. Insurance Co. of NA, G.R.
No. 168402, August 6, 2008, in Divina, 2010).
The obtainment of a license prescribed by the
Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine
courts by a foreign corporation. However, no
foreign corporation shall be permitted to transact
business in the Philippines, as this phrase is
understood under the Corporation Code, unless it
shall have the license required by law, and until it
complies with the law in transacting business here,
it shall not be permitted to maintain any suit in local
courts. As thus interpreted, any foreign corporation
not doing business in the Philippines may maintain
an action in our courts upon any cause of action,
provided that the subject matter and the defendant
are within the jurisdiction of the court. It is not the
absence of the prescribed license but "doing
business" in the Philippines without such license
which debars the foreign corporation from access to
our courts. In other words, although a foreign
corporation is without license to transact business
in the Philippines, it does not follow that it has no
capacity to bring an action. Such license is not
necessary if it is not engaged in business in the
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Philippines (Columbia Pictures v. CA, G.R. No.
110318, August 28, 1996).
A foreign corporation, although not licensed to do
business in the Philippines, may seek recognition
and enforcement of the foreign arbitral award in
accordance with the provisions of the Alternative
Dispute Resolution Act of 2004. A foreign
corporation‘s capacity to sue in the Philippines is
not material insofar as the recognition and
enforcement of a foreign arbitral award is
concerned (Tuna Processing Inc., v. Philippine
Kingford Inc., G.R. No. 185582, February 29, 2012).
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation, which was granted a
license to transact business in the Philippines, is
suable before local courts or administrative
agencies
It is suable since 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, save and
except:
1. Such only as provided for the creation,
formation, organization or dissolution of the
corporations or
Those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members
or officers of corporations to each other or to the
corporation (CC, Sec. 129). (RCC, Sec. 146)
NOTE: Matters relating to the organization or
internal affairs of the corporation are governed by
the laws of the home or incorporating State unless
they offend any public policy of the Philippines.
A foreign corporation doing business in the
Philippines without license may be sued in the
country
While an unlicensed foreign corporation doing
business in the country cannot maintain any action,
said corporation can be sued in the country, under
the doctrine of quasi-estoppel by acceptance of
benefits. It shall not be allowed to invoke its lack of
license to impugn the jurisdiction of the courts
(Marubeni Nedeland BV v. Tensuan, G.R. No. 61950,
September 28, 1990; SEC Opinion, Jan. 10, 1995).
INSTANCES WHERE AN UNLICENSED FOREIGN
CORPORATION BE ALLOWED TO SUE
1. Isolated transactions.
2. A license subsequently granted enables the
foreign corporation to sue on contracts
executed before the grant of the license.
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3. In an action for infringement of patent or other
intellectual property rights, provided that the
country of the foreign corporation is a party to
the Paris Convention.
4. If the foreign corporation is co-plaintiff with a
domestic corporation and the domestic
corporation is the one who instituted the suit in
the Philippines; -or
5. By reason of the doctrine of estoppel.
Isolated transaction
The Court has not construed the term “isolated
transaction” to literally mean “one” or a mere single
act. The phrase “isolated transaction” has a definite
and fixed meaning, i.e., a transaction or series of
transaction set apart from the common business of
a foreign enterprise in the sense that there is no
intention to engage in progressive pursuit of the
purpose and object of the business organization
(Lorenzo Shipping Corp., v. Chubb and Sons, G.R. No.
147724, June 8, 2004).
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a
country which is a party to any convention,
treaty, or agreement relating to intellectual
property rights or the repression of unfair
competition, to which the Philippines is also a
party or extend reciprocal rights sue in
trademark or service mark enforcement action?
A: YES. The foreign corporation mentioned above
may sue in trademark or service mark enforcement
action. This is in accordance with Section 160, in
relation to Section 3 of R.A. No. 8393, The
Intellectual Property Code (Sehwani Inc. v. In-n-Out
Burger, G.R. No. 171053, Oct. 15, 2007).
Q: Surecomp, a foreign corporation duly
organized and existing under the laws of the
Netherlands, entered into a software license
agreement with ABC, a domestic corporation,
for the use of its IMEX Software System (System)
in the bank’s computer system for a period of
twenty (20) years. ABC merged with Global
Business Holdings, Inc. (Global), with Global as
the surviving corporation.
When Global took over the operations of ABC, it
found the System unworkable for its operations,
and informed Surecomp of its decision to
discontinue with the agreement and to stop
further payments thereon. Consequently, for
failure of Global to pay its obligations under the
agreement despite demands, Surecomp filed a
complaint for breach of contract with damages
before the RTC.
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In its complaint, Surecomp alleged that it is a
foreign corporation not doing business in
the Philippines and is suing on an isolated
transaction. Pursuant to the agreement, it
installed the System in ABC’s computers for a
consideration of US$298,000.00 as license fee.
Global filed a motion to dismiss on the ground
that Surecomp had no capacity to sue because it
was doing business in the Philippines without a
license. Is Global estopped from questioning
Surecomp’s capacity to sue?
A: YES, Global is estopped. As a rule, unlicensed
foreign non-resident corporations doing business in
the Philippines cannot file suits in the Philippines.
This is mandated under Section 133 of the
Corporation Code. A corporation has a legal status
only within the state or territory in which it was
organized. For this reason, a corporation organized
in another country has no personality to file suits in
the Philippines. In order to subject a foreign
corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license
from the Securities and Exchange Commission and
appoint an agent for service of process. Without
such license, it cannot institute a suit in
the Philippines.
The exception to this rule is the doctrine of estoppel.
Global is estopped from challenging Surecomp’s
capacity to sue. A foreign corporation doing
business in the Philippines without license may sue
in Philippine courts a Filipino citizen or a Philippine
entity that had contracted with and benefited from
it. A party is estopped from challenging the
personality of a corporation after having
acknowledged the same by entering into a contract
with it. The principle is applied to prevent a person
contracting with a foreign corporation from later
taking advantage of its non-compliance with the
statutes, chiefly in cases where such person has
received the benefits of the contract (Global
Business Holdings, Inc., v. Surecomp Software, B.V.,
G.R. No. 173463, October 13, 2010).
GROUNDS FOR REVOCATION OF LICENSE
Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the SEC upon any of the following
grounds:
1. Failure to file its annual report or pay any fees
as required by the Code;
2. Failure to appoint and maintain a resident
agent in the Philippines;
3. Failure, after change of its resident agent or of
his address, to submit to the Securities and
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Exchange Commission a statement of such
change;
4. Failure to submit to the SEC an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by the Corporation Code;
5. A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its
agencies or political subdivisions;
7. Transacting business in the Philippines outside
of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines (CC, Sec
134). (Now Sec. 151 of the RCC)
A certificate of revocation shall be issued by the SEC.
A copy thereof shall be furnished to the appropriate
government agency in the proper cases. The SEC
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation (CC, Sec. 135).
Effects of revocation of license of a foreign
corporation
The following are the effects of such revocation:
1. The revocation cannot affect the validity of
contracts entered into by it before the
revocation nor its right to maintain an action to
enforce them(Billmeyer Lumber Co. vs.
Merchants’ Coal Co., 69 SE 1073);
2. The revocation shall not affect the validity of
contracts entered into by a foreign corporation
after revocation. The only effect of the
revocation is that the foreign corporation
cannot seek redress from the courts to enforce
such contracts. It simply removes its legal
standing to sue (SEC Opinion No. 10-07, Feb. 5,
2010); and
3. Innocent parties can enforce such contracts
whether the same are considered valid or not.
However, the foreign corporation can no longer
transact business in the Philippines, and it
cannot maintain any suit or action in any court
or administrative agency (CC, Sec. 133).
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Withdrawal by foreign corporation licensed to
transact business in the Philippines from said
license
A foreign corporation licensed to transact business
in the Philippines may be allowed to withdraw from
the Philippines by filing a petition for withdrawal of
license. However, no certificate of withdrawal shall
be issued by the SEC unless all the following
requirements are met:
1. All claims which have accrued in the Philippines
have been paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government
or any of its agencies or political subdivisions
have been paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive
weeks in a newspaper of general circulation in
the Philippines (CC, Sec. 136). (Now Sec. 153
under the RCC)
MERGERS
AND CONSOLIDATIONS
DEFINITION AND CONCEPT
Common forms of corporate combinations
1. Sale of assets – One corporation sells all or
substantially all of its assets to another. Such
sale, usually, though not necessarily made in the
course of the dissolution of the vendor
corporation.
2. Lease of assets – A corporation, without being
dissolved, leases its property to another
corporation for which the lessor merely
receives rental paid by the lessee. This is similar
to the sale of assets, except that under a lease,
nothing passes, except the right to use the
property leased.
3. Sale of stock – The purpose of a holding
corporation is to acquire a sufficient amount of
the stock of another corporation for the
purpose of acquiring control. The acquiring
corporation is called the parent/ holding
company. The corporation whose stocks were
acquired is the subsidiary.
4. Merger – One where a corporation absorbs
another corporation and remains in existence
while others are dissolved.
5. Consolidation - One where a new corporation is
created and consolidating corporations are
extinguished.
Merger
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The seller in good faith Notwithstanding the
Two or more corporations unite, one corporation is authorized to stock sale, the
which retains its corporate existence absorbing or dismiss the affected corporation continues
merging in itself the other which disappears as a employees, but is liable to be the employer of
separate corporation. It is the absorption of one for the payment of its people and
corporation by another which survives (De Leon, separation pay under continues to be liable
2010). the law. The buyer in for the payment of
good faith, on the other their just claims.
Merger vs. De Facto Merger hand, is not obliged to Furthermore, the
absorb the employees corporation or its new
De Facto Merger affected by the sale, majority shareholders
Merger
(2016 Bar) nor is it liable for the are not entitled to
Merger is a re- payment of their lawfully dismiss
organization of two claims. The most that it corporate employees
or more corporations may do, for reasons of absent a just or
that results in their public policy and social authorized cause. (SME
consolidating into a justice, is to give Bank, Inc., et al., v.
single corporation, preference to the Gaspar, et al., G.R. Nos.
which is one of the qualified separated 184517 & 186641,
constituent personnel of the selling October 8, 2013)
corporations, one firm.
Can be pursued by one
disappearing or
corporation acquiring all
dissolving and the Q: One of the stipulations in the sale of SME Bank
or substantially all of the
other surviving. To to Abelardo Samson was that Agustin and De
properties of another
put it another way, Guzman, the majority stockholders and
corporation in exchange
merger is the corporate directors of SME, shall
of shares of stock of the
absorption of one or terminate/retire its employees. At the behest of
acquiring corporation.
more corporations by Samson’s wife, SME’s general manager urged its
The acquiring
another existing employees, respondents Gaspar, et al., to tender
corporation would end
corporation, which their resignations on the promise that they will
up with the business
retains its identity be rehired. The majority shares of SME were
enterprise of the target
and takes over the then sold to the Sps. Samson, and SME did not
corporation; whereas,
rights, privileges, rehire De Guzman, et al.
the target corporation
franchises,
would end up with
properties, claims, Gaspar, et al. filed a complaint for illegal
basically its only
liabilities and dismissal against SME, Samson, Agustin and De
remaining assets being
obligations of the Guzman. The LA ruled that the labor buyer of an
the shares of stock of the
absorbed enterprise is not bound to absorb its employees,
acquiring corporation.
corporation(s). The unless there is an express stipulation to the
absorbing contrary. The NLRC found that there was only a
corporation mere transfer of shares – and therefore, a mere
continues its change of management – from Agustin and De
existence while the Guzman to the Samson Group. As the change of
life or lives of the management was not a valid ground to
other corporation(s) terminate respondent bank employees, the
is or are terminated. NLRC ruled that they had indeed been illegally
dismissed.
(Bank of Commerce v. Radio Philippines Network, Was there a transfer of business such that
Inc., et al., G.R. No. 195615, April 21, 2014) Samson, being an innocent transferee, has no
obligation to retain the employment of Gaspar,
Asset sale vs. Stock sale et al. ?

ASSET SALE
The corporate entity
sells all or substantially
all of its assets to
another entity.
STOCK SALE A: NO. There was no transfer of the business
The individual or establishment to speak of, but merely a change in
corporate the new majority shareholders of the corporation.
shareholders sell a
controlling block of There are two types of corporate acquisitions: asset
stock to new or sales and stock sales. In contrast with asset sales,
existing shareholders. in which the assets of the selling corporation are

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transferred to another entity, the transaction in
stock sales takes place at the shareholder level.
Because the corporation possesses a personality
separate and distinct from that of its shareholders,
a shift in the composition of its shareholders will not
affect its existence and continuity. Thus,
notwithstanding the stock sale, the corporation
continues to be the employer of its people and
continues to be liable for the payment of their just
claims. Furthermore, the corporation or its new
majority shareholders are not entitled to lawfully
dismiss corporate employees absent a just or
authorized cause.
In the case at bar, the Letter Agreements show that
their main object is the acquisition by the Samson
Group of 86.365% of the shares of stock of SME
Bank. Hence, this case involves a stock sale,
whereby the transferee acquires the controlling
shares of stock of the corporation. Thus, following
the rule in stock sales, respondent employees may
not be dismissed except for just or authorized
causes under the Labor Code.
The transfer only involved a change in the equity
composition of the corporation. To reiterate, the
employees are not transferred to a new employer,
but remain with the original corporate employer,
notwithstanding an equity shift in its majority
shareholders. This being so, the employment status
of the employees should not have been affected by
the stock sale. A change in the equity composition of
the corporate shareholders should not result in the
automatic termination of the employment of the
corporation’s employees. Neither should it give the
new majority shareholders the right to legally
dismiss the corporation’s employees, absent a just
or authorized cause.
It is thus erroneous on the part of the corporation to
consider the employees as terminated from their
employment when the sole reason for so doing is a
change of management by reason of the stock sale.
The conformity of the employees to the
corporation’s act of considering them as terminated
and their subsequent acceptance of separation pay
does not remove the taint of illegal dismissal.
Acceptance of separation pay does not bar the
employees from subsequently contesting the
legality of their dismissal, nor does it estop them
from challenging the legality of their separation
from the service (SME Bank, Inc., et al., v. Gaspar, et
al., G.R. Nos. 184517 & 186641, October 8, 2013).
Q: Petitioner Bank of Commerce (BOC) and
Traders Royal Bank (TRB) executed a Purchase
and Assumption agreement, where the former
acquired the latter’s specified assets and
liabilities, excluding liabilities arising from
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judicial actions which were covered by a BSP-
mandated escrow fund of P50 million. Shortly
after, the Supreme Court, in TRB v. RPN, ordered
TRB to pay respondents Radio Philippines
Network, Intercontinental Broadcasting
Corporation, and Banahaw Broadcasting
Corporation (RPN, et al.) actual damages with
legal interest. RPN, et al. filed a motion for
execution against TRB before the RTC. But
rather than pursue a levy in execution of the
corresponding amounts on escrow, RPN, et al.
filed a Supplemental Motion for Execution
where they described TRB as “now BOC” based
on the assumption that TRB had been merged
into BOC.
BOC opposed RPN, et al.’s motion and denied
that there was a merger between itself and TRB.
The RTC granted the writ of execution to cover
all assets of TRB, including those subject of the P
& A agreement. The RTC held that the P &A
agreement was a mere tool to effectuate merger.
BOC appealed to the CA, which affirmed with
modification the RTC decision, by declaring that
no merger existed between BOC and TRB and
deleting the phrase that the P & A agreement
was a farce or a mere tool to effectuate a merger
or consolidation between TRB and BOC. The CA
limited the execution to TRB’s properties found
in BOC’s possession.
The RTC issued an alias writ of execution against
BOC, and BOC sought reconsideration of the
same considering that the CA declared that no
merger existed between BOC and TRB. The RTC
denied BOC’s motion.
a. Was there a merger between BOC and TRB?
b. Should BOC be considered as RPN, et al.’s
judgment debtor?
A:
a. NO.What happened is that TRB sold and BOC
purchased identified recorded assets of TRB in
consideration of BOC’s assumption of identified
recorded liabilities of TRB including booked
contingent accounts. There is no law that
prohibits this kind of transaction especially
when it is done openly and with appropriate
government approval. In a strict sense, no
merger or consolidation took place as the
records do not show any plan or articles of
merger or consolidation.
In his book, Philippine Corporate Law, Dean
Cesar Villanueva explained that under the
Corporation Code, “a de facto merger can be
pursued by one corporation acquiring all or
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substantially all of the properties of another
corporation in exchange of shares of stock of
the acquiring corporation. The acquiring
corporation would end up with the business
enterprise of the target corporation; whereas,
the target corporation would end up with
basically its only remaining assets being the
shares of stock of the acquiring corporation.”
(Emphasis supplied)
Since there had been no merger, BOC cannot be
considered as TRB’s successor-in-interest and
against which the Court’s Decision in TRB v. RPN
may be enforced. BOC did not hold the former
TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s
liabilities to RPN, et al. BOC bought and
acquired those assets and thus, became their
absolute owner.

No de facto merger took place in the present The enforcement, therefore, of the decision in
case simply because the TRB owners did not get the main case should not include the assets and
an equivalent value in BOC shares of stock in properties that BOC acquired from TRB. These
exchange for the bank’s assets and liabilities. have ceased to be assets and properties of TRB
BOC and TRB agreed with BSP’s approval to under the terms of the BSP-approved P & A
exclude from the sale the TRB’s contingent Agreement between them. They are not TRB
judicial liabilities, including those owing to assets and properties in the possession of BOC
RPN, et al. (Bank of Commerce v. Radio Philippines
Network, Inc., et al., G.R. No. 195615, April 21,
The Bureau of Internal Revenue (BIR) treated 2014).
the transaction between the two banks purely
as a sale of specified assets and liabilities when Consolidation
it rendered its opinion on the tax consequences
of the transaction given that there is a Two or more corporations unite, giving rise to a new
difference in tax treatment between a sale and corporate body and dissolving the constituent
a merger or consolidation. corporations which cease to exist as separate
corporations (De Leon, 2010).
b. NO. First, BOC agreed to assume those liabilities
of TRB that are specified in their P & A Merger vs.Consolidation
Agreement. That agreement specifically
excluded TRB’s contingent liabilities that the BASIS CONSOLIDATIO
MERGER
latter might have arising from pending N
litigations in court, including the claims of RPN, One where a
et al. corporation
absorbs One where a new
Second, as already pointed out above, the sale another corporation is
did not amount to merger or de facto merger of corporation created and
Bancommerce and TRB since the elements Definition and remains consolidating
required of both were not present. in existence corporations are
while others extinguished. (CC,
Third, the evidence in this case fails to show that are Sec. 76)
BOC was a mere continuation of TRB. TRB dissolved.
retained its separate and distinct identity after (CC, Sec. 76)
the purchase. Although it subsequently changed Consequent All of the
its name to Traders Royal Holding’s, Inc. such dissolution constituent
change did not result in its dissolution. All consolidated
of a corporation
corporations are
corporation s involved
Fourth, to protect contingent claims, the BSP dissolved without
or are
directed BOC and TRB to put up P50 million in exception
corporation dissolved
escrow with another bank. It was the BSP, not s except one
BOC that fixed the amount of the escrow. Consequent
Consequently, it cannot be said that the latter No new A new
creation of a
bank acted in bad faith with respect to the corporation corporation
new
excluded liabilities. They did not enter into the is created emerges
corporation
P & A Agreement to enable TRB to escape from Acquisition The All assets,
its liability to creditors with pending court of Assets, surviving liabilities, and
cases. Liabilities, corporation capital stock of all
Capital acquires all consolidated
Stock the assets, corporations are

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liabilities, transferred to the
and capital new corporation
stock of all
constituent
corporation
s or disposition of all or substantially all of the
A partnership cannot merge or to consolidate
with a corporation
Only corporations can merge or consolidate into a
single corporation. Hence, a partnership may NOT
be allowed to merge with a corporation but the
partnership may transfer all its assets and liabilities
to the corporation which will issue its shares of
stock to be distributed to the partners in proportion
to their respective interest in the partnership,
provided the partnership shall be dissolved in
accordance with the Civil Code (De Leon, 2010, citing
SEC Opinion, Jan 3, 1984).
Q: Where one corporation sells or otherwise
transfers all of its assets to another corporation,
is the latter liable for the debts and liabilities of
the transferor?
A: GR: NO.
XPNs:
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 to escape liability for such debts
(Edward J. Nell Co. vs. Pacific Farms, Inc., G.R. No.
L-20850, November 29, 1965).
NOTE: The Nell Doctrine states the general rule
that the transfer of all the assets of a corporation to
another shall not render the latter liable to the
liabilities of the transferor. If any of the above-cited
exceptions are present, then the transferee
corporation shall assume the liabilities of the
transferor. (2017 Bar)
Business- Enterprise Transfer
The transferee corporation’s interest goes beyond
the assets of the transferor’s assets and its desires
to acquire the latter’s business enterprise, including
its goodwill.
Section 40 suitably reflects the business-enterprise
transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation
necessarily continued the business of the selling or
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transferor corporation. Given that the transferee
corporation acquired not only the assets but also
the business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the
former. Section 40 refers to the sale, lease, exchange
corporation's assets, including its goodwill. The sale
under this provision does not contemplate an
ordinary sale of all corporate assets; the transfer
must be of such degree that the transferor
corporation is rendered incapable of continuing its
business or its corporate purpose.
The purpose of the business-enterprise transfer is
to protect the creditors of the business by allowing
them a remedy against the new owner of the assets
and business enterprise. Otherwise, creditors
would be left “holding the bag,” because they may
not be able to recover from the transferor who has
“disappeared with the loot,” or against the
transferee who can claim that he is a purchaser in
good faith and for value. Based on the foregoing, as
the exception of the Nell doctrine relates to the
protection of the creditors of the transferor
corporation, and does not depend on any deceit
committed by the transferee corporation, then
fraud is certainly not an element of the business
enterprise doctrine. Indeed, the transferee
corporation may inherit the liabilities of the
transferor despite the lack of fraud due to the
continuity of the latter’s business (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, September 18,
2015).
Q: E Co. sold its assets to M Inc. after complying
with the requirements of the Bulk Sales Law.
Subsequently, one of the creditors of E Co. tried
to collect the amount due it, but found out that E
Co. has no more assets left. The creditors sued M
Inc. on the theory that M Inc. is a mere alter ego
of E Co. Will the suit prosper? (1996 Bar)
A: NO. The suit will not prosper. The sale by E Co. of
its assets to M Inc. did not result in the transfer of
liabilities of the latter to, nor in the assumption
therefore by, the former. The facts given do not
indicate that such transfer or assumption took place
or was stipulated upon by the parties in their
agreement. Furthermore, the sale by E Co. of its
assets is a sale of its property. It does not involve the
sale of the shares of stock of the corporation
belonging to its stockholders. There is therefore no
merger or consolidation that took place. E Co.
continues to exist and remains liable to the creditor.
Constituent Corporation vs. Consolidated
Corporation
UNIVERSITY OF SANTO TOMAS
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Constituent Consolidated
Corporation Corporation
One of the parties to a A completely new
merger or corporation formed
consolidation when two or more
corporations
combined
PLAN OF MERGER OR CONSOLIDATION
Plan of merger or consolidation
The plan of merger or consolidation is a plan
created by the representatives of the constituent
corporations, providing for the details of such
merger.
Contents of a plan of merger or consolidation
The BOD/ BOT of each corporation party to the
merger or consolidation must set forth the following
in their plan of merger or consolidation:
1. The names of the corporations proposing to
merge or consolidate, hereinafter referred to as
the constituent corporations;
2. The terms of the merger or consolidation and
the mode of carrying the same into effect;
3. A statement of the changes, if any, in the AOI of
the surviving corporation in case of a merger;
and, with respect to the consolidated
corporation in case of consolidation, all the
statements required to be set forth in the AOI
for corporations organized under the CC; and
4. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable (CC, Sec. 76).
Approvals required for an effective plan of
merger or consolidation
The plan of merger or consolidation must be
approved by:
1. Majority vote of each of the BOD/ BOT of the
constituent corporation; and
2. Submitted for approval by the stockholders or
members of each of such corporations at
separate corporate meetings duly called for the
purpose. The affirmative vote of the
stockholders representing at least 2/3 of the
outstanding capital stock of each
corporation in the case of stock corporations
or at least 2/3 of the members in the case of
non-stock corporations, shall be necessary for
the approval of such plan (CC, Sec. 77).
Amendment of a plan of merger or consolidation
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Any amendment may be made, provided such
amendment is approved by majority vote of the
respective BOD / BOT of all the constituent
corporations and ratified by the affirmative vote of
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members of
each of the constituent corporations (CC, Sec. 77).
NOTE: Such plan, together with any amendment,
shall be considered as the agreement of merger or
consolidation.
Appraisal right is available to a dissenting
stockholder to a plan of merger or consolidation
Any dissenting stockholder in stock corporations
may exercise his appraisal right in accordance with
this Code: Provided, that if after the approval by the
stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
extinguished (CC, Sec. 77).
ARTICLES OF MERGER OR CONSOLIDATION
After approval of the plan of merger or
consolidation, an article of merger or consolidation
is executed by each of the constituent corporations
to be signed by the president or vice-president of
the each corporation and signed by their secretary
or assistant secretary setting forth:
1. The plan of the merger or the plan of
consolidation;
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock
corporations, the number of members; and
3. As to each corporation, the number of shares or
members voting for and against such plan,
respectively (CC, Sec. 78).
After the approval by the stockholders or members
as required by the preceding section, articles of
merger or articles of consolidation shall be executed
by each of the constituent corporations, to be signed
by the president or vice president and certified by
the secretary or assistant secretary of each
corporation setting forth:
(a) The plan of the merger or the plan of
consolidation;
(b) As to stock corporations, the number of shares
outstanding, or in the case of nonstock corporations,
the number of members;
(c) As to each corporation, the number of shares or
members voting for or against such plan,
respectively;
(d) The carrying amounts and fair values of the
assets and liabilities of the respective
companies as of the agreed cut-off date;
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(e) The method to be used in the merger or
consolidation of accounts of the companies;
(f) The provisional or pro-forma values, as
merged or consolidated, using the accounting
method; and
(g) Such other information as may be prescribed
by the Commission. (RCC, Sec. 77)
PROCEDURE
1. The Board of each corporation shall draw up a
plan of merger or consolidation.
2. The plan of merger or consolidation shall be
approved by majority vote of each board of the
concerned corporations at separate meetings.
3. The plan of merger or consolidation shall be
submitted for approval by the stockholders or
members of each such corporation at separate
corporate meetings duly called for the purpose.
Notice should be given to all stockholders or
members at least two (2) weeks prior to date of
meeting, either personally or by registered
mail.
4. Affirmative vote of 2/3 of the outstanding
capital stock in case of stock corporations, or
2/3 of the members of a non-stock corporation
shall be required.
5. Dissenting stockholders may exercise the right
of appraisal. But if the Board abandons the plan
to merge or consolidate, such right is
extinguished.
6. The plan may still be amended before the same
is filed with the SEC; however, any amendment
to the plan must be approved by the same votes
of the board members of trustees and
stockholders or members required for the
original plan.
7. After such approval, Articles of Merger or
Articles of Consolidation shall be executed by
each of the constituent corporations, signed by
president or VP and certified by secretary or
assistant secretary, setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, the number of shares
outstanding; in non-stock, the number of
members; and
c. As to each corporation, number of shares or
members voting for and against such plan,
respectively.
8. Four copies of the Articles of Merger or
Consolidation shall be submitted to the SEC for
approval. Special corporations like banks,
insurance companies, building and loan
associations, etc., need the prior approval of the
respective government agency concerned.
9. If SEC is satisfied that the merger or
consolidation is not inconsistent with the
provisions of the Corporation Code and existing
laws, it shall issue the Certificate of Merger or
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the Certificate of Incorporation, as the case may
be.
10. If, upon investigation, the SEC has reason/s to
believe that the proposed merger or
consolidation is contrary to or inconsistent with
the Corporation Code or other existing laws, it
shall set a hearing to give the corporations the
opportunity to be heard and written notice of
said hearing shall be given to each constituent
corporation at least two weeks prior to the said
hearing (CC, Secs. 76-79).
EFFECTIVITY
The merger or consolidation shall become effective
upon issuance by the SEC of the certificate of merger
and consolidation.
In the case of merger or consolidation of banks or
banking institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other special
corporations governed by special laws, the
favorable recommendation of the appropriate
government agency shall first be obtained (CC, Sec.
79).
The articles of merger or of consolidation, signed
and certified as required by this Code, shall be
submitted to the Commission for its approval:
Provided, That in the case of merger or
consolidation of banks or banking institutions,
loan associations, trust companies, insurance
companies, public utilities, educational
institutions, and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the
corporations concerned is consistent with the
provisions of this Code and existing laws, it shall
issue a certificate approving the articles and plan of
merger or of consolidation, at which time the
merger or consolidation shall be effective. If, upon
investigation, the Commission has reason to believe
that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of
this Code or existing laws, it shall set a hearing to
give the corporations concerned the opportunity to
be heard. Written notice of the date, time, and place
of hearing shall be given to each constituent
corporation at least two (2) weeks before said
hearing. The Commission shall thereafter, proceed
as provided in this Code. (RCC, Sec. 78)
Q: FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. The articles
of merger were not registered with the SEC due
to incomplete documentation. DSLAI changed its
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corporate name to MSLAI. The business of
MSLAI, however, failed.
Prior to the closure of MSLAI, Remedios Uy filed
an action for collection of sum of money against
FISLAI. The RTC ruled in favor of Uy and hence,
six (6) parcels of land owned by FISLAI were sold
to Willkom, the highest bidder.
MSLAI filed a complaint for annulment of
sheriff’s sale. Willkom, et al., averred that MSLAI
had no cause of action against them or the right
to recover the subject properties because MSLAI
is a separate and distinct entity from FISLAI.
They further contended that the “unofficial
merger” between FISLAI and DSLAI (now MSLAI)
did not take effect considering that the merging
companies did not comply with the formalities
and procedure for merger or consolidation as
prescribed by the Corporation Code of
the Philippines. Was the merger between FISLAI
and DSLAI (now MSLAI) valid and effective?
A: NO. The merger was not valid. Merger does not
become effective upon the mere agreement of the
constituent corporations. Since a merger or
consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders
and creditors, there must be an express provision of
law authorizing them.
The merger shall only be effective upon the issuance
of a certificate of merger by the SEC, subject to its
prior determination that the merger is not
inconsistent with the Corporation Code or existing
laws.
In this case, it is undisputed that the articles of
merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true
that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact
remains that no certificate was issued by the SEC.
Such merger is still incomplete without
the certification.
The issuance of the certificate of merger is crucial
because not only does it bear out SEC’s approval but
it also marks the moment when the consequences of
a merger take place. By operation of law, upon the
effectivity of the merger, the absorbed corporation
ceases to exist but its rights and properties, as well
as liabilities, shall be taken and deemed transferred
to and vested in the surviving corporation
(Mindanao Savings and Loan Association, Inc., et al.,
v. Edward Willkom, et al., G.R. No. 178618, October
11, 2010).
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EFFECTS AND LIMITATIONS
Effects of a merger or consolidation
1. The constituent corporations shall become a
single corporation which:
a. In case of merger, shall be the surviving
corporation designated in the plan of
merger.
b. In case of consolidation, shall be the
consolidated corporation designated in the
plan of consolidation.
2. The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation.
3. The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject to
all the duties and liabilities of a corporation
organized under this Code.
4. The surviving or the consolidated corporation
shall thereupon and thereafter possess:
a. All the rights, privileges, immunities and
franchises of each of the constituent
corporations;
b. All property, real or personal, and all
receivables due on whatever account,
including subscriptions to shares and other
choses in action, and all and every other
interest of, or belonging to, or due to each
constituent corporation.
5. These shall be deemed transferred to and
vested in such surviving or consolidated
corporation without further act or deed.
6. The surviving or consolidated corporation
shall:
a. Be responsible and liable for all the
liabilities and obligations of each of the
constituent corporations in the same
manner as if such surviving or consolidated
corporation had itself incurred such
liabilities or obligations;
b. 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
c. The rights of creditors or liens upon the
property of any of such constituent
corporations shall not be impaired by such
merger or consolidation (CC, Sec. 80; BPI v.
Lee, G.R. No. 190144, August 1, 2012).
SECTION 80
Garnishment upon the surviving corporation for
the liabilities of the absorbed corporation
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Citytrust was dissolved, no winding up of its affairs
or liquidation of assets, privileges, powers and
liabilities took place. As the surviving corporation,
BPI simply continued the combined businesses of
the two banks and absorbed all the rights,
privileges, assets, liabilities and obligations of City
Trust, including the latter’s obligation over the
garnished deposits of the defendants.
Through the service of the writ of garnishment, the
garnishee becomes a “virtual party” to, or a “forced
intervenor” in the case and the trial court thereby
acquires jurisdiction to bind him to compliance with
all orders and processes of the trial court with a
view to the complete satisfaction of the judgment of
the court.
Citytrust, therefore, upon service of the notice of
garnishment and its acknowledgment that it was in
possession of defendants’ deposit accounts became
a “virtual party” to or “forced intervenor” in the civil
case. As such, it became bound by the orders and
processes issued by the trial court despite not
having been properly impleaded therein.
Consequently, by virtue of its merger with BPI, the
latter, as the surviving corporation, effectively
became the garnishee, thus the “virtual party” to the
civil case (BPI v. Lee, G.R. No. 190144, August 1,
2012).
Transfer of employees of the absorbed
corporation to the surviving corporation.
It is contrary to public policy to declare the former
employees of the absorbed corporation as forming
part of its assets or liabilities that were transferred
to and absorbed by the surviving corporation in the
Articles of Merger. Assets and liabilities, in this
instance, should be deemed to refer only to property
rights and obligations and do not include the
employment contracts of its personnel. A
corporation cannot unilaterally transfer its
employees to another employer like
chattel. Certainly, if the surviving corporation as an
employer had the right to choose who to retain
among the employees of the absorbed corporation,
the latter employees had the concomitant right to
choose not to be absorbed by the corporation. Even
though the employees of the absorbed corporation
had no choice or control over the merger of their
employer, they had a choice whether or not they
would allow themselves to be absorbed by the
surviving corporation. Certainly nothing prevented
the employees of the absorbed corporation from
resigning or retiring and seeking employment
elsewhere instead of going along with the proposed
absorption (BPI v. BPI Employees Union – Davao
Chapter, G.R. No. 164301, October 19, 2011).
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NOTE: On motion for reconsideration, however, the
Supreme Court ruled that it is more in keeping with
social justice that the employees of the absorbed
corporation be considered employees of the
surviving corporation without break in the
continuity of their employment even without
express stipulation in the Articles of Merger (Bank
of the Philippine Islands v. BPI Employees Union –
Davao Chapter, supra).
Q: Associated Banking Corporation and Citizens
Bank and Trust Company (CBTC) merged to
form just one banking corporation known as
Associated Citizens Bank, the surviving
bank. The Associated Citizens Bank changed its
corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation.
Lorenzo Sarmiento executed in favor of CBTC a
promissory note. Upon maturity and despite
repeated demands Sarmiento failed to pay the
amount due. Associated Bank filed a collection
suit against Sarmiento. Sarmiento contends that
Associated Bank is not the proper party in
interest because the promissory note was
executed in favor of Associated Citizens Bank.
The trial court ordered Sarmiento to pay. The CA
however, held that the Associated Bank had no
cause of action against Lorenzo Sarmiento Jr.,
since said bank was not privy to the promissory
note executed by Sarmiento in favor of Citizens
Bank and Trust Company (CBTC). The court
ruled that the earlier merger between the two
banks could not have vested Associated Bank
with any interest arising from the promissory
note executed in favor of CBTC after such
merger.
May Associated Bank, the surviving corporation,
enforce the promissory note made by Sarmiento
in favor of CBTC, the absorbed company, after
the merger agreement had been signed?
A: YES. Associated Bank may enforce the
promissory note. Ordinarily, in the merger of two or
more existing corporations, one of the combining
corporations survives and continues the combined
business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the
surviving corporation. Although there is dissolution
of the absorbed corporations, there is no winding up
of their affairs or liquidation of their assets, because
the surviving corporation automatically acquires all
their rights, privileges and powers, as well as their
liabilities. All contracts of the absorbed
corporations, regardless of the date of execution
shall pertain to the surviving corporation
UNIVERSITY OF SANTO TOMAS
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Securities Regulation Code

(Associated Bank v. CA, G.R. No. 123793, June 29, Securities are shares, participation or interests in a
1998). corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate,
contract, instrument, whether written or electronic
SECURITIES REGULATION CODE in character.

KINDS OF SECURITIES

STATE POLICY, PURPOSE

(DO DIET)

Nature of the Securities Regulation Code (SRC) 1. Debt instruments – bonds, debentures,
notes, evidence of indebtedness, asset-
The SRC is the law that regulates securities (its backed securities.
issuance, distribution and sale) and the person who Asset-backed securities (ABS) - These are
deals with such securities. It is enacted to protect financial securities the value of which
the public from unscrupulous promoters, who stake depends on the assets underlying it. For
business or venture claims which have really no investors, ABS are alternative to investing
basis, and sell shares or interests therein to in corporate debt. An ABS is essentially the
investors. It also serves to protect investors, same thing as a mortgage-backed security,
promote investor confidence, and stabilize the except that the securities backing it are
financial markets. assets such as loans, leases, credit card
debt, a company’s receivables, royalty and
The law does not guarantee that a person who so on, and not mortgaged-based securities,
invests in securities will make money. The law only hence, the risk involved in ABS is greater.
ensures that there will be a fair and full disclosure 2. Other instruments as may in the future be
of information regarding securities so that the determined by the SEC.
investor could make an informed judgment (Divina, 3. Derivatives– options and warrants
2014).
Options– are contracts that give the buyer
State policy with regard to the SRC the right, but not the obligation, to buy or
sell an underlying security at a
1. Establish a socially-conscious free market that predetermined price called the exercise or
regulates itself. strike price, on or before a predetermined
2. Encourage widest participation of ownership in date, called the expiry date, which can only
enterprises. be extended in accordance with Exchange
3. Enhance democratization of wealth. rules (Sundiang Sr. & Aquino, 2014).
4. Promote development of the capital market.
5. Protect investors. Kinds of Options
6. Ensure full and fair disclosure about securities. a. Call option – option to buy
7. Minimze, if not totally eliminate, insider trading b. Put option – option to sell
and other fraudulent or manipulative devices c. Straddle – combination of both call and put
and practices which creates distortion in the option.
free market.
Warrants - are rights to subscribe or
The Securities Regulation Code is called a “ truth in purchase new shares or existing shares in a
securities law “ because it requires the issuer to company, on or before a predetermined
make full and fair disclosure of information about date called the expiry date, which can only
securities being sold or offered to be sold within the be extended in accordance with Exchange
Philippines and penalizes manipulative and rules. Warrants generally have a longer
fraudulent acts, devices and schemes exercise period than options.
Investments instruments – Investment
DEFINITION OF SECURITIES contracts, fractional undivided interests in
oil, gas, or other mineral rights.

Securities (1996 Bar) Investment contract – is a contract,

transaction or scheme whereby a person
invests his money in a common enterprise

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and is led to expect profits primarily from
the efforts of others.
Howey Test
For an investment contract to exist, the
following elements must concur:
a. A contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common
enterprise;
d. Expectation of profits; and
e. Profits arising primarily from the effort of
others.
Network marketing,- a scheme adopted by
companies to get people to buy their
products outside the usual retail system
where products are brought from the
store’s shelf and where the buyer can
become a down-line seller, earning
commissions from purchases made by new
buyers whom he refers to the person who
sold the product to him, is not an
investment contract. The commissions are
incentives to down-line sellers to bring in
other customers. These can hardly be
regarded as profits from investment of
money under the Howey Test (SEC v.
Prosperity.Com, Inc., G.R. No. 164197,
January 25, 2012).
4. Equity instruments – Shares of stock,
certificates of interest or participation in a
profit sharing agreement, certificates of
deposit for a future subscription,
proprietary or non-proprietary
membership certificates in corporations.
5. Trust instruments – Certificates of
assignments, certificates of participation,
trust certificates, voting trust certificates or
similar instruments [SRC, Sec. 3.1 (e)].
Q: Betty Go Gabionza and other investors lent,
invested or deposited money with ASBHI. For
this, ASBHI issued two (2) postdated checks to
its lenders, one representing the principal
amount and the other covering the interest
thereon. On the maturity of the checks, the
individual lenders renewed the loans, either
collecting only the interest earnings or rolling
over the same with the principal amounts.
After sometime, DBS Bank refused to pay for the
checks by virtue of “stop payment” orders from
ASBHI. The series of events led to the filing of the
complaints by Gabionza, et al., for Estafa under
Article 315(2)(a) and (2)(d) of the Revised Penal
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Code, Estafa under PD No. 1689, violation of the
Revised Securities Act and violation of the
General Banking Act.
The DOJ concluded that ASHBHI, et al., are liable
for violating such prohibition against the sale of
unregistered securities. However, the CA
reversed the DOJ holding that the postdated
checks issued by ASBHI did not constitute a
security under the Revised Securities Act. Are
the checks issued by ASHBHI “securities”?
A: YES. The checks issued constitute securities;
hence, the non-registration thereof is a violation of
the Revised Securities Act. It is one thing for a
corporation to issue checks to satisfy isolated
individual obligations, and another for a
corporation to execute an elaborate scheme where
it would portray itself to the public as a pseudo-
investment house and issue postdated checks
instead of stocks or traditional securities to
evidence the investments of its patrons. The
Revised Securities Act is geared towards the
maintainance of the stability of the national
investment market against activities such as those
apparently engaged in by ASBHI. ASBHI adopted
this scheme in an attempt to circumvent the Revised
Securities Act, which requires a prior license to sell
or deal in securities.
It bears pointing out that the definition of
“securities” set forth in Section 2 of the Revised
Securities Act includes “commercial papers
evidencing indebtedness of any person, financial or
non-financial entity, irrespective of maturity,
issued, endorsed, sold, transferred or in any manner
conveyed to another. A check is a commercial paper
evidencing indebtedness of any person, financial or
non-financial entity. Since the checks in this case
were generally rolled over to augment the creditor’s
existing investment with ASBHI, they most
definitely take on the attributes of traditional
stocks. A different rule would open the floodgates
for a similar scheme, by companies without prior
license or authority from the SEC. This cannot be
countenanced (Gabionza v. CA, G.R. No. 161057,
September 12, 2008).
Test on determining whether or not it is a
security
Does it represent a share, participation, or interest
in a commercial enterprise or any profit making
venture? If yes, then, it is a security. If it is a security,
then, it cannot be sold, or offered for sale or
distribution within the Philippines without a
registration statement duly filed with and approved
by the SEC (Divina, 2014).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

Securities Regulation Code
Requirement before securities are sold or
offered for sale or distribution within the
Philippines
They are required to be registered with and
approved by the SEC. Registration also includes the
disclosure to SEC of all material and relevant
information about the issuer of the security. Prior to
the sale, the information on the securities, in such
form and with such substance as the SEC may
prescribe, shall be made available to each
prospective purchaser (SRC, Sec. 8.1).
GR: Securities must be registered with and
approved by SEC.
REASON: To protect the public from fraud.
XPNs: The following need not be registered:
1. Exempt securities; and
2. Securities sold in exempt transactions.
XPN TO XPN: SRC provides that the resale of
securities previously sold in an exempt transaction
must be registered.
Effect of non-registration
The issuer would be penalized. Issuers of securities
not registered shall be subjected to criminal, civil
and administrative charges. (i.e., upon conviction, a
fine P50,000 to P5 M and/or imprisonment of 7-12
years). It carries also civil liabilities in that the
purchaser can recover from the seller (i) the
consideration paid with interest thereon, less the
amount of any income received on the purchased
securities, upon the tender of such securities, or (ii)
damages if the purchaser no longer owns such
securities. Furthermore, the SEC may issue a cease
and desist order.
Q. ABC Corp. is engaged in the pawnshop
business involving cellphones, laptops and
other gadgets of value. In order to expand its
business and attract investors, it offered to any
person who invests at least P100,000.00 a
“promissory note” where it obligated itself to
pay the holder a 50% return on investment
withing one month. Due to the attractive offer,
many individuals invested in the company but
not one of them was able to realize any profit
after one month.
Has ABC Corp. violated any law with its scheme?
Explain.
A: YES. ABC Corp. violated the provisions of the
Securities Regulation Code that prohibits sale of
securities to the public, like promissory, without a
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registration statement filed with and approved by
the Securities and Exchange Commission.
Q: Timeshare Corp. sold to Spouses Cortez one
timeshare of Laguna de Boracay. After
sometime, the SEC issued a resolution to the
effect that Timeshare Corp. was without
authority to sell securities, like timeshares. It
held therefore that the purchaser may exercise
the option to unilaterally rescind the purchase
agreement and receive the refund of money paid
applies to all purchase agreements entered into
by Timeshare Corp. prior to the effectivity of the
Registration Statement. Hence, Spouses Cortez
demanded their right to cancel their contract, as
it appears that Laguna de Boracay is selling said
shares without license or authority from the
SEC.
Despite repeated demands, Timeshare Corp.
failed and refused to refund the same.
Timeshare Corp. contends that its mere
registration as a corporation already authorized
it to deal with unregistered timeshares. Does the
registration of Timeshare Corp. as a corporation
authorize it to deal with unregistered
timeshares?
A: NO. Mere registration as a corporation does not
authorize it to deal with unregistered timeshares.
Corporate registration is just one of several
requirements before it may deal with timeshares.
Prior to fulfillment of all the other requirements of
Section 8, Timeshare Corp. is absolutely proscribed
from dealing with unregistered timeshares. No
securities, except of a class exempt under the SRC or
unless sold in any transaction exempt under the
same, shall be sold or offered for sale or distribution
to the public within the Philippines unless such
securities shall have been registered and permitted
to be sold as provided by the SRC (Timeshare Realty
Corporation v. Cesar Lao, G.R. No. 158941, February
11, 2008).
Q: Petitioners filed before the RTC a
Complaint for declaration of nullity of contract
and sums of money with damages against
respondent, Citibank. They discovered that the
securities sold to them were not registered with
the Securities and Exchange Commission (SEC)
in violation of the "Securities Regulation Code"
(SRC). Respondent invoked Doctrine of Primary
Jurisdiction and contended the complaint
should be first filed with the SEC and not directly
before the RTC. Should the complaint be
dismissed for lack of jurisdiction of the RTC?
A: NO. petitioners’ complaint constitutes a civil suit
for declaration of nullity of contract and sums of
money with damages, which stemmed from
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respondent’s alleged sale of unregistered securities,
in violation of the various provisions of the SRC.
Civil suits falling under the SRC are under the
exclusive original jurisdiction of the regional trial
courts and hence, need not be first filed before the
SEC, unlike criminal cases wherein the latter body
exercises primary jurisdiction. (PUA V. CITIBANK
G.R. No. 1980064, September 16, 2013)
Validity of the sale of shares acquired 12 months
after the approval of the Registration Statement
If the person who acquired the security sued any of
the enumerated persons under Sec. 56.1 for
recovery of damages after the issuer has made
generally available to its security holders an income
statement covering a period of at least twelve (12)
months beginning from the effective date of the
registration statement, then the right of recovery
shall be conditioned on proof that such person who
acquired the security relying upon such untrue
statement in the registration statement or relying
upon the registration statement and not knowing of
such income statement, but such reliance may be
established without proof of the reading of the
registration statement by such person (SRC, Sec.
56.2).
Securities market professionals (persons who
deal with securities)
1. Broker – A person engaged in the business of
buying and selling securities for the account of
others (SRC, Sec.3.3).
2. Dealer– Any person who buys and sells
securities for his/her own account in the
ordinary course of business (SRC, Sec. 3.4).
3. Associated person of a broker or dealer – He
is an employee of a broker or dealer who
directly exercises control of supervisory
authority, but does not include a salesman, or
an agent, or a person, whose functions are
solely clerical or ministerial (SRC, Sec. 3.5).
4. Salesman – He is a natural person, employed as
such, or as an agent, by a dealer, issuer or
broker to buy and sell securities; but for the
purpose of registration, shall not include any
employee of an issuer whose compensation is
not determined directly or indirectly on sales of
securities of the issuer (SRC, Sec 3.13).
Obligation of the broker to his client
The primary obligation of the broker is to ensure his
account’s compliance with the law (Abacus
Securities Corp. v. Ampil, G.R. No. 160922, February
27, 2006).
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NOTE: Since a brokerage relationship is essentially
a contract for the employment of an agent, the law
on contractsgoverns the broker-principal
relationship.
Registration of security market professionals
Security market professionals are required to be
registered. No broker shall sell any securities unless
he is registered with the SEC (Revised Securities Act,
Sec. 1,) (Nicolas v. CA, et al., G.R. No. 12285, March 27,
1998).
Q: Can a stock broker without license from the
SEC, recover management fees allegedly earned
from handling the securities transactions of a
client?
A: NO. An unlicensed person may not recover
compensation for services as a broker where a
statute or ordinance is applicable and such is of a
regulatory nature.
EXEMPT SECURITIES
(PC-RIBO)
1. Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or by
any person controlled or supervised by, and
acting as an instrumentality of said
government.
2. Any security issued or guaranteed by the
government of any Country with which the
Philippines maintains diplomatic relations, or
by any state, province or political subdivision
thereof on the basis of reciprocity. Provided,
that the SEC may require compliance with the
form and content of disclosures the
Commission may prescribe.
3. Certificates issued by a Receiver or by a trustee
in bankruptcy duly approved by the proper
adjudicatory body.
4. Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
Insurance Commission, Housing and Land Use
Regulatory Board, or the Bureau of Internal
Revenue.
5. Any security issued by a Bank except its own
shares of stock (which serves to promote the
sale of securities issued by heavily regulated
banks).
6. Other securities as determined by the SEC by
rule or regulation, after public hearing (SRC, Sec.
9).
Being an issuer of an exempt security does NOT
exempt such issuer from the requirement of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

Securities Regulation Code
submission of reports under the regime of full and
fair disclosure.
RATIONALE: The listed securities are exempted
because they are either guaranteed by the
government or they are already regulated by
another government agency or body other than the
SEC.
EXEMPT TRANSACTIONS
(JuDe ISCaRIOT’S Ex-20-QB’s)
1. Any JUdicial sale, or sale by an executor,
administrator, guardian, receiver or trustee in
insolvency or bankruptcy.
2. Those sold by a pledge holder, mortgagee, or
any other similar lien holder, to liquidate a bona
fide debt a security pledged in good faith as
security for such Debt.
3. Those sold or offered for sale in an Isolated
transaction for the owner’s account and the
owner not being an underwriter.
4. Distribution by the corporation of Securities to
its stock holders or other security holders as
stock dividends or distribution out of surplus.
5. Sale of CApital stock of a corporation to its own
stockholders exclusively wherein no
commission or remuneration is paid or given
directly or indirectly in connection with the sale
of such capital stock.
NOTE: Also, this sale must not involve an
underwriter or financial advisor.
6. Bonds or notes secured by a mortgage upon
Real estate or tangible personal property,
where the entire mortgage together with all the
bonds or notes secured thereby are sold to a
single purchaser at a single sale.
7. Issue and delivery of any security in exchange
for any other security of the same Issuer
pursuant to the right of conversion entitling the
holder of the security surrendered in exchange
to make such conversion.
8. Broker’s transactions executed upon
customer’s Orders, on any registered Exchange
or other Trading market.
9. Share Subscriptions in capital stock prior to
incorporation or in pursuance of an increase in
its authorized capital stock under the
Corporation Code when no expense is incurred,
or no commission, compensation or
remuneration is paid or given in connection
with the sale or disposition of such securities,
and only when the purpose for soliciting, giving
or taking of such subscriptions is to comply
with the requirements of such law as to the
percentage of the capital stock of a corporation
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which should be subscribed before it can be
registered and duly incorporated, or its
authorized capital increased.
10. EXchange of securities by the issuer with its
existing security holders exclusively, when no
commission or other remuneration is paid or
given directly or indirectly for soliciting such
exchange.
11. Sale by issuer to fewer than 20 persons in the
Philippines during any 12 month period,
otherwise known as private placement
transactions (19 Lender Rule).
Requisites:
1. Sale to not more than 19 non-
institutional retail investors;
2. The security is made payable to a
specific person;
3. Security is non-negotiable and non-
assignable; and
4. It is in an amount not exceeding fifty
(50) million pesos.
12. Sale of securities to any number of the following
Qualified Buyers:
a. banks;
b. registered investment houses;
c. insurance companies;
d. pension funds or retirement plans
maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko Sentral
to engage in trust functions,
investment companies;
e. investment companies; and
f. other persons or entities ruled qualified by
the SEC on the basis of such factors such as
financial sophistication, net worth,
knowledge, and experience in financial and
business matters, or amount of assets
under management (SRC, Sec. 10.1).
RATIONALE: Although the securities themselves
must still be registered, the sale or issue need not be
registered because the investors involved herein
are considered as highly sophisticated investors or
specialized investors and as such, have a greater
risk tolerance or do not need strict protection from
the Commission.
List of exempt transactions under SRC is NOT
exclusive
The list is not exclusive. The Commission may
exempt other transactions, if it finds that the
requirements of registration under the Code is not
necessary in the public interest or for the protection
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of the investors such as by reason of the small
amount involved or the limited character of the
public offering (SRC, Sec. 10.02).
NON-EXEMPT
All securities, unless specifically exempted by law,
shall not be sold or offered for sale or distribution
within the Philippines, without a registration
statement duly filed with and approved by the
Commission (SRC, Sec. 8.1).
(subject to consultation)
PROCEDURE FOR REGISTRATION
OF SECURITIES
Purpose for registration of securities
Registration of securities allows the subsequent
release of these securities to the investing public
and serves to protect investors.
Procedure for registration of securities
(A- POSE- CsFP- RulE)
1. Application – All securities required to be
registered shall be registered through the filing
by issuer with SEC, of a sworn registration
statement with respect to such securities in
such form and containing such information or
documents as the Commission shall prescribe.
2. Prospectus – The registration statement shall
include any prospectus required or permitted
to be delivered.
3. Other information– The information required
for the registration of any kind and all securities
shall include, among others, the effect of the
securities’ issue on ownership, on the mix of
ownership, especially foreign and local
ownership.
4. Signatories to registration statement– The
registration statement shall be signed by the
issuer’s:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
f. Corporate secretary or persons performing
similar functions
NOTE: It shall be accompanied by a duly
verified resolution of the Board of Directors of
the issuer corporation.
5. Written consent of Expert – The written consent
of the expert named as having certified any part
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of the registration statement or any document
used in connection therewith shall also be filed.
6. Certification by Selling stockholders– Where the
registration statement includes shares to be
sold by the selling shareholders, a written
certification by such selling shareholders as to
the accuracy of any part of the registration
statement contributed by such selling
shareholders shall also be filed.
7. Fees – Upon filing of the registration statement,
the issuer shall pay to the SEC a fee of not more
than one tenth of one percent (1/10 of 1%) of
the maximum aggregate price at which such
securities are proposed to be offered; the SEC
shall prescribe by rule, diminishing the fees in
inverse proportion, the value of the aggregate
price of the offering.
NOTE: This fee paid to the SEC is called a
diminishing fee.
8. Notice and Publication – Notice of the filing of
the registration statement shall be immediately
published by the issuer, at its own expense, in
two newspapers of general circulation in the
Philippines; once a week for two consecutive
weeks, or in such other manner as the
Commission by rule shall prescribe, reciting
that:
a. A registration statement for the sale of such
security has been filed;
b. The aforesaid registration statement as
well as the papers attached thereto is open
to inspection at the Commission during
business hours; and
c. Copies thereof, photo static or otherwise,
shall be furnished to interested parties at
such reasonable charges as the
Commission may prescribe.
9. RULing – Within 45 days after the date of the
filing of the registration statement, or by such
later date to which the issuer has consented, the
SEC shall declare the registration statement
effective or rejected, unless the applicant is
allowed to amend the registration statement.
The Commission shall enter an order declaring
the registration statement to be effective if it
finds that the registration statement together
with all the other papers and documents
attached thereto is on its face complete and that
the requirements have been complied with. The
Commission may also impose such terms and
conditions as may be necessary or appropriate
for the protection of the investors.
10. Effectivity – Upon effectivity of the registration
statement, the issuer shall state under oath in
every prospectus that all registration
requirements have been met and that all
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information are true and correct as represented
by the issuer or the one making the statement
(SRC, Sec. 12).
NOTE: Any untrue statement or fact of omission to
state a material fact required to be stated therein or
necessary to make the statement therein not
misleading shall constitute fraud.
Grounds for rejection of a registration
statement and revocation of the effectivity of a
registration statement and the registration of a
security [I-ICE]
After due notice and hearing by issuing an order to
such effect, the Commission may reject the
registration statement or revoke the registration of
a security based on the following grounds:
1. The Issuer: [REFaCo]
a. Has been judicially declared Insolvent;
b. Has violated any of the provisions of the
Code, the Rules promulgated pursuant
thereto, or any order of the SEC of which
the issuer has notice in connection with the
offering for which a registration statement
has been filed;
c. Has been or is Engaged or is about to
engage in fraudulent transactions;
d. Has made any False or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities; or
e. Has failed to comply with any requirement
that the Commission may impose as a
condition for registration of the security for
which registration statement has been
filed.
2. The registration statement is on its face
Incomplete or inaccurate in any material
respect or includes any untrue statement of a
material fact or omits to state a material fact
required to be stated therein or necessary to
make the statements therein not misleading;
3. The issuer, any officer, director or Controlling
person of the issuer, or any person performing
similar functions, or any underwriter has been
convicted by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
restrained by the SEC or other competent
judicial or administrative body for violations of
securities, commodities and other related laws;
and
4. Any issuer who refuses to permit the
Examination to be made by the Commission
(SRC, Sec. 13).
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NOTE: The Commission may compel the production
of all the books and papers of the issuer, and may
administer oaths to, and examine the officers of
such issuer or any other person connected
therewith as to its business and affairs.
Grounds for suspension of registration (I-FIRe)
1. If any time, the Information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or incomplete
in any material respect.
2. The sale or offering for sale of the security
registered thereunder may work or tend to
work a Fraud.
3. Pending Investigation of the security
registered, if the Commission deems it
necessary, to ascertain whether the registration
of such security should be revoked on any
ground specified the SRC.
4. Refusal to furnish information required by the
Commission (SRC, Sec. 15).
Grounds for suspension or cancellation of
certificate of registration (ROSe Co BRO)
1. Fraud in procuring Registration.
2. Serious misrepresentation as to Objectives of
corporation.
3. Refusal to comply with lawful order of SEC.
4. COntinuous non-operation for at least 5 years.
5. Failure to file By-laws within required period.
6. Failure to file Reports.
7. Other similar grounds (SRC, Sec. 6 [L])
Order of suspension by the SEC requires a
subsequent hearing
An order of suspension must be followed by a
hearing to be conducted by the Commission. If the
Commission determines that the sale of any security
should be revoked, it shall issue an order
prohibiting the sale of such security. Until the
issuance of a final order, the suspension of the right
to sell, though binding upon the persons notified
thereof, shall be deemed confidential, and shall not
be published, unless it shall appear that the order of
suspension has been violated after notice.
However, if the Commission finds that the sale of the
security will neither be fraudulent nor result in
fraud, it shall forthwith issue an order revoking the
order of suspension, and such security shall be
restored to its status as a registered security as of
the date of such order of suspension.
Q: Philippine Chromite, Inc., after registration of
its securities, sold P10 M worth of common
stocks to the public at P.01 per share. In its
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registration statement, it alleged that it holds a c. Similar transactions where there is no
perfected mining claim on 100 hectares of change of beneficial ownership.
chromite land in Botolan, Zamabales. X, a
Botolan resident, bought P50,000 worth of 2. Effecting a series of transactions that will raise
stocks of the corporation from the stock or depress the price of securities to induce the
exchange. After its public offering, the value of purchase or sale of securities respectively, or
the stock dropped to half its price. X made some creating active trading to induce transactions
investigations and discovered that the mining through manipulative devices:
claims of the corporation had not been a. Marking the close – buying and selling of
perfected at the time of the issuance of its securities at the close of the market in an
securities. The stock, however, rallied and after effort to alter the closing price of these
2 years, commanded a price of 1 ½centavo per securities;
share. On its third year, the company collapsed b. Painting the tape – engaging in a series of
and its stocks became totally valueles s. What is transactions effected by brokers in
the remedy of X? securities that are reported publicly to give
the impression or illusion of activity or
A: The remedy of X for damages is lost by price movement in a security, which may
prescription. Any suit therefore must be filed trick investors into trading in these
within 2 years after the discovery of the facts securities because of the alleged trading
constituting the cause of action (but not beyond 5 volume or indications of interest;
years after such cause of action accrued). 2 years c. Squeezing the float – refers to taking
having already elapsed since the time that X had advantage of a shortage of securities in the
discovered the misrepresentation in the market by controlling the demand side and
registration statement of the corporation, the exploiting market congestion during such
latter’s civil liability has prescribed. X, however, is shortages in a way to create artificial
not prevented from invoking SEC’s regulatory prices. This prevents the actual market
powers against the corporation. from determining the price of these
securities;
d. Hype and dump – engaging in buying
PROHIBITIONS ON FRAUD, activity at increasingly higher prices and
MANIPULATIONS AND INSIDER TRADING then selling securities in the market at the
higher prices;
e. Boiler room operations – refers to activities
MANIPULATION OF SECURITY PRICES that involve the use of high pressure sale
tactics such as direct mail offers or
Acts which are considered as manipulation of telephone follow-ups to investors to
security prices (2001 Bar) promote purchase and sale of securities
wherein there is misrepresentation in
The price of securities should be dictated by market these securities. This is a fraudulent
forces. It cannot be pegged or stabilized. The transaction that tricks investors into
following acts are considered as manipulation of trading in a fake market;
security prices and are therefore prohibited: f. Daisy chain – refers to a series of purchase
and sales of the same issue at successively
1. Transactions intended to create a false or higher prices by the same group of people
misleading appearance of active trading in any with the purpose of manipulating prices are
listed security traded in an Exchange or any drawing unsuspecting investors into the
other trading market: market leaving them defrauded of their
a. Wash Sale – is a transaction in which there money and securities;
is no genuine change in the beneficial (or g. Front-Running – is the prohibited practice
actual) ownership of a security; of a broker-dealer executing its proprietary
b. Matched Sale – is a change of ownership in order before the customer’s order for the
the securities by entering an order for the same security. This violates the fiduciary
purchase or sale of a security with the responsibility by the broker-dealer to its
knowledge that a simultaneous order of customer accounts as well as placing the
substantially the same size, time, and price, customer’s order first; or
for the sale or purchase of any such h. Churning – involves the excessive trading of
security, has or will be entered by or for the securities by a broker-dealer in a
same or different parties; or customer’s discretionary account in order

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to generate commissions, without regard to
the customer’s investment objective.
3. Circulating or disseminating information that
the price of any security listed in an Exchange
will or is likely to rise or fall because of
manipulative market operations of any one or
more persons conducted for the purpose of
raising or depressing the price of that security
for the purpose of inducing the purchase or sale
of such security.
4. To make false or misleading statement with
respect to any material fact, which he knew or
had reasonable ground to believe was so false
or misleading, for the purpose of inducing the
purchase or sale of any security listed or traded
in an Exchange.
5. To effect, either alone or with others, any series
of transactions for the purchase and/or sale of
any security traded in an exchange for the
purpose of pegging, fixing or stabilizing the
price of such security, unless otherwise allowed
by the Code or by rules of the Commission (SRC,
Sec. 24).
Short sales
It is the selling of shares which the seller does not
actually own or possess and therefore he cannot,
himself, supply the delivery. Short selling leads to
speculation of price of securities.
Short swing transaction
It is a transaction by the director, issuer or any
person controlling the issuer (stockholder owning
10% of the stocks), whereby such person buys and
sells securities within six (6) months.
FRAUDULENT TRANSACTIONS
The following are considered as fraudulent
transactions:
1. Employment of any device, scheme or artifice to
defraud investors;
2. Obtaining money or property by means of any
untrue statement of a material fact or any
omission to state a material fact necessary in
order to make the statement made not
misleading; and
3. Engaging in any act, transaction, practice or
course of business, which operates as a fraud or
deceit upon any person.
NOTE: Section 5, Rule 8 of the Revised Rules of
Court provides that in all averments of fraud or
mistake, the circumstances constituting fraud or
mistake must be stated with particularity. These
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rules find specific application to Section 5(a) of P.D.
No. 902-A which speaks of corporate devices or
schemes that amount to fraud or misrepresentation
detrimental to the public and/or to the
stockholders.
INSIDER TRADING
A purchase or sale made by an insider, or such
insider’s spouse or his relative by affinity or
consanguinity within the second degree, legitimate
or common-law, shall be presumed to be effected
while in possession of material non-public
information if transacted after such information
came into existence but prior to the public
dissemination of such information, and lapse of
reasonable time for the market to absorb such
information. (2015 Bar)
Insider
A person who is in possession of corporate material
information not generally available to the public.
Who may be an 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. Constructive Insider – A person who learns
such information by a communication from any
of the foregoing insiders (SRC, Sec. 3.8).
Other prohibited acts in an insider trading
1. For an insider to communicate material non-
public information about the issuer or the
security to any person who by virtue of the
communication thereby becomes an insider,
where the original insider communicating the
information knows or has reason to believe that
such person will likely buy or sell a security of
the issuer while in possession of such
information (SRC, Sec. 27.3).
2. When a tender offer has commenced or is about
to commence, it is unlawful for any person,
other than the tender offeror, who is in
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possession of material non-public information
relating to such tender offer to buy or sell the
securities of the issuer that are sought or to be
sought by such tender offer, if such person
knows or has reason to believe that the
information is non-public and has been
acquired directly or indirectly from the tender
offer, or those acting on its behalf, the issuer of
the securities sought or to be sought by such
tender offer, or any insider of such issuer (SRC,
Sec. 27.4 [a][i]).
3. When a tender offer has commenced or is about
to commence, it is also unlawful for any tender
offeror, or those acting on its behalf, the issuer
of securities covered by such tender offer, and
any insider, to communicate material non-
public information to any person relating to the
tender offer which would likely result in
violation of prohibition of the insider from
trading (SRC, Sec. 27.4 [a][ii]).
Material non-public information (1995 Bar)
1. Information about the issuer or the security has
not been generally disclosed to the public and
would likely affect the market price of the
security after being disseminated to the public
and the lapse of a reasonable time for the
market to absorb the information; or
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 (SRC, Sec. 27.2).
Q: Grand Gas Corporation, a publicly listed
company, discovered after extensive drilling a
rich deposit of natural gas along the coast of
Antique. For five (5) months, the company did
not disclose the discovery so that it could quietly
and cheaply acquire neighboring land and
secure mining rights to the land. Between the
discovery and its disclosure of the information
to the Securities and Exchange Commission, all
the directors and key officers of the company
bought shares in the company at very low prices.
After disclosure, the price of the shares went up.
The directors and officers sold their shares at
huge profits.
a. What provision of the Securities Regulation
Code (SRC) did they violate, if any? Explain.
b. Assuming that the employees of the
establishment handling the printing work of
Grand Gas Corporation saw the exploration
reports which were mistakenly sent to their
establishment together with other materials
to be printed. They too bought shares in the
company at low prices and later sold them at
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huge profits. Will they be liable for violation
of the SRC? Why? (2008 Bar)
A:
a. The directors and officers of the corporation
violated Sec. 27 of the Securities and Regulation
Code on the prohibition on insider’s trading.
Sec. 27.1 of the Securities and Regulation Code
provides that it shall be unlawful for an insider
to sell or buy a security of the issuer, while in
possession of material information with respect
to the issuer or the security that is not generally
available to the public. In this case, the directors
and officers fall squarely into the definition of
an insider under Sec. 3.8 of the Securities and
Regulation Code. Thus, the directors and
officers are liable for violating the prohibition
on Insider trading.
b. The said employees will also be liable for
engaging in insider trading. Sec. 3.8 of the
Securities and Regulation Code, an insider is
also a person whose relationship or former
relationship to the issuer gives or gave him
access to material information about the issuer
or security that is not generally available to the
public. The said employees because of their
relationship with the issuer, Grand Gas
Corporation as their printer, where able to
obtain material information. They too became
liable for insider trading when they bought the
shares in the company and at the same time
possessing undisclosed material information.
Q: In insider trading, what is a fact of special
significance? (1991 Bar)
A: It is, in addition to being material, such fact as
would likely, on being made generally available, to
affect the market price of a security to a significant
extent, or which a reasonable person would
consider as especially important under the
circumstances in determining his course of action in
the light of such factors as the degree of its
specificity, the extent of its difference from
information generally available previously, and its
nature and reliability (SRC, Sec. 30 [c]).
Q: You are a member of the legal staff of a law
firm doing corporate and securities work for
Coco Products Inc., a company with unique
products derived from coconuts and whose
shares are traded in the Philippine Stock
Exchange. A partner in the law firm, Atty.
Buenexito, to whom you report, is the Corporate
Secretary. You have long been investing in Coco
Products stocks even before you became a
lawyer.
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While working with Atty. Buenexito on another
file, he accidentally gave you the Coco Products
file containing the company's planned corporate
financial rehabilitation. While you knew you
had the wrong file, your curiosity prevailed and
you browsed through the file before returning it.
Thus, you learned that a petition for financial
rehabilitation is imminent, as the company
could no longer meet its obligations as they fell
due.Soon after, your mother is rushed to the
hospital for an emergency operation, and you
have to raise money for her hospital bills. An
immediate option for you is to sell your Coco
Products shares. The sale would be very timely
because the price of the company's stocks are
still high. Would you sell the shares to raise the
needed funds for your mother's hospitalization?
Take into account legal and ethical
considerations (2013 Bar)
A: The sale of the shares does not constitute insider
trading. Although Atty. Buenexito, as corporate
secretary of Coco Products, Inc., was an insider, it
did not obtain the information regarding the
planned corporate rehabilitation by communication
from him. He just accidentally gave the wrong file
(SRC, Sec. 3.8).
It would be unethical to sell the shares. Rule 1.01 of
the Code of Professional Responsibility provides, “A
lawyer shall not engage in unlawful, dishonest,
immoral or deceitful conduct.”
He should desist from engaging in unfair deceitful
conduct to conceal form the buyer of the shares of
the planned corporate rehabilitation.
Q: Suppose “A” is the owner of several inactive
securities. To create an appearance of active
trading for such securities, “A” connives with “B”
by which “A” will offer for sale some of his
securities and “B” will buy them at certain fixed
price, with the understanding that although
there would be an apparent sale, “A” will retain
the beneficial ownership thereof.
A. Is the arrangement lawful?
B. If the sale materializes, what is it called?
A:
A. No. the arrangement is not lawful. It is an artificial
manipulation of the price of securities. This is
prohibited by the Securities Regulation Code.
B. If the sale materializes, it is called a wash sale or
simulated sale. (BAR 2001)
Possible defenses against insider trading
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1. That the information was acquired not on
account of his relationship with the issuer.
2. That he disclosed the information to the other
party who knew or had the reason to believe he
knew the material information.
3. That the purchaser or seller was not aware of
the material, non-public information at the time
of the purchase or the sale.
PROTECTION OF INVESTORS
Provisions in the SRC intended to protect the
investors
1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule
TENDER OFFER RULE (2002, 2010, 2016 BAR)
Tender offer means a publicly announced intention
by a person acting alone or in concert with other
persons to acquire equity securities of a public
company. It is also an offer by the acquiring person
to stockholders of a public company for them to
tender their shares therein on the terms specified in
the offer (Cemco Holdings, Inc. v. National Life
Insurance Co, Inc. G.R. No. 171815, August 7, 2007).
It is an invitation by the acquirer of shares of a
company for other stockholders to tender their
shares to the acquirer so that they may sell their
shares in the same price and conditions as the
previously acquired shares.
It is given to all stockholders by:
1. Filing with the SEC a declaration to that effect,
and paying the filing fee;
2. Furnishing the issuer a statement containing
the information required of the issuers as SEC
may prescribe, including subsequent or
additional materials; or
3. Publishing all requests or invitations for tender,
or materials making a tender offer or
requesting or inviting letters of such security.
Purpose of tender offer
Tender offer is in place to protect the interest of
minority stockholders of a target company against
any scheme that dilutes the share value of their
investments. It affords such minority shareholders
the opportunity to withdraw or exit from the
company under reasonable terms or a chance to sell
their shares at the same price as those of the
majority stockholders.
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Public company
1. Those listed on an exchange;
2. Those with assets of at least PHP 50M and
having 200 shareholders owning at least 100
shares each; or
3. Those companies that have an effective
registration statement under Section 12 of the
SRC.
Mandatory tender offer (2002 Bar)
Tender offer is required to be made when:
1. Any person or group of persons acting in
concert, who intends to acquire fifteen
percent (15%) of equity securities in a
public company in one or more
transactions within a period of twelve (12)
months.
2. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares
that are sufficient to gain control of the
board in a public company in one or more
transactions within a period of twelve (12)
months.
If the tender offer is oversubscribed, the
aggregate amount of securities to be
acquired at the close of such tender offer
shall be proportionately distributed across
selling shareholders with whom the
acquirer may have been in private
negotiations and other shareholders. For
purposes of SRC Rule 19.2.2, the last sale
that meets the threshold shall not be
consummated until the closing and
completion of the tender offer
NOTE: If the acquisition is made through
the Exchange trading system tender offer is
not required provided after acquisition
through the Exchange trading system, they
fail to acquire their target of thirty five
percent (35%) or such outstanding voting
shares that is sufficient to gain control of
the board.
3. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares
that are sufficient to gain control of the
board in a public company directly from
one or more stockholders.
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The sale of shares pursuant to the private
transaction or block sale shall not be
completed prior to the closing and
completion of the tender offer.
4. Any acquisition that would result in
ownership of over fifty percent (50%) of
the total outstanding equity securities of a
public company.
NOTE: Tender offer shall be made at a price
supported by a fairness opinion provided
by an independent financial advisor or
equivalent third party. The acquirer in such
a tender offer shall be required to accept all
securities tendered (2015 SRC Rules, Sec.
19.2).
Q: C Corp. is the direct holder of 10% of the
shareholdings in U Corp., a non-listed (not
public) firm, which in turn owns 62% of the
shareholdings in H Corp., a publicly listed
company. The other principal stockholder in H
Corp. is C Corp. which owns 18% of its shares.
Meanwhile, the majority stocks in U Corp. are
owned by B Corp. and V Corp. at 22% and 30%
respectively. B Corp. and V Corp. later sold their
respective shares in U Corp. to C Corp., thereby
resulting in the increase of C Corp’s. interest in U
Corp., whether direct or indirect, to more than
50%
Does the Tender Offer Rule apply in this case
where there has been an indirect acquisition of
the shareholdings in H Corp. by C. Corp.? Discuss.
(2016 Bar)
A: Yes, the mandatory tender offer is still applicable
even if the acquisition, direct or indirect, is less than
35% when then purchase would result in direct or
indirect of over 50% of the total outstanding equity
securities of a public company (Cemco Holdings v.
National Life Insurance Co., G.R. No. 171815, August
7, 2007).
Coverage of the application of tender offer
The mandatory tender offer rule covers not only
direct acquisition but also indirect acquisition or
“any type of acquisition.”
The legislative intent of Section 19 of the Securities
Regulation Code is to regulate activities relating to
acquisition of control of the listed company and for
the protection of the minority stockholders of a
listed corporation. Whatever may be the method by
which control of a public company is obtained,
either through the direct purchase of its stocks or
through an indirect means, mandatory tender offer
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applies. What is decisive is the determination of the
power of control. The legislative intent makes clear
that the type of activity intended to be regulated is
the acquisition of control of the listed company
through the purchase of shares. Control may be
effected through a direct and indirect acquisition of
stock, and when this takes place, irrespective of the
means, a tender offer must occur (Cemco Holdings
Inc. v. National Life Insurance Co.Inc., G.R. No.
171815, August 7, 2007).
Illustration of the application of tender offer in
direct acquisition:
The shares of stock of X company are owned by A
(19%), B (16%), C (20%), D (14%), E (31%). If Aljon
buys the shares of A (19%), the transaction is not
subject to mandatory tender offer. However, if Aljon
buys the shares of A (19%) and the shares of B
(16%), then tender offer must be made because the
total shares bought by Aljon is 35%.
Illustration of the application of tender offer in
indirect acquisition:
The shares of stock of X company are owned by A
(16%), B (19%), C (15%), D (18%), and Corporation
E (32%) respectively. The shares of Corporation E
are owned by Kenneth (50%), King (25%) and Jacq
(25%). If Aljon acquires the shares of B (19%), the
transaction is not subject to mandatory tender offer
because it did not reach the 35% threshold limit
required by law. However, if Aljon acquires the
shares of B (19%) and the shares of Kenneth in
Corporation E (50% of 32 is 16%), then, tender offer
must be made because the total shares bought by
Aljon directly and indirectly is 35%.
Obligations of person making a tender offer
1. Make an announcement of his intention in a
newspaper of general circulation, prior to the
commencement of the offer.
2. At least (2) business days prior to the date of the
commencement of the tender offer:
a. File with the SEC a required form for tender
offer including all exhibits thereto (and any
amendments thereto), with the prescribed
filing fees; and
b. Hand deliver a copy of such form including
all exhibits (and amendments thereto) to
the target company and its principal
executive office and to each Exchange
where such class of target company’s
securities are listed for trading.
3. Report the results of the tender offer by filing
with the SEC, not later than ten (10) calendar
days after the termination of the tender offer,
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copies of the final amendments to the form.
(Sundiang Sr. & Aquino, 2014)
Unlawful and prohibited acts relating to tender
offers
It shall be unlawful for any person to:
1. Make any untrue statement of a material fact or
omit to state any material fact necessary in
order to make statements made, in the light of
the circumstances under which they are made,
not misleading; or
2. Engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection
with any tender offer or request or invitation
for tenders, or any solicitation of security
holders in opposition to or in favor of any such
offer, request, or invitation.
Margin trading (2009 Bar)
A kind of trading that allows a broker to advance for
the customer/investor part of the purchase price of
the security and to keep the same security as
collateral for such advance.
Margin allowance standard
GR: The credit extended must be for an amount not
greater than, whichever is higher of:
1. 65% of the current market price of the security;
or
2. 100% of the lowest market price during the
preceding 36 calendar months, but not more
than 75% of the current market price.
XPN: The Monetary Board may increase or decrease
the above percentages, in order to achieve the
objectives of the Government with due regard for
promotion of the economy and prevention of the
use of excessive credit.
Purposes of the margin requirements
They are primarily intended to achieve a
macroeconomic purpose – the protection of the
overall economy from excessive speculation in
securities. Their recognized secondary purpose is to
protect small investors.
Burden of compliance with margin
requirements
The brokers and dealers have the burden of
compliance with margin requirements.
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NOTE: In securities trading, the brokers are
essentially the counterparties to the stock
transactions at the Exchange. Since the principals of
the broker are generally undisclosed, the broker is
personally liable for the contracts thus made.
Brokers have a right to be reimbursed for sums
advanced by them with the express or implied
authorization of the principal (Abacus Securities
Corp.v. Ampil, G.R. No. 160016, February 27, 2006).
RULES ON PROXY SOLICITATION
properly seen as an election controversy within the
jurisdiction of the RTC special commercial court
(GSIS vs. CA, G.R. Nos. 183905 and 184275, April 16,
2009).
DISCLOSURE RULE
Beginning of disclosure requirement
It begins at registration and continues periodically
through the regular filing of periodic report.

Requisites for valid proxy solicitation Suspension of disclosure

1. It must be in writing. It may be suspended for any fiscal year after the
2. It must be signed by the stockholder or his duly year such registration became effective if such
authorized representative. issuer as of the first day of any such fiscal year, has
3. It must be filed before the scheduled meeting less than 100 shareholders of such class of
with the corporate secretary (SRC, Sec. 20.2). securities and it notifies the Commission of such
(SRC IRR, Rule 17.1).
NOTE: For public companies, the period to submit
proxy solicitation should not be later than five (5) End of disclosure requirement
days before the meeting unless the by-laws
provides for a longer period. GR: Disclosure does not end because once an issuer
Unless otherwise provided in the proxy, the proxy becomes a reporting company, it remains as such
shall be valid only for the meeting for which it is even when the registration of securities has been
intended. No proxy shall be valid and effective for a revoked (SRC IRR, Rule 13).
period longer than five (5) years at one time.
XPN: If the primary license is revoked.
Rules on proxy solicitation with regard to
broker or dealer XPN to the XPN: In the case of hospitals and
educational institutions if the primary license is
1. No broker or dealer shall give any proxy, revoked, the disclosure requirement still continues
consent or authorization, in respect of any because of public interest.
security carried for the account of a customer,
to a person other than the customer, without Reportorial requirements
the express written authorization of such
customer. 1. Issuers:
2. A broker or dealer who holds or acquires the a. Shall file with the Commission within 135
proxy for at least 10% or such percentage as the days, after the end of the issuer’s fiscal year,
Commission may prescribe of the outstanding or such other time as the Commission may
share of the issuer, shall submit a report prescribe, an annual report which shall
identifying the beneficial owner within 10 days include among others, a balance sheet,
after such acquisition, for its own account or profit and loss statement and statement of
customer, to the issuer of the security, to the cash flows, for such last fiscal year, certified
Exchange where the security is traded and to by an independent certified public
the Commission (SRC, Sec. 20.4, 20.5). accountant, and a management discussion
and analysis of results of operations;
Jurisdiction over violations of the SEC rules on and
proxy solicitation b. Such other periodical reports for interim
fiscal periods and current reports on
The power of the SEC to investigate violations of its significant developments of the issuer as
rules on proxy solicitation is unquestioned when the Commission may prescribe as
proxies are obtained to vote on matters unrelated to necessary to keep current information on
the cases enumerated under Section 5 of PD 902-A. the operation of the business and financial
However, when proxies are solicited in relation to condition of the issuer (SRC, Sec. 17).
the election of corporate directors, the resulting 2. Types of issuers required to file reports:
controversy, even if it ostensibly raised the violation
of the SEC rules on proxy solicitation, should be

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a. An issuer which has sold a class of its
securities pursuant to a registration
statement under Section 12 of the SRC;
b. An issuer with a class of securities listed for
trading in an Exchange;
c. An issuer with assets of at least PHP 50M
and having 200 or more holders each
holding at least 100 shares
3. Persons acquiring securities - If the issuer is one
that has to make a report, any person who
acquires directly or indirectly the beneficial
ownership of more than 5% of such class, or in
excess of such lesser per centum as the
Commission by rule may prescribe, shall, within
10 days after such acquisition or such
reasonable time as fixed by the Commission,
submit to the issuer of the security, to the
Exchange where the security is traded, and to
the Commission a sworn statement containing:
a. His personal circumstances
b. The nature of such beneficial ownership
c. If the purpose was to acquire control of the
business, any plans the recipient may have
affecting a major change in the
business
d. The number of shares beneficially owned,
and the number of shares for which there is
a right to acquire
e. granted to such person or his associates
f. Information as to any agreement with a
third person regarding the securities (SRC,
Sec. 18).
4. Persons that has beneficial ownership of 10% or
more - Every person who is directly or
indirectly the beneficial owner of more than
10% of any class of any equity security, or who
is director or an officer of the issuer of such
security, shall file:
a. Statement with the SEC and, if such security
is listed for trading on an Exchange, also
with the Exchange, of the amount of all
equity securities of such issuer of which he
is the beneficial owner;
b. Within 10 days after the close of each
calendar month, if there is a change in
ownership during such month, a statement
indicating his ownership at the close of the
calendar month and such changes in his
ownership as have occurred during such
calendar month (SRC, Sec. 23).
Q: Union Bank, through its General Counsel and
Corporate Secretary, sought the opinion of the
SEC as to the applicability and coverage of the
Full Material Disclosure Rule on banks,
contending that said rules, in effect, amend
Section 5 (a) (3) of the Revised Securities Act
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which exempts securities issued or guaranteed
by banking institutions from the registration
requirement. The SEC, informed Union Bank
that while the requirements of registration do
not apply to securities of banks which are
exempt under Section 5(a) (3) of the Revised
Securities Act, however, banks with a class of
securities listed for trading on the Philippine
Stock Exchange, Inc. are covered by certain
Revised Securities Act Rules governing the filing
of various reports with SEC. The Is Union Bank
required tocomply with SEC’s full disclosure
rules?
A: YES. Union Bank is required to comply with SEC’s
full disclosure rule. The exemption from the
registration requirement enjoyed by Union Bank
does not necessarily connote that it is exempted
from the other reportorial requirements. Having
confined the exemption enjoyed by Union Bank
merely to the initial requirement of registration of
securities for public offering, and not to the
subsequent filing of various periodic reports, the
SEC, as the regulatory agency, is able to exercise its
power of supervision and control over corporations
and over the securities market as a whole.
Otherwise, the objectives of the “Full Material
Disclosure” policy would be defeated since Union
Bank and its dealings would be totally beyond the
reach of respondent Commission and the investing
public (Union Bank of the Philippines v. SEC, G.R. No.
138949, June 6, 2001).
CIVIL LIABILITY
Grounds for civil liability to arise
1. False Registration Statement (SRC, Sec. 56)
2. Fraud in connection with prospectus,
communications and reports (SRC, Sec. 57)
3. Fraud in connection with security transactions
(SRC, Sec. 58)
4. Manipulation of security prices (SRC , Sec. 60)
5. Insider trading (SRC, Sec. 61)
Persons that may be liable in case of false
registration statement
1. The issuer and every person who signed the
registration statement.
2. Every person who was a director of, or any
other person performing similar functions, or a
partner in, the issuer at the time of the filing of
the registration statement or any part,
supplement or amendment thereof with
respect to which his liability is asserted.
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3. Every person who is named in the registration
statement as being or about to become a
director of, or a person performing similar
functions, or a partner in, the issuer and whose
written consent thereto is filed with the
registration statement.
4. Every auditor or auditing firm named as having
certified any financial statements used in
connection with the registration statement or
prospectus.
5. Every person who, with his written consent,
which shall be filed with the registration
statement, has been named as having prepared
or certified any part of the registration
statement, or as having prepared or certified
any report or valuation which is used in
connection with the registration statement,
with respect to the statement, report, or
valuation, which purports to have been
prepared or certified by him.
6. Every selling shareholder who contributed to
and certified as to the accuracy of a portion of
the registration statement, with respect to that
portion of the registration statement which
purports to have been contributed by him.
7. Every underwriter with respect to such security
(SRC, Sec. 56).
Persons liable for fraud in connection with
prospectus, communications and reports
Any person who offers to sells or sells:
1. In violation any provisions on registration
of securities; or
2. By the use of any means or instruments of
transportation or communication, by
means of a prospectus or other written or
oral communication (SRC, Sec. 57.1).
Persons liable for fraud in connection with
security transactions
Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26 of SRC.
Persons liable for the manipulation of security
prices
Any person who willfully participates in any act or
transaction in violation of Section 24 of SRC shall be
liable to any person who shall purchase or sell any
security at a price which was affected by such act or
transaction.
Persons liable with regard to insider trading
Any person in case of legal tender who:
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1. Purchases or sells a security while in
possession of material information not
generally available to the public;
2. Communicates material non-public
information.
NOTE: The liability of the persons enumerated shall
be jointly and severally.
Prescriptive period for filing of action
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.
Jurisdiction over civil liabilities
The court which has jurisdiction over cases
involving civil liabilities is the Regional Trial Court.
Q: In civil liabilities, is it required that the action
be filed first with the SEC before filing the same
with the RTC?
A: NO. As ruled by the Court that “all complaints for
any violation of the [SRC] x x x should be filed with
the SEC,” it should be construed as to apply only to
criminal and not to civil suits such as petitioners’
complaint. It is apparent that the SRC provisions
governing criminal suits are separate and distinct
from those which pertain to civil suits (Pua v.
Citibank, N. A., G.R. No. 180064, September 16, 2013).
Limitation for awarding damages
1. The court can award not exceeding triple
the amount of the transaction plus actual
damage.
2. The court is also authorized to award attorney’s
fees not exceeding 30% of the award.
Award of exemplary damages
The court may award exemplary damages in cases
of:
1. Bad Faith;
2. Fraud;
3. Malevolence; or
4. Wantonness in the violation of SRC or the Rules
and Regulations promulgated by the
Commission.
Q: Mr. and Mrs. Reyes invested their hard-
earned savings in securities issued by LEAD
Bank. After discovering that the securities sold
to them were not registered with the SEC in
violation of the Securities Regulation Code, the
spouses Reyes filed a complaint for nullity of
contract and for recovery of a sum of money
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with the RTC. LEAD Bank moved to dismiss the
case on the ground that it is the SEC that has
primary jurisdiction over actions involving
violations of the Securities Regulation Code. If
you were the judge, how would you rule on the
motion to dismiss? (2015)
A: The motion should be denied. Civil suits falling
under the SRC (like liability for selling unregistered
securities) are under the exclusive original
jurisdiction of the RTC and hence, need not be first
filed before the SEC unlike criminal cases, wherein
the latter body exercises primary jurisdiction (Pua
vs Citibank, GR no. 180064, September 16,
2013).
BANKING LAWS
THE NEW CENTRAL BANK ACT
(NCBA, R.A. 7653) as amended by R.A. 11211
Bangko Sentral ng Pilipinas (BSP)
It is the State’s central monetary authority. It is the
government agency charged with the responsibility
of administering the monetary, banking and credit
system of the country and is granted the power of
supervision and examination over bank and non-
bank financial institutions performing quasi-
banking functions, including savings and loan
associations (Busuego v. CA, G.R. No. L-48955, June
30, 1987).
Bangko Sentral ng Pilipinas as an institution
The BSP is a government-owned corporation which
enjoys fiscal and administrative autonomy.
STATE POLICIES
Policy of the state with respect to the creation of
the Bangko Sentral ng Pilipinas
The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in the
discharge of its mandated responsibilities
concerning money, banking and credit (NCBA, Sec 2).
While it is a government owned corporation it
enjoys fiscal and administrative autonomy.
Fiscal – relating to treasury as in the monetary
board.
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Administrative – being the regulatory agency in
accordance with its policy directions.
Salient considerations on the creation of Bangko
Sentral ng Pilipinas
1. It is established as an independent central
monetary authority.
2. Its capital shall be P50,000,000,000,
P200,000,000,000 to be fully subscribed by the
Philippine Government.
3. The increase in capitalization shall be funded
solely from the declared dividends of the
Bangko Sentral in favor of the National
Government.
4. Any declared dividends of the Bangko Sentral in
favor of the National Government shall be
deposited in a special account in the General
Fund, and earmarked for the payment of
Bangko Sentral’s increase in capitalization.
Such payment shall be released and disbursed
immediately and shall continue until the
increase in capitalization is fully paid.
RESPONSIBILITY AND
PRIMARY OBJECTIVE OF THE BSP
Responsibilities of BSP (P-S-R) (1992, 1998 Bar)
1. To provide policy directions in the areas of
money, banking, and credit.
2. To supervise bank operations.
3. To exercise regulatory and examination powers
over quasi-banking operations of non-bank
financial institutions, money service
businesses, credit granting businesses and
payment system operators.
Primary objectives of BSP
1. To maintain price stability conducive to a
balanced and sustainable growth of the
economy; and
2. To promote and maintain monetary stability
and the convertibility of the peso (NCBA, Sec. 3).
Functions of BSP(BRAGS-CHoBE)
1. Banker of the government – the BSP shall be the
official depository of the Government and shall
represent it in all monetary fund dealings
(NCBA, Secs. 110- 116).
2. Custodian of Reserves (NCBA, Secs. 64-66, 94,
103)
3. Financial Advisor of the government (NCBA,
Secs. 123-124) – Under Article VII, Sec. 20 of the
1987 Constitution, the President may contract
or guarantee foreign loans but with the prior
concurrence of the Monetary Board.
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4. Government agent (NCBA, Secs. 117-122) connection with any civil or criminal action
5. Source of credit (NCBA, Secs. 61-63, 81-89, 109) (NCBA, Sec 15).
6. Issuer of Currency (NCBA, Sec. 49-60)
7. Clearing channel or House; especially where NOTE: In the event of a settlement or compromise,
the PCHC does not operate (NCBA, Sec. 102) indemnification shall be provided only in
8. Supervisor of the Banking system (NCBA, Sec. connection with such matters covered by the
25) – shall include the power to: settlement as to which the BSP is advised by
external counsel that the person to be indemnified
a. Examine, which power extends to did not commit any negligence or misconduct. The
enterprises wholly or majority-owned or costs and expenses incurred in defending the
controlled by the bank (GBL, Sec. 7); this aforementioned action, suit or proceeding may be
power may not be restrained by a writ of paid by the BSP in advance of the final disposition of
injunction unless there is convincing proof such action, suit or proceeding upon receipt of an
that the action of the BSP is plainly undertaking by or on behalf of the member, officer,
arbitrary (NCBA, Sec. 25) or employee to repay the amount advanced should
b. Place a bank under receivership or it ultimately be determined by the Monetary Board
liquidation (NCBA, Sec. 30) that he is not entitled to be indemnified as provided
c. Initiate criminal prosecution of erring in this subsection (Ibid.).
officers of banks.
Composition of the Monetary Board
9. Extends discounts, loans and advances to
banking institutions in order to influence The MB shall be composed of 7 members appointed
the volume of credit consistent with by the President with a 6-year term.No member of
objective of price stability. the MB may be reappointed more than once(NCBA,
Note: When availing of the loan facilities of Sec. 6).
the BSP, private banks assign to BSP their
receivables including the collaterals Members
1. The BSP Governor or his designated alternate (a
MONETARY BOARD; deputy governor);
POWERS AND FUNCTIONS OF THE 2. A Cabinet member to be designated by the
President or his designated alternate (an
Monetary Board undersecretary in his department);
3. 5 members from the private sector
It is the body through which the powers and
functions of the BSP are exercised (NCBA, Sec 6). Qualifications

Powers and functions of the Monetary Board 1. Citizenship- natural-born citizens of the
(RASBI) Philippines
2. Age GR: at least 35 years old
1. Issue Rules and regulations it considers XPN: Governor must be at least 40
necessary for the effective discharge of the years old;
responsibilities and exercise of its powers.
2. Direct the management, operations, and 3. Of good moral character
Administration of the BSP, reorganize its 4. Of unquestionable integrity
personnel, and issue such rules and regulations 5. Of known probity and patriotism;
as it may deem necessary or convenient for this 6. With recognized competence in social and
purpose. economic disciplines (NCBA, Sec. 8).
3. Establish a human resource management
System. Powers of the Governor
4. Adopt an annual Budget for and authorize such
expenditures by the BSP as are in the interest of The Governor shall be the chief executive officer of
the effective administration and operations of the Bangko Sentral. His powers and duties shall be
the BSP in accordance with applicable laws and to: (PEDARE)
regulations.
5. Indemnify its members and other officials of the a. prepare the agenda for the meetings of the
BSP, including personnel of the departments Monetary Board and to submit for the
performing supervision and examination consideration of the Board the policies and
functions against all costs and expenses measures which he believes to be
reasonably incurred by such persons in

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necessary to carry out the purposes and
provisions of this Act;
b. execute and administer the policies and
measures approved by the Monetary
Board;
c. direct and supervise the operations and
internal administration of the Bangko
Sentral. The Governor may delegate certain
of his administrative responsibilities to
other officers subject to such rules and
regulations as the Monetary Board may
prescribe;
d. appoint and fix the remunerations and
other emoluments of personnel below the
rank of a department head, as well as to
impose disciplinary measures upon
personnel of the Bangko Sentral.
e. render opinions, decisions, or rulings,
which shall be final and executory until
reversed or modified by the Monetary
Board, on matters regarding application or
enforcement of pertinent banking laws.
f. exercise such other powers as may be
vested in him by the Monetary Board.
Liabilities of the members of the Monetary
Board
Members of the Monetary Board, officials,
examiners, and employees of the BSP who:
1. Willfully violate RA 7653;
2. Are guilty of negligence, abuses or acts of
malfeasance or misfeasance; or
3. Fail to exercise extraordinary diligence in the
performance of his duties
Shall be held liable for any loss or injury suffered by
the BSP or other banking institutions as a result of
such violation, negligence, abuse, malfeasance,
misfeasance or failure to exercise extraordinary
diligence (NCBA, Sec 16).
THE BSP AND BANKS IN DISTRESS
In case of a distressed bank, the BSP appoints a
conservator or receiver for closure of the bank.
Illiquidity
This occurs when the bank is not liquid. It means
that the bank cannot meet its current liabilities. It is
handled by conservatorship.
Liquidity
It is the ability of an asset to be converted into cash.
An entity is liquid when it is able to pay its liabilities
when they fall due.
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Insolvency
This occurs when the actual market value of assets
is insufficient to pay its liabilities, not considering
capital stock and surplus which are not liabilities for
such purpose. An entity is insolvent when it is
unable to meet current and long-term obligations. It
is handled by receivership or closure.
The duration of conservatorship shall not exceed 1
year (NCBA, Sec. 29)
CONSERVATORSHIP
Conservator (2006 Bar)
One appointed if the bank is in the state of illiquidity
or the bank fails or refuses to maintain a state of
liquidity adequate to protect its depositors and
creditors. The bank still has more assets than its
liabilities but its assets are not liquid or not in cash
thus it cannot pay its obligation when it falls due.
The bank, not the BSP, pays for fees.
Powers of a conservator (CARe BEAr)
1. Collect all monies and debts due to the said
bank
2. To take charge of the Assets, liabilities, and
the management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary
Board deems necessary
5. Exercise all powers necessary to restore its
viability, with the power to overrule or
revoke the actions of the previous
management and board of directors of the
bank or quasi-bank
6. To bring court actions to Assail or
Repudiate contracts entered into by the
bank (First Philippine International Bank v.
CA, G.R. No. 115849, Jan. 24, 1996).
Powers of a conservator do not extend to the
revocation of valid and perfected contracts
The powers of a conservator cannot extend to post
facto repudiation of valid and perfected
transactions. Thus, the law merely gives the
conservator power to revoke contracts that are
deemed to be defective- void, voidable,
unenforceable or rescissible. Hence, the
conservator merely takes the place of the bank’s
board (First Philippine International Bank v. CA,
supra.).
Termination of conservatorship
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1. Conservatorship is terminated when the
Monetary Board is satisfied that the bank can
operate on its own and the conservatorship is no
longer necessary; or
2. When the Monetary Board, on the basis of the
report of the conservator or of its own findings,
determine that the continuance in business of the
institution would involve probable losses to its
depositors or creditors (effect: the bank or quasi-
bank would then be place under receivership)
CLOSURE
Grounds for closure of a bank or a quasi-bank
(1997 Bar)
1. Cash Flow test - Inability to pay liabilities
as they become due in the ordinary course
of business (NCBA, Sec. 30 [a]).
2. Balance sheet test – Insufficiency of
realizable assets to meet its liabilities
(NCBA, Sec 30 [b]).
3. Inability to continue business without
involving probable losses to its depositors
and creditors (NCBA, Sec 30 [c]).
4. Willful violation of a cease and desist order
under Section 37 that has become final,
involving acts or transactions which
amount to fraud or a dissipation of the
assets (NCBA, Sec 30 [d]).
5. Notification to the BSP or public
announcement of a bank holiday (GBL, Sec
53).
6. Suspension of payment of its deposit
liabilities continuously for more than 30
days (GBL, Sec 53).
7. Persisting in conducting its business in an
unsafe or unsound manner (GBL, Sec 56).
Close now-hear later doctrine
The doctrine is founded on practical and legal
considerations to obviate unwarranted dissipation
of the bank’s assets and as a valid exercise of police
power to protect the depositors, creditors,
stockholders, and the general public. The law does
not contemplate prior notice and hearing before the
bank may be directed to stop operations and placed
under receivership (Central Bank of the Philippines
v. CA, G.R. No. 76118 Mar. 30, 1993).
Swift, adequate and determined actions must be
taken against financially distressed and
mismanaged banks by government agencies lest the
public faith in the banking system deteriorate to the
prejudice of the national economy (Vivas v. The
Monetary Board of the Bangko Sentral ng Pilipinas,
G.R. No. 191424, August 07, 2013).
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Under R.A. No. 7653, the power of the Monetary
Board (MB) over banks, including rural banks, was
increased and expanded. The Court, in several cases,
upheld the power of the MB to take over banks
without need for prior hearing. It is not necessary
inasmuch as the law entrusts to the MB the
appreciation and determination of whether any or
all of the statutory grounds for the closure and
receiver-ship of the erring bank are present. The
MB, under R.A. No. 7653, has been invested with
more power of closure and placement of a bank
under receivership for insolvency or illiquidity, or
because the bank’s continuance in business would
probably result in the loss to depositors or
creditors.
BSP may order the closure of the bank even without
prior hearing. BSP may rely on the report of either
the conservator, receiver or the head of the
supervising and examining department. It is not
required to conduct a thorough audit of the bank
before ordering its closure. The "close now, hear
later’’ doctrine justifies BSP in ordering bank
closures even without prior hearing. Thus,
injunction does not lie against BSP in the exercise of
the power and function. A contrary rule may lead to
dissipation of assets and trigger bank run. Judicial
review comes only after action of the Monetary
Board if the same was attended with bad faith and
grave abuse of discretion (BSP v. Valenzuela, G.R. No.
184778, October 2, 2009).
Note: The probability of bank runs may give rise to
the right to invoke borrowing of emergency loans
and advancements under Sec. 84 of NCBA
The closure and liquidation of a bank, which is
considered an exercise of police power may be
the subject of judicial inquiry
The validity of such exercise of police power is
subject to judicial inquiry and could be set aside if it
is either capricious, discriminatory, whimsical,
arbitrary, unjust or a denial or due process and
equal protection clauses of the Constitution (Central
Bank v. CA, G.R. No. L-50031-32, July 27, 1981).
Assailing the order of closure (receivership or
conservatorship)
a) The order may be assailed by the stockholders
representing at least majority of the
outstanding capital stock;
d) within ten days from receipt by the board of
directors of the order; and
e) thru a petition for certiorari on the ground that
the action taken by the BSP was in excess of
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jurisdiction or with grave abuse of discretion
as to amount to lack of jurisdiction.
No prior hearing is necessary in appointing a
receiver and in closing the bank. It is enough that
subsequent judicial review is provided for. Indeed,
to require such previous hearings would not only be
impractical but would tend to defeat the very
purpose of the law (Rural Bank of Lucena v. Arca,
G.R. No. L-21146, September 20, 1965).
Q: Upon maturity of the time deposit, the bank
failed to remit. By reason of punitive action
taken by Central Bank, the bank has been
prevented from performing banking operations.
Is the bank still obligated to pay the time
deposits despite the fact that its operations were
suspended by the Central Bank?
A: YES, the suspension of operations of a bank
cannot excuse non-compliance with the obligation
to remit the time deposits of depositors which
matured before the bank’s closure (Overseas Bank
of Manila v. CA, G.R. No. 45886, April 19, 1989).
Bank not liable to pay interest when closed
As a general rule, the bank is not liable to pay
interest on DEPOSIT once it is closed and ceased
operations.
RECEIVERSHIP
Receiver (2006 Bar)
One appointed if the bank is already insolvent which
means that its liabilities are greater than its assets.
The Court has no authority to appoint a receiver for
a bank if the latter will function as such under BSP
law. The power to appoint belongs to BSP.
NOTE: For banks, the receiver would be the
Philippine Deposit Insurance Corporation; for
quasi-banks, it could be any person of recognized
competence in banking or finance (NCBA, Sec. 30).
Duties of a receiver
The receiver shall: (IAN-WiDE)
1. Immediately gather and take charge of all
the assets and liabilities of the institution;
2. Administer the same for the benefit of the
creditors, and exercise the general powers
of a receiver under the Revised Rules of
Court;
3. Not, with the exception of administrative
expenditures, pay or commit any act that
will involve the transfer or disposition of
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any asset of the institution: Provided that
the receiver may deposit or place the funds
of the institution in non-speculative
investments;
4. Within 90 days from the take-over, the
receiver shall determine whether the
institution may be rehabilitated or
otherwise placed in such a condition that it
may be permitted to resume business with
safety to its depositors and creditors and
the general public; and
5. If the receiver determines that the
institution cannot be rehabilitated or
permitted to resume business, then the
Monetary Board shall notify in writing the
board of directors of the institution of its
findings and direct the receiver to proceed
with liquidation of the institution (NCBA,
Sec 30).
The insolvency of a bank and the consequent
appointment of a receiver restrict the bank's
capacity to act, especially in relation to its
property.
Where upon the insolvency of a bank, a receiver
therefor is appointed, the assets of the bank pass
beyond its control into the possession and control of
the receiver whose duty it is to administer the assets
for the benefit of the creditors of the bank. Thus, the
appointment of a receiver operates to suspend the
authority of the bank and of its directors and
officers over its property and effects, such authority
being reposed in the receiver (Villanueva v. CA, G.R.
No. 114870, May 26, 1995).
The receiver is not authorized to transact
business in connection with the bank’s assets
and property
A receiver can only perform acts of administration
and not acts of dominion. The receiver cannot
approve an option to purchase real property. He has
only the authority to administer the same for the
benefit of its creditors (Abacus Real Estate
Development Center, Inc. v. Manila Banking Corp, G.R.
No. 162270, Apr. 6, 2005).
Nature of order of receivership
While resolutions of the Monetary Board
forbidding a bank to do business on account of a
condition of insolvency and appointing a receiver to
take charge of the bank’s assets or determining
whether the bank may be rehabilitated or should be
liquidated are by law “final and executory.”
However, they can be set aside by the court on one
specific ground - if the action is plainly arbitrary and
made in bad faith. Such contention can be asserted
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MERCANTILE LAW
as an affirmative defense or a counterclaim in the
proceeding for assistance in liquidation (Salud v.
Central Bank, G.R. No. L-17630, August 19, 1986).
LIQUIDATION
Liquidation of a bank
Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the
same to creditors and other parties for the purpose
of paying debts of such institution (Banco Filipino v.
Central Bank, G.R. No. 70054, December 11, 1991).
Liquidator of a distressed bank can prosecute
and defend suits against the bank
Prosecution of suits, collection and the foreclosure
of mortgages against debtors of the bank by the
liquidator are among the usual and ordinary
transactions pertaining to the administration of a
bank (Banco Filipino v. Central Bank, ibid).
A liquidator may foreclose mortgages due to a
bank while the issue of receivership is pending
A liquidator can foreclose mortgages for and in
behalf of the bank even if the issue on receivership
and liquidation is still pending (Supra).
Q: An intra-corporate case was filed before RTC.
On the other hand, another complaint was filed
before BSP to compel a bank to disclose its
stockholdings invoking the supervisory power
of the latter. Is there a forum shopping?
A: NONE. The two proceedings are of different
nature praying for different relief. The complaint
filed with the BSP was an invocation of its
supervisory powers over banking operations which
does not amount to a judicial proceeding (Suan v.
Monetary Board, A.C. No. 6377, March 12, 2007).
Commencement of liquidation proceedings bar
the filing of a separate action or petition to assail
the order of closure
Once liquidation proceedings have been initiated,
the majority stockholders of the bank can no longer
file a separate action or petition to assail the order
of closure. Instead, issues on validity of closure
should be raised as affirmative defenses in the
liquidation proceeding. This is necessary to prevent
multiplicity of suits or conflicting resolutions (Salud
v. Central Bank of the Philippines, G.R. No. L-17620,
August 19, 1986).
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Liquidation proceedings may be carried out
with or without tax clearance
Unlike in a voluntary dissolution of a corporation
under the Corporation Code, BSP can liquidate the
bank with or without tax clearance (GBL).
Banks under liquidation by the PDIC as ordered by
the Monetary Board constitute a special case
governed by the special rules and procedures
provided under Section 30 of the New Central Bank
Act, which does not require that a tax clearance be
secured from the BIR. Only a final tax return is
required to satisfy the interest of the BIR in the
liquidation of a closed bank. It is unreasonable for
the liquidation court to require that a tax clearance
be first secured as a condition for the approval of
project of distribution of a bank under liquidation
(PDIC v. BIR, G.R. No. 172892, June 13, 2013).
Filing of the claims against the insolvent bank
GR: All claims against the insolvent bank should be
filed in the liquidation proceeding. It is not
necessary that a claim be initially disputed in a court
or agency before it is filed with the liquidation court
(Ong v. CA, G.R. No. 112830, Feb. 1, 1996).
XPN: Where it is the bank that files a claim against
another person or legal entity, the claim should be
filed in the regular courts.
Reason: The judicial liquidation is intended to
provide an orderly mode for payment of all claims.
In addition, such petition is not in the nature of a
disputed claim against the bank.
Q: Aaron, a well-known architect, is suffering
from financial reverses. He has four creditors
with a total claim of P 26 million. Despite his
intention to pay these obligations, his current
assets are insufficient to cover all of them. His
creditors are about to sue him. Consequently, he
was constrained to file a Petition for Insolvency
(Act 1956).
a. Since Aaron was merely forced by
circumstances to petition the court to
declare him insolvent, can the judge
properly treat the petition as one for
involuntary insolvency. Explain.
b. If Aaron is declared an insolvent by the
court, what would be the effect, if any, of
such declaration on his creditors?
Explain.
c. Assuming that Aaron has guarantors for
his debts, are the guarantors released
from their obligations once Aaron is
discharged from his debts? Explain.
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Intellectual Property Code
d. What remedies are available to the
guarantors in case they are made to pay
the creditors? Explain. (2005 Bar)
A:
a. NO. In involuntary insolvency, it is the creditors
who ask for the declaration of the debtor’s
insolvency. In this case, it is the debtor who filed
a petition for insolvency. The fact that Aaron
has the intention to pay his obligations and was
just constrained to file a petition as one for
involuntary insolvency.
b. A declaration of the court that the debtor is
insolvent shall have the following effects: (Sec.
59 of Insolvency Law):
i. All debtor’s assets placed in sheriff
custody until a receiver or assignee has
been appointed;
ii. Payment to debtor of any debt due to
him, or delivery of any property due to
him, and transfer or conveyance of any
property by him, are forbidden;
iii. Time and place is fixed for a meeting of
creditors to select the assignee in
insolvency; and
iv. And all civil proceedings against
insolvent are stayed
c. NO. By virtue of the doctrine of excussion
provided under Art. 2058, the creditor can go
against the guarantor after the former has
exhausted all the properties of the principal
debtor and has resorted to all legal remedies
against such debtor. In this case, Aaron has
insufficient property to discharge his
obligations prompting him to file a petition for
insolvency which stays claims against him. The
fact that Aaron was declared insolvent permits
the creditor to enforce his claim against the
guarantor.
d. The guarantor is entitled to be reimbursed by
the debtor for the following:
i. Total amount of the debt paid;
ii. Legal interest from the time payment was
made known to the debtor;
iii. Expenses incurred after notifying debtor
that demand to pay was made upon him;
and
iv. Damages in accordance with law.
Bank deposits as a rule not preferred credits
The exception is when the deposits are covered by a
cashier's check purchased from the bank when the
bank officers knew or ought to have known that the
bank is insolvent (Miranda v. PDIC, G.R. No. 169334,
September 8, 2006).
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Rule of promissory estoppel
The BSP may not thereafter renege on its
representation and liquidate the bank after majority
stockholders of the bank complied with the
conditions and parted with value to the profit of CB,
which thus acquired additional security for its own
advances, to the detriment of the bank’s
stockholders, depositors and other creditors
(Ramos v. Central Bank of the Philippines, G.R. No. L-
29352, Oct. 4, 1971).
A final and executory judgment against an
insolvent bank may be stayed
After the Monetary Board has declared that a bank
is insolvent and has ordered it to cease operations,
the assets of the insolvent bank are held in trust for
the equal benefit of all creditors. One cannot obtain
an advantage or preference over another by
attachment, execution or otherwise. The final
judgment against the bank should be stayed as to
execute the judgment would unduly deplete the
assets of the banks to the obvious prejudice of other
depositors and creditors (Lipana v. Development
Bank of Rizal, G.R. No. L-73884, Sept. 24, 1987).
Q: The Blue Star Corporation filed with the RTC
a petition for rehabilitation on the ground that it
foresaw impossibility of paying its obligations
as they fall due. Finding the petition sufficient in
form and substance, the court issued an Order
appointing a rehabilitation receiver and staying
the enforcement of all claims against the
corporation. What is the rationale for the Stay
Order? (2006 Bar)
A: The reason behind the indiscriminate suspension
or stay order in relation to the creditors’ claim is to
expedite the rehabilitation of the distressed
corporation by enabling the management
committee or the rehabilitation receiver to
effectively exercise its/his powers free from any
judicial or extrajudicial interference that might
unduly hinder or prevent the rescue of the debtor
company. It also recognizes the assets of a
corporation under rehabilitation held under trust
for the equal benefit of all creditors under the
doctrine equality is equity, whereby all the creditors
ought to stand on equal footing, and not one of them
should be paid ahead of others.
Q: MATAH Bank suffered extreme financial losses
for five years since 2009. The BSP, through the
Monetary Board, placed MATAH Bank under the
receivership of PDIC. After two (2) public sale
attempts, PDIC informed BSP that MATAH Bank
can hardly be rehabilitated. BSP ordered the
PDIC to commence the liquidation of the bank.
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MERCANTILE LAW
However, the stockholders representing the
majority stock of MATAH Bank filed a petition for
certiorari before the CA challenging the order of
the Monetary Board to commence the liquidation
proceedings. It alleged that the Monetary Board
must first conduct its own independent factual
determination on the bank's viability before
ordering its liquidation. Is their contention
correct?
A: No. Nothing in Section 30 of RA 7653 requires the
BSP, through the Monetary Board, to make an
independent determination of whether a bank may
still be rehabilitated or not. Once the receiver
determines that rehabilitation is no longer feasible,
the Monetary Board is simply obligated to notify in
writing the bank's board of directors of the same and
direct the PDIC to proceed with liquidation. (APEX
BANCRIGHTS HOLDINGSv. BSP 214866, October 02,
2017)

Conservatorship vs. Receivership vs. Liquidation

CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

1. Inability to pay liabilities as they
fall due e.g: bank run, rumors, etc. 1. Insolvency
2. Assets are less than its liabilities 2. Continuance
1. Continuing inability
3. Cannot continue business would involve
2. Unwillingness to
Grounds 4. without causing damage; probable loss to its
maintain condition of
5. Violation of a cease and desist creditors
liquidity
order 3. Bank cannot be
6. “Bank holiday” for more than 30 rehabilitated
days (NCBA, Sec. 30).
1. Juridical personality is retained
1. Juridical personality is 2. Suspension of operation
retained. /stoppage of business Same with
Effects
2. Perfected transactions 3. Assets deemed in custodia conservatorship
cannot be repudiated legis(Domingo v. NLRC, G.R.
156761, October 17, 2006)
Within 90 days if liquidation is When debts have been
When decided upon; paid in accordance
After 1 year
terminated Until the bank is viable again, if with the liquidation
rehabilitation is decided upon plan

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