Commercial Law Review I Tanglaw Notes | 1

have a perpetual existence, it can

exist in perpetuity.
ADVANCED BAR REVIEW
– COMMERCIAL LAW Powers, attributes and properties
expressly authorized by law or
REVIEW I incident to its existence.
• No corporation shall exercise
Lecture by: corporate powers other than those
which are conferred in the
Atty. Mary Ann Reyes
Corporation Code or its Articles of
CORPORATION LAW Incorporation or those which are
either necessary or incidental to
A corporation is an artificial being its existence. (Section 44, Revised
created by operation of law, having the Corporation Code)
right of succession and the powers, • Ideally, a corporation should
attributes and properties expressly operate within the limits of its
authorized by law or incident to its corporate purpose.
existence. (Sec. 2, Revised • Ultra Vires acts – voidable and are
Corporation Code) susceptible of ratification.

Operation of Law 1. Artificial Being Created by

• Private Corporations – cannot be Operation of Law
created by a Special Law under the
Constitution and can only be 2. Under the concession theory, a
created by a General Law corporation is an artificial creature
(Corporation Code). without any existence until it has
• GOCCs or Government Owned and received the imprimatur of the state
Controlled Corporations – can be acting according to law through the
created either by a General Law SEC.
(Corporation Code) or Special Law
which will become its charter. 3. Private corporations are generally
created under the provisions of the
Right of Succession
Corporation Code. This is done by filing
• It can exist even if some or all of
the articles of incorporation with the
its stockholders die or sell their
SEC; the life of the corporation starts
shares, not unlike in a case of a
from the issuance of the certificate of
partnership that a death of a
incorporation.
partner is a ground for dissolution
of the partnership.
Here, Noell claims it was entitled to
• Under the Revised Corporation
moral damages since Independent’s
Code, a corporation is allowed to

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Commercial Law Review I Tanglaw Notes | 2

collection suit tarnished its good • Religious Corporation

business name and standing. (Corporation sole, religious
societies)
There is no standing doctrine that • One person Corporation
corporations are, as a matter of right,
entitled to moral damages since there STOCK VS
are incapable of feelings or mental
NON-STOCK
anguish. Exceptions, if any, only apply
pro hac vice. (Noell Whessoe vs. CORPORATIONS
Independent Testing Corp, G.R. No.
199851, 2018, Leonen, J) Corporations formed or organized under
this Code may be stock or nonstock
corporations. Stock corporations are
DIFFERENT CLASSES OF
those which have capital stock divided
CORPORATION into shares and are authorized to
As to Organizers distribute to the holders of such shares,
• Public dividends, or allotments of the surplus
• Private profits on the basis of the shares held.
All other corporations are nonstock
As to Function corporations. (Sec. 3, Revised
• Public Corporation Code)
• Private
As to Governing Law • Non-stock Corporations – not
• Public authorized to distribute its
• Private profits to its members.
As toLegal Status
DE JURE VS
• de jure
• de facto DE FACTO CORPORATIONS
• Corporation by estoppel De Jure Corporation
(ostensible corporation) • Formed either in strict or
• Corporation by Prescription substantial compliance with the
As to Existence of Stocks requirements of a law
• Stock Corporation • Existence of a de jure corporation
• Non-Stock Corporation cannot be questioned even by the
state.
As to Laws of Incorporation
• Domestic De Facto Corporation
• Foreign • A Certificate of Incorporation is
issued, the same as a De Jure
Special Corporations
Corporation, by the SEC.
• Close Corporation
• Educational Corporation

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Commercial Law Review I
Requirements to be considered a De
Facto Corporation:
1. There is a valid statute in which
it was created;
2. There is colorable compliance
with the requirements of the law and an
attempt in good faith to form a
corporation;
3. It is a user of corporate powers
The filing of AOI and issuance of
incorporation are essential for the
existence of a de facto corporation.
The doctrine of incorporation by
estoppel is founded on the principles
of equity and designed to prevent the
injustice and unfairness. It applies
when a non-existent corporation
enters into contracts or dealings with
third persons.
A person who deals with such
corporation is estopped from denying
the latter’s legal existence in any
action leading out of or involving such
contract or dealing. (Missionary
Sisters of Our Lady of Fatima vs.
Algona, G.R. No. 224307, August
6, 2018, Reyes Jr., J)
NOTE:
A corporation by estoppel is
not a de jure or a de facto
corporation, but is considered a
corporation in relation only to those
who cannot deny its corporate
existence due to its agreement,
admission, or conduct.
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Tanglaw Notes | 3
TEST TO DETERMINE
NATIONALITY OF
CORPORATIONS
INCORPORATION TEST
Determined by the state of
incorporation, regardless of the
nationality of the stockholders, used
under the Corporation Code.
CONTROL TEST
• Determined by the nationality
of the controlling stockholder
or members; applied in times
of war and for purposes of
investments under the
Foreign Investments Act.
• Shares belonging to
corporations or partnerships
at least 60% of the capital of
which is owned by Filipino
citizens shall be considered of
Philippine nationality.
• In Heirs of Gamboa vs.
Teves, G.R. No. 176579,
2012, the SC said that in
interpreting the term
“capital” in Sec. 11, Art.
XII of the Constitution, mere
legal title is not sufficient to
meet the 60% Filipino-owned
capital required. The legal and
beneficial ownership of 60%
of the OCS must rest in the
hands of Filipino nationals. It
said that both the voting
control test and the
beneficial ownership test
Commercial Law Review I Tanglaw Notes | 4

must be applied to whether a various indicia that the

corporation is a Philippine beneficial ownership and
national. control of the corporation do
not in fact reside in Filipino
GRANDFATHER RULE shareholders but in foreign
stakeholders.
• Determines the actual Filipino • One indicator of dummy
ownership and control in a status is when the foreign
corporation by tracing both investors provide practically
the direct and indirect all the funds and technological
shareholdings of a corporation support for a joint venture
• In Narra Nickel Mining and undertaken with Filipino
Development Corporation vs. partners, and where such
Redmont Consolidated Mines, foreign investors get to
Corp., G. R. No. 195580, manage the company even
April 21, 2014, the SC said while being minority
”the grandfather test was stockholders.
originally intended to look into
• The control test is still the
the citizenship of the
prevailing mode of
individuals who ultimately own
determining whether or not a
and control the shares of
corporation is a Filipino
stock of a corporation for the
corporation. It is only in case
purposes of determining
of doubt, based on the
compliance with the
attendant facts and
constitutional requirement of
circumstances of the case,
Filipino ownership.”
that the Grandfather Rule is
• In the same case, the SC held applied.
that the grandfather rule
applies only when the 60-40 • Corollary test to the Control Test
Filipino-foreign ownership is in
doubt or where there is
DOCTRINE OF SEPARATE
reason to believe that there is
non-compliance with the JURIDICAL
provisions of the Constitution PERSONALITY/SEPARATE
on the nationality restriction. LEGAL ENTITY
• “Doubt” does not
• Under this doctrine, a
automatically mean the mere
corporation is considered to
failure of the Filipino
have legal personality distinct
ownership to meet the 60%
and separate from its
threshold of the corporation’s
equity. “Doubt” refers to

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Commercial Law Review I
directors, individual
stockholder or members.
• The assets and liabilities of
the corporation are not owned
by the stockholders even if
they own the entire or
majority of the capital stock,
and vice versa.
• Thus, in cases of satisfaction
of debt, a creditor of the
corporation cannot claim the
assets of the stockholders,
nor can a creditor of a
stockholder claim the assets
of the corporation, as a
general rule.
• But a corporation can be liable
for tort, as when the act was
committed by the officer or
agent under express direction
or authority from the
stockholders or members
acting as a body or generally
from the directors as the
governing body (PNB vs. CA,
1978). Here, PNB failed to
observe that degree of care,
precaution and vigilance which
the circumstances demanded
in approving or disapproving
the lease of said sugar export
quota. Thus, it is liable for
damages.
DOCTRINE OF PIERCING
THE VEIL OF CORPORATE
FICTION
• By way of exception, this
doctrine allows a
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Tanglaw Notes | 5
stockholder or member of a
corporation to be held
liable for the obligations of
the corporation (traditional
veil piercing)
• Under this doctrine, “a
corporation will be looked
upon as a legal entity as a
general rule, and until
sufficient reason to the
contrary appears; but when
the veil of legal entity is
used as a shield to
perpetuate fraud, to
defeat public convenience,
justify wrong, or defend a
crime, this fiction shall be
disregarded and the law will
regard the corporation as
an association of persons,
or in case of two
corporations, merge them
into one.”
• The traditional veil piercing
applies only to hold liable
the stockholder/member
for debts or obligations of
the corporation.
• But under the Doctrine of
Reverse Corporate
Piercing (IAME vs. Litton,
2017), a corporation can
be made liable for the
personal debts or
obligations of a
stockholder/member/offic
er/director.
Commercial Law Review I
GROUNDS FOR APPLYING
THE VEIL PIERCING
DOCTRINE
• When the veil of legal entity is
used as a shield to perpetuate
fraud, to defeat public
convenience, justify wrong, or
defend a crime.
• When corporate veil is
pierced, the corporation and
persons who are normally
treated as distinct from the
corporation are treated as one
person, such that when the
corporation is adjudged liable,
there persons too become
liable as if they were the
corporation. (Lanuza vs BF
Corp., 2014)
• The doctrine of piercing the
corporate veil applies only in
three basic areas:
o Defeat public
convenience as when
the corporate fiction is
used as a vehicle for
the evasion of an
existing obligation;
o Fraud cases or when
the corporate entity is
use to justify a wrong,
protect fraud, or
defend a crime; or
o Alter ego cases
• There must be proof and not
just mere allegations.
INSTRUMENTALITY RULE
OR ALTER EGO THEORY
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Tanglaw Notes | 6
• Where one corporation is so
organized and controlled and
its affairs are conducted so
that its is, in fact, a mere
instrumentality or adjunct of
the other, the fiction of the
corporate entity or the
”instrumentality” may be
disregarded.
What are the elements for piercing
the corporate veil based on the
alter ego theory?
1. Control, not mere stock
control but complete
domination, of finances, 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)
2. Such control must have been
used by the defendant to
commit a 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)
3. Such control and breach of
duty must have proximately
caused the injury or unjust
loss complained of (WPM
International Trading vs.
Labayen, 2014) – harm test
Commercial Law Review I
Note: These three elements must
be satisfied in order to justify
piercing the corporate veil based on
the Alter Ego Theory.
• It doesn’t mean that two
corporations are treated as one,
the legal personality of the other
corporation will be dissolved. It is
only to satisfy the debt of the
other.
As a general rule, a corporation will
be looked upon as a legal entity,
unless and until sufficient reason to
the contrary appears. But when the
notion of legal entity is used to
defeat public convenience, justify
wrong, protect fraud, or defend
crime, the law will regard the
corporation as an association of
persons.
Also, the legal entity may be
disregarded in the interest of justice
in such cases as fraud that may work
inequities among members of the
corporation internally, involving no
rights of the public or third persons.
In both instance, there must have
been fraud and proof of it. For the
separate juridical personality of a
corporation to be disregarded, the
wrongdoing must be clearly and
convincingly established. It cannot be
presumed. (Aboitiz Equity Ventures
vs. Chiongbian, 2014, Leonen, J)
Piercing the corporate veil in order to
hold corporate officers personally
liable for the corporation’s debts
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Tanglaw Notes | 7
requires that the bad faith or
wrongdoing of the director must be
established clearly and convincingly
as bad faith is never presumed.
(Pioneer Insurance Surety Corp. vs.
Morning Star Travel, 2015)
To be held criminally liable for the
acts of a corporation, there must be
a showing that its officers, directors
and shareholders actively
participated in or had the power to
prevent the wrongful act. (SEC vs.
Price Richardson Corp., 2017)
A holding company may be held liable
for the acts of its subsidiary only
when it is adequately proven that:
a. There was control over the
subsidiary
b. Such control was used to
protect fraud or gross
negligence amounting to bad
faith or evade an obligation.
c. Fraud was the proximate
cause of another’s existing
injury.
In this case, complainants failed to
prove that G Holdings fraudulently
exercised its control over Maricalum
Mining to fraudulently evade any
obligation. (Maricalum Mining vs.
Florentino, 2018)
To hold a director or officer
personally liable for corporate
obligations and pierce the veil of
Commercial Law Review I Tanglaw Notes | 8

corporate fiction, two requisites more than 15 except

must concur: educational non-stock
1. Complainant must allege in the corporation which must be 5,
complaint that said and religious societies (not
director/officer assented to less than 5, not more than 15)
patently unlawful acts of the
corporation, or officer was c. Incorporators who are natural
guilty of gross negligence or persons must be of legal age
bad faith; d. Each incorporator of stock
2. Complainant must clearly and corporation must own or be a
convincingly prove such subscriber of at least one
unlawful acts, negligence or share of the capital stock;
bad faith. must be members of a non-
stock corporation, except
Here, Lim’s misuse of Tyrehaus as a [the] independent director
corporation to perpetuate breach of
contractual obligation renders Lim Natural persons who are licensed to
personally liable. (Total Petroleum practice a profession and
vs. Lim, 2020) partnerships or associations
organized for the purpose of
practicing a profession, are not
INCORPORATORS allowed to organized a corporation
unless otherwise provided under
• Are those stockholders
special laws. (Section 10)
mentioned in the AOI as
originally forming and • Before the revision of the
composing the corporation and
Corporation Code, only natural
who are signatories thereof. persons can be incorporators.
(Section 4)
But under the Revised Corporation
The following can be incorporators: Code even corporations,
a. Any person, partnership,
partnerships and associations can
association, or corporation, now be incorporators.
whether singly or jointly with
others.
b. Between one (for OPCs and
SUBSCRIPTION
corporation sales) but not REQUIREMENTS
more than 15 (for regular
corporations). R.A. 11232 removed the
requirement that upon incorporation,
Exception: non-stock at least 25 percent of the authorized
corporations which may be capital stock of a stock corporation
must be subscribed, and at least 25

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Commercial Law Review I
percent of the subscribed capital
must be paid up, with the paid-up
capital not lower than P5, 000.
The Code also does not provide for a
minimum authorized capital but
special laws may require such.
But the law requires that in case of
an increase in the authorized capital
stock, 25 percent of the increase
must be subscribed, and 25 percent
of the subscribed must be paid up.
CORPORATE TERM
A corporation shall have a perpetual
existence unless its articles of
incorporation provide otherwise. But
an OPC must always have perpetual
existence.
Corporations with certificates of
Incorporation issued prior to the
effectivity of this Code, and which
continue to exist, shall have
perpetual existence, unless the
corporation, upon a vote of its
stockholders representing majority
of its outstanding capital stock,
notifies the SEC that it elects to
retain its specific corporate term
pursuant to its AOI. Any change in
the corporate term under this
section is without prejudice to the
appraisal right of dissenting
stockholders. (Section 11)
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Tanglaw Notes | 9
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 SEC, 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. (Section 11)
• In the case of a one-person
corporation, the law requires it to
have perpetual existence.
• One-person corporation formed by
trustees and estates, their
corporate existence should be co-
terminous with the trust or estate.
CLASSIFICATION OF
SHARES
COMMON SHARES
• Most common type of shares
which enjoy no preference; has
the right to vote unless there
are founder shares.
PREFERENCE SHARES
• Par value shares which enjoy
preference as to dividends and
assets upon dissolution as stated
in AOI and stock certificate.
• Preferred shares must always
have par value. (Section 6)
Commercial Law Review I T a n g l a w N o t e s | 10

DOCTRINE OF EQUALITY • Such exclusive right shall not be

allowed if its exercise will
OF SHARES
violate CA 108 or the Anti-
Where the AOI do not provide Dummy Law, R.A. 7042 or the
for any distinction of the shares of FIA, and other laws.
stock, all shares issued by the
corporation are presumed to be equal REDEEMABLE SHARES
and enjoy the same rights and (Section 8)
privileges and are also subject to the
• May be issued by the
same liabilities (Section 6) except
corporation when expressly
otherwise provided in the AOI and in
provided in the AOI. These are
the stock certificate.
shares which may be purchased
by the corporation from holders
QUESTION: of such shares upon the
expiration of a fixed period,
What shares could be deprived of regardless of the existence of
voting rights?
unrestricted retained earnings
in the books of the corporation
ANSWER: and upon such other terms and
conditions stated in the AOI and
No share may be deprived of voting the certificate of stock.
rights except those classified and
issued as preferred or redeemable • Corporations required to
shares, unless otherwise provided in maintain sinking fun to answer
this Code, and that “there shall for redemption price if
always be a class or series of shares corporation is required to
which have complete voting rights.” redeem.
(Section 6) • RS deemed retired upon
redemption unless otherwise
FOUNDER SHARES provided for in AOI;
Unrestricted retained earning
• Are those classified as such in not necessary before shares can
the AOI which may be given be redeemed but there must be
certain rights and privileges not sufficient assets to pay the
enjoyed by owners of other creditors to answer for
stocks. However, if the right is operations. (Republic Planters
the exclusive right to vote and Bank vs. Agana)
be voted as director, it must be
for a period not exceeding 5
years counted from the date of
TREASURY SHARES
Incorporation. (5 years not (Section 9)
extendible)

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Commercial Law Review I
• Shares which have been earlier
issued as fully paid and have
thereafter been acquired by the
corporation by purchase,
donation, redemption, donation,
or thru some lawful means.
• Such shares may against be
disposed of for a reasonable
price fixed by the board, even
for less than par, since they are
considered as fully paid.
• They are not considered
outstanding shares as they are
held by the corporation, not part
of OCS
• They are not entitled to
dividends or vote until they are
reissued. A corporation cannot
declare dividends for itself.
• Generally, TS, being unrealized
income, are not part of earned or
surplus profits, and therefore
not distributable as dividends,
either in cash or stocks.
• However, if there are retained
earnings arising from the
business of the corporation, TS,
being the property of the
corporation, may be distributed
as property dividends but not as
stock dividends.
NOTE: a promoter is not part of the
corporation but merely attracts investors.
QUESTION:
If a corporation, re-acquire its Treasury
Share. How much can it sell its TS?
ANSWER:
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T a n g l a w N o t e s | 11
According to Section 9 [of the
Corporation Code], at a reasonable price.
INCORPORATION AND
ORGANIZATION
PROMOTER
• A self-constituted organizer who
finds an enterprise or venture and
helps to attract investors, forms a
corporation, and launches it in
business, all view to promoting
profits.
• The corporation is not bound by the
contract entered into by the
promoter before incorporation
unless the contract is ratified.
(Cagayan Fishing vs. Sandiko)
• The promoter is personally liable
for contracts or agreements with
third persons contracted in behalf
of future corporation, if the
corporation does not ratify the
same or unless the agreement was
expressly made subject to such
approval or ratification.
• The promoter should remit to the
corporation profits that he derived
that properly pertains to the
corporation.
SUBSCRIPTION CONTRACT
• Any 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
Commercial Law Review I T a n g l a w N o t e s | 12

parties refer to it as purchase or 4. Previously incurred debts of

some other contract. (Section 59) corporation;
5. Amounts transferred from
unrestricted retained earnings to
QUESTION: stated capital (in case of stock
dividend declaration);
How do you become a stockholder of a 6. Outstanding shares in exchange for
corporation? How do you buy shares in a stocks in the event of
corporation? reclassification or conversion
7. Shares of stock in another
ANSWER: corporation; and/or*
You can buy from an existing 8. Other generally accepted form of
stockholder or you can buy directly from consideration*
the corporation.
NOTE: Promissory notes or future
KINDS OF SUBSCRIPTION services [are] not valid considerations.
CONTRACTS
ARTICLES OF
1. Pre-incorporation subscription
INCORPORATION
• Entered into before incorporation
and irrevocable for 6 months from CORPORATE NAME
date of subscription unless all
• Under Section 17 of RA 11232,
other subscribers consent or if
no corporate name shall be
corporation failed to materialize
allowed by the SEC if:
• It cannot be revoked after filing o It is not distinguishable
the AOI with SEC. (Section 60) from that already
2. Post-incorporation subscription reserved or registered for
the use of another
• Entered into after incorporation
corporation (ex: Inc. or
Corp.,); or
VALID CONSIDERATIONS o If such name is already
FOR STOCKS protected by law; or
o When its use is contrary to
(SECTION 61)
existing law, rules, or
• Stocks shall not be issued for
regulations
consideration less than par or
issued price thereof. • Under BP 68
o Identical or deceptively or
1. Cash;
confusingly similar to that
2. Property (tangible or intangible);
of any existing corporation
3. Labor or services actually rendered
or other name protected
to the corporation;
by law or is patently

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Commercial Law Review I T a n g l a w N o t e s | 13

deceptive, confusing, or PURPOSE

contrary to existing laws.
Where a corporation has more than one
stated purpose, the articles of
NOTE: If you change the corporate name,
incorporation shall state which is the
it does not create a new corporation. It is
primary purpose and which is/are the
the same corporation with the same
secondary purpose or purposes;
rights, obligations and liabilities.
Provided, that a non-stock corporation
may not include a purpose which would
A name is not distinguishable even if it
change or contradict its nature as such;
contains one or more of the following:
a. The word “corporation”,
Limitations on purpose clause:
“company”, “incorporated”,
a. Purpose must be lawful;
“limited”, “limited liability” or an
b. Corporation cannot be formed
abbreviation of any of such
for purpose of practicing
words; and
profession;
b. Punctuations, articles,
c. Purposes must be capable of
conjunctions, contractions,
being legally combined;
prepositions, abbreviations,
d. If the purpose is one under
different tenses, spacing or
supervision of another
number of the same word or
government agency, favorable
phrase.
recommendation [is] required;
e. Corporations with foreign equity
The SEC may summarily order the
[are] not allowed to engage in
corporation to immediately cease and
certain businesses.
desist from using such name and
required the corporation to register a
new one. It may cause the removal of all PRINCIPAL OFFICE
visible signages, marks, advertisements,
labels, prints, and other effects bearing The place where the principal office
such corporate name. Upon approval of of the corporation is to be located,
the new corporate name, the SEC shall which must be within the Philippines.
issue a certificate of incorporation
under the amended name (Section 17) It may determine the venue of
court cases and if service of summons
If the corporation fails to comply with and notices was properly made. (Sy vs.
the SEC’s order, it may hold the Tyson Enterprises, 1982)
corporation and its responsible
directors or officers in contempt A specific address is now required;
and/or hold them administratively, Metro Manila is no longer allowed.
civilly, and/or criminally liable and/or
revoke its registration.* TERM OF EXISTENCE

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Commercial Law Review I
• Under Section 11, a corporation
shall have a perpetual existence
unless its articles of
incorporation provide otherwise.
In the cases of OPCs, their term
of existence shall be perpetual,
except for trust or estates
whose term of existence shall be
co-terminous with existence of
trust or estate. (SEC MC 7)
• Corporations with certificates of
incorporation issued prior to the
effectivity of this Code, and
which continue to exist, shall
have perpetual existence, unless
the corporation, upon a vote of
its stockholders representing a
majority of its outstanding
capital stock, notifies the
Securities and Exchange
Commission or SEC that it elects
to retain its specific corporate
term pursuant to its articles of
incorporation.
• A corporation whose term has
expired may apply for a revival of
its corporate existence. Upon
approval by the Securities and
Exchange 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.
• No application for revival of
certificate of incorporation of
banks, banking and quasi-banking
institutions, preneed, insurance
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T a n g l a w N o t e s | 14
and trust companies, non-stock
savings and loans associations,
pawnshops, corporations,
engaged in money service
business, and other financial
intermediaries shall be approved
by the SEC unless accompanied
by a favorable recommendation
of the appropriate government
agency. (Section 11)
WHO MAY NOT APPLY FOR
REVIVAL OF CORPORATE
EXISTENCE
(SEC MC 23, 2019)
a. Expired corporation which has
completed liquidation of its
assets
b. Corporation whose certificate of
Incorporation was revoked for
reason other than non-filing of
report
c. Corporation dissolved by virtue
of Sec. 6C and 6D of PD 902-A
d. Expired corporation which
already availed of re-
registration
NAME, NATIONALITY AND
RESIDENCE OF
INCORPORATORS
• Are those stockholders or
members mentioned in the AOI
as originally forming and
composing the corporation and
who are signatories thereof.
(Section 4)
Commercial Law Review I
The following can be incorporators
(Section 10):
a. Any person, partnership,
association or corporation,
whether singly or jointly with
others;
b. Between one (for OPCs and
corporation sole) but not more
than 15;
c. Incorporators who are natural
persons must be of legal age;
d. Each incorporator of a stock
corporation must own or be a
subscriber of at least one share
of the capital stock.
Natural persons who are licensed to
practice a profession, and partnerships
or associations organized for the
purpose of practicing a profession, are
not allowed to organized a corporation
unless otherwise provided under special
laws. (Section 10)
NOTE: No nationality or residence
requirements under the Code (Revised
Corporation Code)
NUMBER OF DIRECTORS OR
TRUSTEES
Under Section 15, the number of
directors shall not be more than 15 while
the number of trustees may be more
than 15.
Exceptions:
• Close corporations (where
the number of directors can
be more than 15 but not
exceeding 20 when the AOI
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provides that the business of
the corporation shall be
managed by stockholders
rather than by the BOD
under Section 96);
• Educational non-stock
corporations where the
number of trustees must be
between 5 and 15 in multiple
of 5;
• Religious societies where the
number of trsutees must not
be less than 5 and not more
than 15 (Section 114).
GENERAL RULE: At least two except in
the case of OPCs and corporation sole.
OTHER CONTENTS OF AOI
• Names, nationalities and
residences of persons who shall
act as directors or trustees until
the first regular directors or
trustees are duly elected and
qualified in accordance with this
Code;
• If a stock corporation, the
amount of its authorized capital
stock in lawful money of the
Philippines, the number of shares
into which it is divided; the par
value of each; names,
nationalities, residence of
subscribers and amounts
subscribed; and a statement that
some or all shares are without
par value if applicable.
• If non-stock corporation, the
amount of its capital or money
Commercial Law Review I
contributed or donated by
specified persons, stating the
names, nationalities and
residences of the contributors
or donors and the amount given
by each.
• An arbitration agreement may be
provided pursuant to Section
181 (only for UNLISTED
CORPORATIONS).
• Name of treasurer elected by
subscribers who shall certify
that the paid-up portion of the
subscription has been duly
received.
• An undertaking that the
incorporation shall change the
name of the corporation upon
notice from [the] SEC that
another entity has acquired prior
right to use of such name, that
the name has already been
declared not distinguishable
from a name already registered
or reserved for the use of
another corporation, or that it is
contrary to law, public morals,
good customs, or public policy.
(new provision)
• If the corporation engages in a
nationalized industry, a certificate of incorporation shall
statement that no transfer of
stock will be allowed I it will
reduce the stock ownership of
Filipinos to a percentage below
the required legal minimum.
• AOI no longer requires that at
least 25 percent of the
authorized capital stock be
subscribed and that at least 25
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percent of the subscribed be
paid-up, with the minimum paid-
up capital at P5,000.00
• No minimum capital stock
required, except if required
under special law. (ex: banks,
insurance companies)
NON-AMENDABLE ITEMS IN
THE AOI
1. Original incorporators
2. Name of incorporating
directors/trustees
3. Name of original treasurer
4. Number of shares originally
subscribed and paid
5. Date, place of execution of AOI,
signatories
COMMENCEMENT OF
CORPORATE EXISTENCE
• From the date the SEC issues a
certificate of incorporation
under its official seal.
• But under Section 21, if a
corporation does not formally
organize and commence its
business within 5 years from
date of incorporation, its
be deemed revoked as of the day
following the end of the 5-year
period.
• Formal organization includes:
organizational meeting of
stockholders to elect the board
of directors, adoption and filing
of by-laws, organizational
Commercial Law Review I
meeting of BOD to elect
corporate officers.
• If a corporation has commenced
business but subsequently
becomes inoperative for a period
of at least 5 years, the SEC may
after due notice and hearing,
place the corporation under
delinquent status.
• If within two years, the
corporation fails to resume
operations, the SEC shall revoke
its certificate of incorporation.
QUESTION:
Up to when can a corporation can submit
its by-laws?
ANSWER:
The Corporation Code is silent. But it
doesn’t mean that you can exists as a
corporation without by-laws.
ELECTION OF
DIRECTORS OR
TRUSTEES
QUALIFICATIONS OF
DIRECTORS
a. For stock corporation, must own
(legal owner) at least 1 share of
the capital stock of the
corporation; for non-stock
corporation, must be a member
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(except for independent
director);
b. New law removed [the]
requirement that majority of the
directors/trustees must be
residents of the Philippines;
c. He must not have been convicted
by final judgment of an offense
punishable by imprisonment for a
period exceeding 6 years, or a
violation of this Code, or for
violating the SRC, committed
within 5 years prior to his
election or appointment as
director (Section 26);
d. He must not have been found
administratively liable for an
offense involving fraudulent
acts, committed within 5 years
prior to his election or
appointment as director;
e. By a foreign court or equivalent
foreign regulatory authority for
acts, violations, or misconduct
similar to those enumerated in c
and d, committed within 5 years
prior to his election or
appointment as director.
The foregoing is without prejudice to
qualifications or other disqualifications
which the SEC or the PCC may impose in
its promotion of good governance or as a
sanction in its administrative
proceedings.
OTHER REQUIREMENTS:
1. Must be of legal age
2. Must possess other
qualifications as may be
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prescribed in the by-laws of the
corporations. (i.e he must not be
a director in a competing
corporation)
WHO ELECTS THE
DIRECTORS/TRUSTEES?
The stockholders in a stock corporation;
the members in a non-stock corporation
in a meeting duly called for that purpose
Exception: in the case of close
corporation
Under Section 96, if the AOI provides
that the business of the corporation
shall be managed by the stockholders
rather than by a BOD, no meeting of
stockholders need to be called to elect
directors and the stockholders shall be
deemed directors and shall be subject
to all liabilities of directors.
METHODS OF VOTING –
Election of Directors
In stock corporation, stockholders
entitled to vote shall have the right to
vote the number of shares of stock
standing in their own names in the stock
books of the corporation at the time
fixed in the bylaws or where the bylaws
are silent, at the time of election
(Section 23)
Except when the exclusive right to vote
is reserved for holders of founders
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shares under Section 7, each
stockholder or member shall have the
right to nominate any director or
trustee who possesses all the
qualifications and none of the
disqualifications.
• The total number of votes to
cast shall not exceed the number
of shares owned by the
stockholders as shown in the
books of the corporation
multiplied by the whole number
of directors to be elected.
(Section 23)
• Election should be at large in
stock corporations; there can be
no voting by district or region in
a stock corporation.
o But there can be election
by region in non-stock
corporation because the
right to vote in a non-
stock corp may be limited,
broadened, or denied in
the AOI or by-laws.
(Section 89)
• No delinquent stock shall be
voted (Section 23)
• In the case of non-stock
corporations, unless otherwise
provided in the AOI or in the by-
laws, its members may cast as
many votes as there are trustees
to be elected but may not cast
more than 1 vote for 1 candidate
Section 23)
• Nominees for directors or
trustees receiving the highest
number of votes shall be
declared elected. (Section 23)
Commercial Law Review I
QUESTION:
How many votes can you cast?
ANSWER:
You multiply the number of shares by
the number of seats to be elected.
EXAMPLE:
10 shares x 10 seats to be elected = 100
votes
Stock Corporation: Can be straight and
cumulative voting
QUORUM REQUIRED FOR
ELECTION
At all elections of directors or trustees,
there must be present, either in person
or through a representative authorized
to act by written proxy, the owners of
majority of the OCS, or if there be no
capital stock, a majority of the members
entitled to vote.
A stockholder or member who
participates through remote
communication or in absentia shall be
deemed present for purposes of quorum.
MODE OF VOTING
1. In Person
2. By written Proxy
3. When authorized in the bylaws of
by a majority of the BOD,
through remote communication
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or in absentia. A stockholder or
member who participates
through remote communication
or in absentia shall be deemed
present for purposes of quorum.
Under Section 23, the last mode may
not be exercised in corporations vested
with public interest, notwithstanding
the absence of a provision in the bylaws
of such corporations.
• Voting by proxy is not a matter of
right, the corporation can prohibit
the voting by proxy.
ELECTION BY BALLOT
• The election must be by ballot if
requested by any voting
stockholder or member (Section
23)
TERM OF
DIRECTORS/TRUSTEES
• Directors – one year (exception:
OPC and close corporation)
• Trustees – not exceeding three
years (exception: educational
non-stock, five years staggered)
• Independent directors –
maximum cumulative term of 9
years (SEC MC No. 4, 2017)
INDEPENDENT DIRECTORS FOR
CORPORATIONS VESTED WITH
PUBLIC INTEREST
(Section 22) – new provision
The board of the following corporations
vested with public interest shall have
independent directors consisting at
least 20 percent of such board:
Commercial Law Review I
1. Corporations covered by R.A.
8977, Section 17.2 or the
Securities Regulation Code or
those whose securities are
registered with the SEC, those
listed with an exchange or with
assets of at least P50 million and
having 200 or more holders of
shares, each holding at least 100
shares of a class of its equity
shares;
2. Banks and quasi-banks, NSSLAs
(non-stock savings and loan
associations), pawnshops,
corporations engaged in money
service business, preneed, trust
and insurance companies, and
other financial intermediaries;
[
3. Other corporations engaged in
business vested with public
interest similar to the above as
may be determined by SEC.
• They need to appoint independent
directors.
WHO IS AN INDEPENDENT
DIRECTOR (Section 22)
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
director.
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Independent directors must be elected
by shareholders present or entitled to
vote in absentia during the election of
directors. They shall be subject to rules
and regulations governing their
qualifications, disqualifications, voting
requirements, duration of term and
term limit, maximum number of board
memberships and other requirements
that the SEC will prescribe to
strengthen their independence and align
with international best practices.
BY-LAWS
Relatively permanent and continuing
rules of action adopted by the
corporation for its own government and
that of the individuals composing 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
vs. CA, 270 SCRA 503, 1997)
REQUISITES:
a. Must be consistent with the CCP,
other pertinent laws and
regulations, and the AOI;
b. Must be reasonable and not
arbitrary or oppressive;
c. Must not disturb vested rights,
impair contract or property
rights of stockholders or
members or create obligations
unknown to law.
ADOPTION OF BY-LAWS
ORIGINAL BY-LAWS (Section 45)
Commercial Law Review I
1. May accompany the AOI and SEC
will approve it together with the
articles; must be signed by all
incorporators.
2. If filed subsequently, the
affirmative vote of the
stockholders representing at
least a majority of the
outstanding capital stock, or of
at least a majority of the
members in case of non-stock
corporation shall be necessary.
• It must be filed with the SEC and
attached to the original AOI.
• By-laws will be effective only
upon issuance by the SEC of a
certification that the by-laws
are in accordance with the Code.
• Before, the by-laws must be filed
within a month after receipt of
the official notice of the
issuance of the certificate of
incorporation.
• Now, it must be filed within five
years; otherwise, the
corporation is considered as
having failed to formally organize
and its certificate of
incorporation shall be deemed
revoked under Section 21.
AMENDMENT
• Amendment or repeal or adoption
of new by-laws may be made by
the stockholders together with
the BOD, or by the BOD only.
• If the stockholders together
with [the] board, majority of
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[the] board plus majority of
outstanding capital stock or at
least majority of [the] members
of non-stock corporation.
• If by board, as delegated by 2/3
outstanding capital stock or 2/3
of members.
Any power delegated to BOD or BOT to
amend or repeal bylaws or adopt new
bylaws shall be considered revoked when
[the] stockholders owning or
representing majority of outstanding
capital stock or majority of members
shall so vote at a regular or special
meeting.
CORPORATE POWERS
DOCTRINE/THEORY OF
GENERAL CAPACITY
Maintains that a corporation is said
to hold such powers as are not
prohibited or withheld from it by
general law.
DOCTRINE/THEORY OF
SPECIFIC CAPACITY
Maintains that the corporation
cannot exercise power except those
expressly or impliedly given as well as
incidental powers.
a. Express Powers – those
expressly authorized by the CCP
and other laws, and its AOI or
charter
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b. Implied Powers – those that can
be inferred from or necessary
for the exercise of the express
powers
c. Incidental Powers – those that
are incidental to the existence of
the corporation.
EXPRESS GENERAL POWERS
(Section 35)
1. Sue and be sued in its corporate
name;
2. To have perpetual existence,
unless certificate of
incorporation provides otherwise
(new);
3. Adopt and use a corporate seal;
4. Amend AOI;
5. Adopt, amend or repeal by-laws;
6. For stock corporation – issue
stocks to subscribers and to sell
treasury stocks; for non-stock
corporation – admit members;
7. Purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
mortgage and otherwise deal
with real and personal property,
pursuant to its lawful business,
subject to limitations prescribed
by law and the Constitution;
8. Enter into partnership, joint
venture, merger, consolidation,
or any other commercial
agreement with natural and
juridical persons (new)*;
9. To make reasonable donations
for public welfare, hospital,
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charitable, cultural, scientific,
civil or similar purposes;
10. To establish pension, retirement
and other plans for the benefit
of directors, trustees, officers
and employees; and
11. Other powers essential or
necessary to carry out its
purposes.
*The Revised Corporation Code now
allows Corporations to enter into a
partnership, but limited partnerships
only and not general partnerships.
EXPRESS SPECIFIC POWERS
(Section 37-44)
1. Extend or shorten corporate
term;
2. Increase or decrease corporate
stock;
3. Incur or create bonded
indebtedness;
4. Deny preemptive right;
5. Sell or dispose of all or
substantially all corporate
property and assets;
6. Purchase or acquire shares;
7. Invest corporate funds in
another corporation, business
other than the primary purpose;
8. Declare dividends;
9. Enter into management
contracts;
10. Amend the AOI;
Commercial Law Review I
Ultra Vires Acts
• One committed outside the
object for which a corporation is
created as defined by the law of
its organization and therefor
beyond the power conferred
upon it by law.
• While ultra vires acts are merely
voidable which may be enforced
by performance, ratification, or
estoppel, illegal acts are void and
cannot be validated.
QUESTION:
Why is it to “deny preemptive right” and
not to “grant”?
ANSWER:
Because preemptive right is a legal right
of stockholders but the Corporation can
deny that right. And preemptive right is
the right of the stockholders to
subscribe to new issuances, increases in
the stockholdings. The one selling the
shares is the Corporation and not
another stockholder.
• In a close corporation, its
preemptive right is much broader.
EXTENSION OF CORPORATE
TERM
Must not be earlier than 3 years prior to
original or subsequent expiry date
unless there are justifiable reasons for
earlier extension as may be determined
by SEC
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In case of extension, dissenting
stockholder may exercise appraisal
right.
INCREASE IN CAPITAL STOCK
Sworn statement of corporate
treasurer showing that at least 25% of
increase in capital stock has been
subscribed and at least 25% has been
paid.
No decrease in capital stock shall be
approved by SEC if it will prejudice
rights of corporate creditors.
DOCTRINE OF
INDIVIDUALITY OF
SHARES
A subscription is one, entire and
indivisible whole contract even if two or
more shares are covered. The
subscriber is not entitled to the
certificate for part or all of
certificates covered until full payment
of the subscription price.
But once subscription is fully paid,
corporation may be compelled by
mandamus with damages if it refuses to
issue certificate.
Section 63 – No stock certificate shall
be issued to a subscriber until the full
amount of the subscription together
with interest an expense (in case of
delinquent shares) if any is due, has
been paid.
Commercial Law Review I
But under Section 71, holders of
subscribed shares not fully paid which
are not delinquent shall have all the
rights of a stockholder.
• Corporation by estoppel is not a
real corporation but it is only
considered as a corporation to
prevent injustice or unfairness.
DOCTRINE OF EQUALITY
OF SHARES
Each share shall be equal in all respects
to every other share, except as
otherwise provided in the AOI and in
the certificate of stock. (Section 6)
No share may be deprived of voting
rights, except those classified and
issued as preferred or redeemable
shares, unless otherwise provided in this
Code (founder shares), and there shall
always be a class or series of shares
which have complete voting rights.
TRUST FUND DOCTRINE
The capital stock, property, and other
assets of the corporation are regarded
as equity in trust for the payment of
corporate creditors. The subscribed
capital stock of the corporation is a
trust fund for the payment of debts of
the corporation which the creditors
have the right to look up to satisfy their
credits. Corporation may not dissipate
this and the creditors may sue
stockholders directly for the unpaid
subscription. (CIR vs CA, 1999)
The subscribed capital stock of the
corporation is a trust fund for the
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payment of debts of the corporation
which the creditors have the right to
look up to satisfy their credits.
A corporation has no legal capacity to
release an original subscriber to its
capital stock from the obligation of
paying for his shares, in whole or in part,
without a valuable consideration, or
fraudulently, to the prejudice of
creditors. 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 its debt. (Halley vs.
Printwell, 2011)
The trust fund doctrine is the
underlying principle and/or articulated
in the ff:
a. Procedure for distribution of
capital assets embodied in the
CCP, which allows the
distribution of corporate capital
only in three instances: (1)
amendment of AOI to reduce
authorized capital stock; (2)
purchase of redeemable shares
by the corporation, regardless of
existence of unrestricted
retained earnings; and (3)
dissolution and eventual
liquidation of corporation;
b. Power of corporation to acquire
its own shares only if the
corporation has unrestricted
retained earnings in its books to
cover the shares to be purchased
or acquired.
c. Prohibition against distribution
of corporate assets and property
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unless the stringent all business, and control all properties of

requirements therefor are
complied with.
Corporate Liquidation – Except by
decrease of capital stock and as
otherwise allowed by this Code, no
corporation shall distribute any of its
assets or property except upon lawful
dissolution and after payment of all its
debts and liabilities.
Liability for watered stocks as well as
declaration of dividend only when the
corporation hs unrestricted retained
earnings is also based on the trust fund
doctrine.
the corporation.
Exception: in the case of close
corporation where the stockholders may
under the AOI be authorized to manage
the business of the corporation, or to
elect/appoint all officers, in which case
the stockholders are deemed to be
directors.
At all elections of directors or trustees,
there must be present in person or
through a representative authorized to
act by written proxy, the owners of
majority of the OCS, of a majority of
the members entitled to vote.

• If the corporation is not yet

insolvent or dissolved, the PROXY
creditors cannot go after the • The authority given by the
corporation’s trust fund. stockholder/member to vote for
him.
• The SEC cannot question why the
Corporation decreased its KINDS OF PROXY
authorized capital stock, because it
1. General – gives the right to vote
will go against the business
for directors and all ordinary
judgment rule.
matters that may come before
[the] meeting, but does not give
FUNDAMENTAL RIGHTS right to vote for fundamental
OF STOCKHOLDERS changes in the corporate charter
or for other unusual
DIRECT/INDIRECT transactions, unless so specified.
PARTICIPATION IN 2. Limited – restricts the authority
MANAGEMENT to vote on specified matters only
and may direct the matter in
Generally, stockholders/members
which vote may be cast.
participate indirectly in the
The right to vote of stockholders or
management of the corporation through
members may be exercised in person, or
the board of directors/trustees. Under
through proxy, or when authorized by
Section 22, the BOD or BOT shall
bylaws or by majority of the BOD,
exercise the corporate powers, conduct
stockholders, or members, through

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Commercial Law Review I
remote communication or in absentia.
(Section 49, 55)
Stockholders and members may vote in
person or by proxy in all meetings of
stockholders or members (Section 57)
No proxy shall be valid and effective for
period longer than 5 years at any one
time (Section 57)
In a stock corporation, a bylaw provision
prohibiting the use of proxies in
stockholder’s meetings is void because
the right is given by the statute; but
this right can be denied in a non-stock
corporation in the AOI or by laws.
Under Section 88, the right of
members to vote may be limited,
broadened or denied to the extent
specified in the AOI or by-laws.
Thus, unless otherwise provided in the
AOI or by-laws, a member may vote by
proxy.
Section 47 (4) of the Corporation Code
states that private corporations may
provide in their by-laws for the form of
proxies of stockholders and members
and the manner of voting them. Thus,
the formalities of a proxy may be
provided in the by-laws.
VOTING TRUST
AGREEMENT
Section 58. Voting Rights – One or
more stockholders of a stock
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corporation may create a voting trust
for the purpose of conferring upon a
trustee or trustees the right to vote
and other rights pertaining to the
shares for a period not exceeding five
(5) years at any time.
If the voting trust is a condition in a loan
agreement, said voting trust may be for
a period exceeding five (5) years but
shall automatically expire upon full
payment of the loan.
The certificate or certificates of stock
covered by the voting trust agreement
shall be cancelled and new ones shall be
issued in the name of the trustee or
trustees stating that they are issued
pursuant to said agreement. In the
books of the corporation, it shall be
noted that the transfer in the name of
the trustee or trustees is made
pursuant to said voting trust agreement.
The trustee or trustees shall execute
and deliver to the transferors voting
trust certificates, which shall be
transferable in the same manner and
with the same effect as certificates of
stock.
• Can be transferred like a stock
certificate by indorsement and
delivery
No voting trust agreement shall be
entered into for the purpose of
circumventing the law against anti-
competitive agreements, abuse of
dominant position, anti-competitive
mergers and acquisitions, violation of
nationality, and capital requirements or
Commercial Law Review I T a n g l a w N o t e s | 27

for the perpetuation of fraud. (before, necessary in the exercise of the

only monopolies and illegal combinations following powers:
in restraint of trade or used for a. Power to extend or shorten
purposes of fraud. corporate term (Section 36)
b. Increase or decrease
Unless expressly renewed, all rights corporate stock (Section 37)
granted in a voting trust agreement shall c. Incur or create bonded
automatically expire at the end of the indebtedness (Section 37)
agreed period, and the voting trust d. Deny preemptive right
certificates as well as the certificates (Section38)
of stock in the name of the trustee or e. Sell, dispose, lease, encumber
trustees shall thereby be deemed all or substantially all of
cancelled and new certificates of stock corporate assets. (Section
shall be reissued in the name of the 39)
transferors. f. Invest in another
corporation, business other
The voting trustee or trustees may vote than the primary purpose.
by proxy or in any manner authorized (Section 41)
under the by-laws unless the agreement g. Declare stock dividends
provides otherwise. (Section 42)
h. To enter into management
VTA results in separation of the voting contract (Section 43) if:
rights of a stockholder from his other i. a stockholder or
rights such as the right to receive stockholders
dividends, the right to inspect representing the same
corporate books, right to sell certain interest of both the
interests in the assets of the managing and managed
corporation, and other right to which a corporations own or
stockholder may be entitled until the control more than 1/3
liquidation of the corporation. of the total
outstanding capital
entitled to vote of the
INSTANCES WHERE managing corporation;
STOCKHOLDERS’ CONCURRENCE or
NECESSARY FOR EXERCISE OF ii. a majority of the
members of the board
CORPORATE POWERS
or directors of the
1. Approval of majority of [the] board managing corporation
and concurrence of stockholders also constitute a
representing 2-3 of outstanding majority of the
capital (or 2/3 members) is members of the board

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Commercial Law Review I
of the managed
corporation;
i. Amend the AOI (Section15)
2. Approval of the stockholders
representing majority of the
outstanding capital is necessary
together with board approval in the
following:
a. To enter into management
contract if any of the two
instances stated above are
absent (Section 43)
b. To adapt, amend, or repeal
the by-laws (Section 45 and
47)
3. Without board resolution,
stockholders may by:
a. 2/3 outstanding capital –
delegate to the board the
power to amend the by-laws
(Section 47)
b. Majority of outstanding
capital – revoke the power of
the board to amend the by-
laws which has been
previously delegated.
PROPRIETARY RIGHTS
OF STOCKHOLDERS
1. RIGHT TO DIVIDENDS
• Dividends are corporate profits
set aside, declared, and ordered
by the BOD to be paid to
stockholders.
• Dividends are declared out of
unrestricted retained earnings
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payable in cash, property, or
stock on the basis of outstanding
stock held by them.
Unrestricted retained earnings –
undistributed earnings of the
corporation which have not been
allocated for any managerial,
contractual, or legal purposes and which
are free for distribution to
stockholders as dividends.
• BOD cannot declare dividends if
there are no surplus profits or
when [the] corporation is
insolvent.
• BOD exercises exclusive
authority to declare dividends;
but if stock dividends, needs
concurrence of stockholders
(2/3) who must approve at a
regular or special meeting duly
called for that purpose.
STOCKHOLDERS WHO HAVE
NOT PAID FOR HIS ENTIRE
SUBSCRIPTION ENTITLED TO
DIVIDENDS
Section 71 – Holders of subscribed
shares not fully paid which are not
delinquent shall have all the rights of a
stockholder.
Section 70 – No delinquent stock shall
be voted for, be entitled to vote, or be
represented at any stockholders’
meeting, nor shall the holder thereof be
entitled to any of the rights of a
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stockholder except the right to 4. In case of investment of

dividends. corporate funds for any purpose
other than the primary purpose
But under Section 42, Any cash of the corporation.
dividends due on delinquent stock shall
first be applied to the unpaid balance on Appraisal Right – Right to withdraw
the subscription plus costs and from the corporation and demand
expenses, while stock dividends shall be payment of the fair value of his shares
withheld from the delinquent after dissenting from certain corporate
stockholder until their unpaid acts involving fundamental changes in
subscription is fully paid. corporate structure.

Upon demand for payment of fair value

2. APPRAISAL RIGHT
Section 80. Instances of appraisal
right – any stockholder of a corporation
shall have the right to dissent and
demand payment of the fair value of his
shares in the following instances:
1. In case any amendments to the
articles of incorporation has the
effect of changing or
restricting the rights of any
stockholder or class of shares,
or of authorizing preferences in
any respect superior to those of
outstanding shares of any class,
or of extending or shortening
the term of corporate
existence;
2. In case of sale, lease, exchange,
transfer, mortgage, pledge, or
other disposition of all or
substantially all of the
corporate property and assets
as provided in the Code; and
3. In case of merger
consolidation;
of shares until either abandonment of
the corporate action involved or
purchase of the said shares by the
corporation, all rights accruing to the
shares (including voting and dividend
right) shall be suspended, except the
right of such stockholder to receive
payment of the fair value thereof.
(Section 82)
But if dissenting stockholder is not paid
the value of his shares within 30 days
after the award, the voting and dividend
rights shall immediately be restored.
In close corporations, a stockholder has
the unbridled right to compel the
corporation for any reason to purchase
his shares at their fair value which shall
not be less than the par or issued value,
when the corporation has sufficient
assets to cover its debt and liabilities,
exclusively of capital stock. (Section
104)
“In case any amendment to the articles
or
of incorporation has the effect of:

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Commercial Law Review I
a. Changing or restricting the
rights of any stockholder or class
of shares;
b. Or of authorizing preferences in
any respect superior to those of
outstanding shares of any class;
c. Or of extending or shortening
the term of corporate
existence.”
The first one includes the change in the
par value of the shares with preference
as to dividends and/or assets,
withdrawal or modification of their
redeemable or convertible feature,
restriction of voting rights to certain
corporate actions, denial of preemptive
rights.
The second one includes the creation of
a new set of preferred shares, with
superior features to those of
outstanding shares.
Fair value of shares – The law
encourages mutual agreement of parties
in setting the fair value of dissenting
shares. If they fail to reach an
agreement within the prescribed period,
a disinterested three-man panel shall
determine such value.
RULES FOR EXERCISE OF
APPRAISAL RIGHT
1. Stockholder must be a dissenting
stockholder or voted against a
proposed action (Section 81)
2. He must make a written demand
on the corporation within 30 days
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after the vote was taken (failure
to make demand within such
period deemed a waiver of the
appraisal right)
3. The proposed action is any one of
the instances enumerated above
• If the proposed action is
implemented, the
corporation shall pay to such
stockholder, upon surrender
of the stock certificate
representing such shares,
the fair value;
4. Within 10 days after demanding
payment, dissenting stockholder
shall submit stock certificate for
notation that such shares are
dissenting shares
5. The price to be paid is the fair
value of the shares on the date
before the vote was taken
(excluding any appreciation or
depreciation in anticipation of
such corporate action)
6. Fair values shall be agreed upon;
if no agreement between the
corporation and withdrawing
stockholder within 60 days from
date [the] vote [was] taken, fair
value shall be determined by
majority of the 3 disinterested
persons – one to be named by
stockholder, another by [the]
corporation, third by the two
chosen. (Section 81)
• The finding of majority of
appraisers final and their
award paid by [the]
corporation within 30 days
after award is made (if not
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paid within 30 days, voting
and dividend rights [are]
restored)
7. Corporation must have
unrestricted retained earnings in
the books to cover such payment.
8. Upon payment, stockholder shall
transfer his shares to the
corporation.
9. Appraisal right extinguished
when:
i. He withdraws the demand
with the corporation’s
consent;
ii. Proposed action is
abandoned or rescinded
by the corporation;
iii. SEC disapproves the
action (Section 83)
• Disapproved by the SEC where
such approval is necessary, or if
the SEC determines that such
stockholder is not entitled to the
appraisal right.
10. When he fails to submit the
stock certificate within 10 days
from demand to the corporation
for notation that such shares are
dissenting shares.
11. Under Section 85, if shares
represented by the certificates
bearing such notation are
transferred and the certificates
consequently cancelled, the
rights of the transferor as a
dissenting shareholder shall
cease and the transferee shall
have all the rights of a regular
stockholder and all dividend
distributions which would have
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accrued on such shares shall be
paid to the transferee.
3. RIGHT TO INSPECT
BOOKS AND RECORDS
Requirements: (Section 73)
a. Must be exercised at reasonable
hours on business days;
b. Stockholder had not improperly
used any info he secured through
any previous examination; and
.
c. Demand is made in good faith or
for legitimate purpose
d. Is not a competitor, director,
officer, controlling stockholder,
or otherwise represents the
interests of a competitor (new
provision)
• A requesting party who is not a
stockholder or member of record,
is a competitor, director, officer,
controlling stockholder or
otherwise represents the interests
of a competitor shall have no right
to inspect or demand reproduction
of corporate records.
e. Inspecting or requesting party
shall remain bound by
confidentiality rules under
prevailing laws, such as the rules
on trade secrets or processes
(IPC), Data Privacy Act, the SRC
and the Rules of Court.
• Names of stockholders,
shareholdings are recorded in a
Stock Transfer Book
• If the Corporation refuses to show
the books of the Corporation even
Commercial Law Review I
with a justifiable reason, the
stockholder may file a petition for
mandamus to compel the
Corporation to show such records.
Mandamus is the proper remedy if [the]
stockholder being improperly deprived
of right to inspect
Any stockholder who shall abuse the
right granted under this section shall be
penalized under Section 158 of this
Code, without prejudice to the
provisions of the IPC and the Data
Privacy Act. (new provision)
Any officer or agent of the corporation
who shall refuse to allow the inspection
and/or reproduction of records shall be
liable to such director, trustee,
stockholder, or member for damages,
and in addition, shall be guilty of an
offense punishable under Section 161
of this Code.
If such refusal is made pursuant to a
resolution or order of the BOD/BOT,
the liability shall be imposed upon the
directors or trustees who voted for
such refusal.
It shall be a defense that the person
demanding to examine and copy
excerpts from the corporation’s record
and minutes has improperly used any
information secured through any prior
examination of the records or minutes
of such corporation or of any other
corporation, or was not acting in good
faith or for a legitimate purpose in
making the demand, or is a competitor,
director, officer, controlling
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stockholder or otherwise represents
the interests of a competitor.
If the corporation denies or does not
act on demand for inspection and/or
reproduction, the aggrieved party may
report such denial or inaction to the
SEC. Within 5 days from receipt of such
report, the SEC shall conduct a summary
investigation and issue an order
directing the inspection or reproduction
of the requested records. (new
provision)
4. PREEMPTIVE RIGHTS
(Section 38)
All stockholders of a stock corporation
shall enjoy pre-emptive right to
subscribe to all issue or disposition of
shares of any class, in proportion to
their respective shareholdings, unless
such right is denied by the articles of
incorporation or amendment thereto:
Provided, that such pre-emptive right
shall not extend to:
a. Shares to be issued in compliance
with laws requiring stock
offerings or minimum stock
ownership by the public; or
b. To shares to be issued in good
faith with approval of the
stockholders representing two-
thirds (2/3) of the outstanding
capital stock, in exchange for
property needed for corporate
purposes or in payment of a
previously contracted debt.
(Section 38)
Commercial Law Review I
Preemptive right is also not available if
such right is denied in the AOI.
If one shareholder does not want to
exercise this right, the other
shareholders are not entitled to
purchase the corresponding shares of
the declining shareholder. But if nobody
purchased the same and later on the
board reissued the shares, the
preemptive right applies.
In case of close corporations under
Section 101, the preemptive right
extends to all stocks to be issued,
including reissuance of TS, unless the
AOI provides otherwise.
5. RIGHT TO VOTE
Exception to stockholders’ right to
vote:
1. Non-voting shares except those
provided for in Section 6 (only
preferred and redeemable
shares may deprived the right to
vote)
2. Treasury shares have no voting
rights while they remain in the
treasury. (Section 56)
3. Shares declared delinquent are
not entitled to vote at any
meeting
4. Unregistered transferees of
shares of stock
• The right to vote is generally vested
with the legal owner of the stocks as
appearing in the books of the
corporation.
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QUESTION:
How is the right to vote exercised?
ANSWER:
In person, through proxy, or when
authorized by bylaws, through remote
communication or in absentia (Section
49)
MATTERS WHICH THE CODE
REQUIRES TO BE TAKEN UP AT A
REGULAR OR SPECIAL MEETING OF
THE STOCKHOLDERS CALLED FOR
THAT PURPOSE
1. Removal of directors/trustees
(Section 27)
2. Filling up of vacancies in the office
of directors/trustees (Section 28)
3. Ratification of contract of
corporation with any of its
directors/trustees (Section 31)
4. Extension or shortening of
corporate term (Section 36)
5. Increase/decrease of capital stock
or incurring or increasing bonded
indebtedness (Section 37)
6. Sale of all or substantially all
corporation assets (Section 39)
7. Investment of corporate funds in
another corporation or business or
for any other purpose (Section 41)
8. Declaration of stock dividends
(Section 42)
9. Entering into management contract
with another corporation (Section
43)
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10. Amendment or repeal of bylaws or
adoption of new one (Section 45,
47)
11. Fixing issue price of no par value
shares (Section 61)
12. Merger or consolidation (Section
76)
13. Dissolution of corporation (Section
134)
QUESTION:
Who cannot participate in the meeting?
ANSWER:
1. Holders of delinquent shares who
cannot vote or be voted for but
entitled to dividends
2. Those exercising appraisal right
(Section 82); from time of
demand for payment of fair value
of shares until the purchase of
the said shares by the
corporation, all rights accruing to
such shares, including voting and
dividend rights, are suspended.
If not paid within 30 days after
award, voting and dividend rights
are immediately restored.
3. Those denied voting rights
(preferred, redeemable),
except on matters until Section
6 transfer but it serves as the trustee of
4. On order of the proper forum
pursuant to Section 49
6. RIGHT TO DIVIDENDS
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WHO MAY DECLARE DIVIDENDS
(Section 42)
a. BOD alone – cash, property
dividends
b. BOD with approval of
stockholders representing not
less than 2/3 outstanding capital
– stock dividends
Conditions that must be present to
declare dividends:
1. Unrestricted retained earnings
2. Resolution of the board or if
stock dividends, the board with
the occurrence of 2/3 of
outstanding capital
WHO ARE ENTITLED TO
DIVIDENDS
Dividends are payable to the
stockholders of records as of the date
of the declaration of dividends or
holders of record on a certain future
date, as the case may be, unless the
parties have agreed otherwise.
A transfer of shares which is not
recorded in the books of the
corporation is valid only as between the
parties, hence, the transferor has the
right to dividends as against the
corporation without the notice of
the real owner of the dividends, subject
to the contract between the transferor
and the transferee as to who is entitled
to receive the dividends. (Cojuangco vs.
Sandiganbayan, 2009)
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REMEDIAL RIGHTS OF Controversies, a stockholder/member

may bring an action in the name of a
STOCKHOLDERS
corporation provided that:
Individual Actions 1. He was a stockholder or member
o Those brought by the at the time the acts or
shareholder in his own name transactions at the time the
against the corporation when a subject of the action occurred
wrong is directly inflicted and at the time the action was
against him filed;
o Can be shareholder vs. 2. He exerted all reasonable
shareholder OR shareholder vs. efforts, and alleges the same
corporation with particularity in the
complaint, to exhaust all
Representative Actions remedies available under the
o Those brought by the AOI, by-laws, laws or rules
stockholder in behalf of governing the corporation, to
himself and all other obtain the relief desired;
stockholders similarly situated (Villamor vs. Umale, 2014,
when a wrong is committed Leonen, J)
against a group of stockholders.
3. Appraisal rights are available for
the act complained of; and
Derivative Suit
o Those brought by one or more 4. The suit is not a nuisance or
stockholders/members in the harassment suit.
name and on behalf of the
corporation to redress wrongs The fifth requisite, which is implied, is
committed against it, or that the action brought by the
protect/vindicate corporate stockholder/member must be in the
rights whenever the officials of name of the corporation.
the corporation refuse to sue, or
the ones to be sued, or has It is also important that the corporation
control of the corporation. be made a party to the case and that it
must be served with process so that the
o The suing stockholder is
corporation may get the benefit of the
regarded as a nominal party, with
suit.
the corporation as the real party
When the object if the wrong done is
in interest.
the corporation itself or the whole body
of its stock and property without any
REQUISITES:
severance or distribution among
Under Rule 8, Section 1 of the Interim individual holders, it is derivative suit
Rules of Intra-Corporate and not an individual suit or

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Commercial Law Review I
class/representative suit that
stockholder must resort to. (Florete
Jr. vs. Florete Sr., 2016, Leonen, J)
OBLIGATIONS OF A
STOCKHOLDER
1. Liability to corporation for
unpaid subscription
2. Liability to corporation for
interest on unpaid subscription if
so required by by-laws (Section
65)
3. Liability to creditors of
corporation for unpaid
subscription
4. Liability for watered stock
(Section 64)
5. Liability for dividends unlawfully
paid (Section 42); and
6. Liability for failure to create
corporation
7. To be liable, as general,
partners, for all debts, liabilities
and damages in case of
corporation by estoppel
8. To be personally liable for torts,
in case stockholders in close
corporations actively participate
in management of corporate
affairs
MEETINGS OF
STOCKHOLDERS
A stockholder is given the right to
participate in the corporate affairs by
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giving him the right to attend meetings
after due notice and the right to vote
thereof in person or through proxy or
trustee.
KINDS OF MEETINGS
A. REGULAR
When: Annually on a date fixed in the
by-laws; if not fixed in the by-laws or
not so fixed, any date after April 15 of
every year as determined by BOD/BOT
Written Notice: Within [the] period
provided in by-laws, law or regulation; or
if none, at least 21 days prior to meeting
(sent by electronic mail, or such other
manner as the SEC shall allow; as
provided in by-laws)
B. SPECIAL
When: At any time deemed necessary;
or as provided in by-laws
Written Notice: At least 1 week, unless
a different period provided in by-laws,
law or regulation.
PLACE AND TIME OF
MEETINGS
• Whether regular or special, city or
municipality of principal office and if
practicable, principal office of
corporation (Section 50). Any city
or municipality in Metro Manila,
Metro Cebu, Metro Davao and other
Metropolitan areas shall be
considered a city or municipality.
Commercial Law Review I
• For non-stock corporations, the
bylaws may provide that members
may holder their regular or special
meetings at any place even outside
the place where the principal office
is located provided that the place of
meetings is within RP territory and
provided proper notice sent to all
members (Section 92)
QUORUM
Stockholders representing majority of
outstanding capital stock or majority of
members (Section 51), unless
otherwise provided in the Code or in the
bylaws.
NOTE: where quorum is present, it is
not broken by the subsequent
withdrawal of a part of the
shareholders
Excluded from computation of quorum:
1. Delinquent shares or members
2. Non-voting shares or members
The total OCS without distinction as to
disputed or undisputed shares is the
basis in determining presence of
quorum.
Unissued stocks may not be voted or
considered in determining whether
quorum is present in stockholders’
meeting. Only those which are issued
and outstanding may vote.
• Allowed to be lower than the
majority of the outstanding capital
stock if it is stated in the by-laws.
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SEC MC No. 6 (2020)
When provided in the by-laws or by a
majority of the BOD/BOT, stockholders
or members may participate in the
meeting through remote communications
or other alternative modes of
communication.
A stockholder/member participating
through remote communication or in
absentia is deemed present for
purposes of quorum.
NOTE: Where a quorum is present, it is
not broken by the subsequent
withdrawal of a part of the
shareholders.
MATTERS WHICH BOD/BOT
SHALL ENDEAVOR TO PRESENT
TO STOCKHOLDERS DURING
REGULAR MEETING (Section 49)
– new provision
1. Minutes of the most recent regular
meeting including:
a. Description of voting and
vote tabulation procedures
used in the previous meeting;
b. Description of opportunity
given to
stockholders/members to
ask questions and a record of
the questions asked and
answer given;
c. Matters discussed and
resolutions reached;
d. Record of voting results for
each agenda item;
e. List of directors, trustees,
officers, stockholders or
Commercial Law Review I T a n g l a w N o t e s | 38

members who attended the (Exception: educational non-stock, 5

meeting; years staggered)
f. Such other items which SEC
may require in the interest of Each director and trustee shall hold
good corporate governance office until the successor is elected and
and protection of minority qualified. A director who ceases to own
stockholders. at least (1) share of stock or a trustee
who ceases to be a member of the
2. Members’ list for non-stock
corporation shall cease to be such.
corporation and for stock
corporation, material information on
current stockholders and their REMOVAL AND FILING OF
voting rights.
VACANCIES
3. Detailed, descriptive, balanced and
comprehensible assessment of REQUISITES FOR REMOVAL:
corporation’s performance, including
1. Must take place at a regular or
information on any material change
special meeting of the
in corporation’s business, strategy,
stockholders or members called
and other affairs.
for the purpose;
2. There must be previous notice to
BOARD OF the stockholders/members of
the intention to propose such
DIRECTORS/TRUSTEES removal;
Unless otherwise provided in this Code, 3. Removal must be by a vote of the
the board of directors or trustees shall stockholders representing 2/3
exercise the corporate powers, conduct outstanding capital stock or 2/3
all business, and control all properties of members entitled to vote; and
the corporation. (Section 22)
4. The director may be removed
with or without cause unless he
TERM OF OFFICE was elected by the minority, in
which case, it is required that
Directors shall be elected for a term of there is a cause for removal.
one (1) year from among the holders of (Section 27)
stocks registered in the corporation’s
books. (Exception: close corporation, The SEC shall motu proprio or upon
OPCs, corporation sole, religious verified complaint, and after due notice
societies) and hearing, order the removal of a
director or trustee elected despite the
Trustees shall be elected for a term not disqualification, or whose
exceeding three (3) years from among disqualification arose or is discovered
the members of the corporation.

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subsequent to an election. The removal
is without prejudice to other sanctions
which SEC may impose on BOD or
trustees who with knowledge of the
disqualification failed to remove such
director or trustee. (new provision)
QUESTION:
Who can remove a director or trustee of
Corporation?
ANSWER:
Generally, the stockholders. But now,
the law allows the SEC to motu propio
the removal of a director or trustee.
FILING OF VACANCIES IN
THE BOARD (Section 28)
1. By stockholders or members at
a regular or special meeting
called for that purpose – if
vacancy results because of: (i)
removal; (ii) expiration of term;
(iii) the ground is other than
removal or expiration of term
(e.g death, resignation,
abandonment) where the
remaining directors do not
constitute a quorum; (iv) increase
in the number of directors.
2. By board if remaining directors
constitute a quorum – if vacancy
other than by removal or by
expiration of term i.e. death,
resignation, abandonment
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A director or trustee elected to fill a
vacancy shall be referred to as
replacement director or trustee and
shall serve only for the unexpired term
of the predecessor in office.
When the vacancy 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, the vacancy may be
temporarily filled from among the
officers of the corporation by
unanimous vote of the remaining
directors or trustees. The action by the
designated director or trustee shall be
limited to the emergency action
necessary, and the term shall cease
within a reasonable time from the
termination of the emergency or upon
election of the replacement director or
trustee, whichever comes earlier. (new)
COMPENSATION
As a rule, a director or trustee is only
entitled to a reasonable per diem (just
enough to cover the costs of attending
the meeting); such is not subject to tax
because it is not [an] income; however,
excessive per diem amounts to
compensation and is generally subject to
tax.
COMPENSATION OF NON-
EXECUTIVE DIRECTORS OR
TRUSTEES
Director or trustee may be entitled to
compensation (on top of his reasonable
Commercial Law Review I T a n g l a w N o t e s | 40

per diem), if authorized in the by-laws • Courts may look into the
or by majority vote of the shareholders reasonableness of compensation if it
or members. would amount to giving away
corporate funds in the guise of
Total yearly compensation of all compensation as against the interest
directors must not exceed 10% of [the] of the dissenting minority or in
corporation’s income before tax. fraud of creditors.

No limitation to yearly compensation of

DISLOYALTY OF
trustees. But under the Tax Code,
yearly administrative costs (including DIRECTORS/TRUSTEES
salaries of all personal and yearly
If they acquire any personal or
compensation of trustees if so granted)
pecuniary interest in conflict with their
must not exceed 30% of total expenses;
duty as such directors or trustees, then
and yearly compensation of all trustees
this is a violation of their duty of loyalty
must not exceed 10% of corporation’s
incidental income.
Under Section 30, a director, trustee or
officer who attempts to acquire or
But in any case, director or trustee may
acquire any interest adverse to the
not participate in determining his own
corporation in respect of any matter
compensation. If compensation is to be
which has been reposed in him in
determined for all members of the
confidence, as to which equity imposes a
board, subject to
disability upon him to deal in his own
shareholders/members approval.
behalf, shall be liable as a trustee for
the corporation and must account for
COMPENSATION OF EXECUTIVE
DIRECTORS/TRUSTEES
the profits which otherwise would have
accrued to the corporation (forbidden
A director or member my be appointed as a
profit)
corporate officer, i.e. President. His
compensation as a corporate officer is not
subject to the limitations.
This is not susceptible of ratification
• Section 30 – Provides the fiduciary
• Public interest companies must
duty if the director or trustee
submit to their shareholders and
the SEC an annual report of the
total compensation of each DOCTRINE OF CORPORATE
director/trustee. OPPORTUNITY
• The stockholders representing at
least a majority of the OCS or (Section 33)
majority of the members may grant
directors or trustees with Where a director, by virtue of such
compensation and approve the office, acquires a business opportunity
amount at a regular or special which should belong to the corporation,
meeting. thereby obtaining profits to the

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prejudice of such corporation, the
director must account for and refund to
the latter all such profits, unless the act
has been ratified by a vote of the
stockholders owning or representing at
least two- thirds (2/3) of the
outstanding capital stock. This provision
shall be applicable, notwithstanding the
fact that the director risked one’s own
funds in the venture.
Subject to ratification however by
stockholders owning or representing at
least 2/3 of the OCS.
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. The BOD 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. The directors are also not liable to
the stockholders in performing such
acts. (Montelibano vs. Bacolod Murcia
Milling, 1962; Philippine Stock
Exchange vs. CA, 1997)
QUESTION:
Are corporate agents such as directors,
trustees or offices of a corporation
solidarily liable with the corporation
they represent?
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T a n g l a w N o t e s | 41
ANSWER:
No. Obligations incurred by them, acting
as such corporate officers, are not
theirs but the director accountabilities
of the corporation they represent.
But solidary/personal liabilities may be
incurred:
1. The director willfully and
knowingly voted for or assented
to a patently unlawful corporate
act;
2. The director or trustee was
guilty of gross negligence or bad
faith in directing corporate
affairs; and
3. The director or trustee acquire
personal or pecuniary interest in
conflict with his or her duties as
director or trustee. (Section 31,
CCP)
4. When a director or officer has
consented to the issuance of
watered stocks or who, having
knowledge thereof, did not
forthwith file with the
corporation secretary his
written objection thereto;
5. When a director, trustee or
officer has contractually agreed
or stipulated to hold himself
personally and solidarily liable
with the corporation; and
6. When a director, trustee or
officer is made, by specific
provision of law, personally liable
for his corporate action. (Lanuza
vs. BF Corporation, 2014)
Commercial Law Review I
In labor cases, corporate officers and
directors are solidarily liable with the
corporation for the termination of
corporate employees done with malice or
bad faith (Uichico vs. NLRC, 1997)
Unless the law specifically provides, a
corporate officer or agent is not civilly
or criminally liable for acts done by him
as such officer or agent. Exception:
BP22, Anti-Dummy Law
REQUISITES TO HOLD A DIRECTOR
OR OFFICER PERSONALLY LIABLE
FOR CORPORATE OBLIGATIONS:
(1) 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) complainant must clearly and
convincingly prove such unlawful acts,
negligence or bad faith.
The personal liability of corporate
officers validly attaches only when (a)
they assent to a patently unlawful act of
the corporation; or (b) they are guilty of
bad faith or gross negligence in
directing its affairs; or (c) they incur
conflict of interest resulting damages
to the corporation, its stockholders or
other persons. (Zaragoza vs. Tan,
2017)
Acts of an officer that are not
authorized by the BOD/BOT do not bind
the corporation unless the corporation
ratifies the acts or holds the officer
out as a person with authority to
transact on its behalf. (Doctrine of
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Apparent Authority) (University of
Mindanao vs. BSP, 2016, Leonen, J)
The doctrine of apparent authority
provides that even if no actual authority
has been conferred on an agent, his or
her acts, as long as they are within his
or her apparent scope of authority, bind
the principal. However, the principal's
liability is limited to third persons who
are reasonably led to believe that the
agent was authorized to act for the
principal due to the principal's conduct.
Apparent authority is determined by
the acts of the principal and not by the
acts of the agent. (Calubad vs. Ricarcen
Devt Corp, 2017, Leonen J)
SPECIAL FACTS DOCTRINE
While a director does not stand in
fiduciary relation to the stockholder, he
is under legal obligation to make a fair
and full disclosure of pertinent official
information where special
circumstances exist giving rise to the
obligation to disclose. (Strong vs.
Repide, 213 US 419)
A corporation's repeated payment of an
allegedly unauthorized obligation
contracted by one of its officers
effectively ratifies that corporate
officer's allegedly unauthorized act.
(Terp Construction Corporation vs.
Banco Filipino, 2019, Leonen J)
The Postmaster General's lack of
authority may be ratified through the
Board of Director's silence or
Commercial Law Review I
acquiescence. The ratification of the
unauthorized act does not necessarily
mean that the contract is valid. If the
contract is executed without complying
with the laws on procurement, the erring
public official may be held
administratively liable. (Office of the
Ombudsman vs. De Guzman, 2017,
Leonen J)
SELF-DEALING DIRECTORS,
TRUSTEES OR OFFICERS
(Section 31)
A contract of the corporation with one
or more of its directors, trustees,
officers or their spouses and relatives
within the fourth civil degree of
consanguinity or affinity is voidable, at
the option of such corporation, unless all
the following conditions are present:
a. The presence of such director or
trustee in the board meeting in
which the contract was approved
was not necessary to constitute a
quorum for such meeting;
b. The vote of such director or
trustee was not necessary for
the approval of the contract;
c. The contract is fair and
reasonable under the
circumstances;
d. In case of corporations vested
with public interest, material
contracts are approved by at
least 2/3 of the entire
membership of the board, with at
least a majority of the
independent directors voting to
approve the material contract;
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(new provision) - enhances the
protection of minority
shareholders in public interest
companies. This is the strictest
voting requirement for an
approval by the board in the
entire Code.
e. In case of an officer, the
contract has been previously
authorized by the BOD
Where any of the first 3 conditions 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 OCS or the members in a meeting
called for the purpose.
Provided, that full disclosure of the
adverse interest of the directors or
trustees involved is made at such
meeting and the contract is fair and
reasonable under the circumstances.
NOTE: If all present, contract is valid
and enforceable
INTERLOCKING DIRECTORS
(Section 32)
Except in case of fraud, and provided
the contract if fair and reasonable
under the circumstances, a contract
between 2 or more corporations having
interlocking directors shall not be
invalidated on that ground alone.
But if the interest of the interlocking
director in 1 corporation is substantial
and in the other corporation merely
Commercial Law Review I
nominal, the contract shall be subject to
the provisions of Section 31 insofar as
the latter corporations are concerned.
Stockholdings exceeding 20% of the
OCS shall be considered substantial for
purposes of interlocking directors.
NOTE: If substantial in one and nominal
in the other, voidable at the option of
the corporation unless the requirements
under Section 31 are met, in so far as
the latter corporation is concerned
If both substantial or both nominal
valid.
EXECUTIVE COMMITEES
Section 34. Executive, Management,
and other Special Committees
If the bylaws so provide, the board may
create an executive committee
composed of at least 3 directors.
Said committee may act by majority
vote of all its members, on such specific
matters within the competence of the
board, as may be delegated to it in the
by-laws or by majority vote of the
board, except with respect to:
a. Approval of any action for which
shareholders' approval is
required;
b. filling of vacancies in the board;
c. amendment or repeal of bylaws
or adoption of new bylaws;
d. amendment or repeal of any
board resolution which by its
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express terms is not amendable
or repealable; and
e. distribution of cash dividends to
the shareholders
The BOD may create special committees
of temporary or permanent nature and
determine the members' term,
composition, compensation, powers, and
responsibilities. (this is with or without
bylaw authority)
• Not all committees are under the
executive committee; created by
the by-laws
MEETINGS OF THE BOARD
KINDS:
1. Annual meeting – date specified
in by-laws;
2. Regular – monthly unless
otherwise specified in by-laws;
3. Special – may be held at any time
upon [the] call of [the] President
or as provided in by-laws.
NOTICE:
• At least two days prior to
scheduled regular or special
meeting unless longer time
provided in by- laws; may be
waived expressly or impliedly.
• Notice may be sent through e-
mail, messaging service, or such
other manner as provided in the
by- laws or board resolution.
(SEC MC no. 6, 2020)
PLACE OF MEETINGS:
Commercial Law Review I
• May be held anywhere in or
outside the Philippines, unless
the bylaws provide otherwise.
QUORUM:
• Majority of the directors or
trustees as stated in the AOI
shall constitute a quorum to
transact corporate business,
unless the AOR or by-laws
provides for a greater majority.
• Director/trustee who
participates thru remote
communication deemed present
for purpose of attaining quorum
(SEC MC no. 6, 2020)
VOTE REQUIRED:
• Every decision reached by at
least a majority of the directors
or trustees constituting a
quorum
• But election of officers requires
the vote of a majority of all the
members of the board to be valid
as a corporate act.
MODE OF ATTENDANCE, VOTING:
• Directors/trustees who cannot
physically attend or vote at
board meeting can participate
and vote thru remote
communication such as
videoconferencing,
teleconferencing, other
alternative modes of
communication. But they cannot
attend or vote by proxy (Section
52)
• Director/trustee who has
potential interest in any related
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party transaction must recuse
from voting on the approval of
said transaction without
prejudice to compliance with
Section 31.
• Director/trustee participating
via remote communication may
cast his vote on any item in the
agenda through e-mail, messaging
service or such other manner as
may be provided in the internal
procedure (SEC MC no. 6,
2020)
• The chairman, or in his absence,
the president shall preside at all
meetings of directors/trustees,
as well as of the
stockholders/members, unless
the by-laws provide otherwise.
NOTE:
Any action of the board without a
meeting and without the required voting
and quorum requirements will not bind
the corporation, unless subsequently
ratified, either expressly or impliedly.
But in the case of close corporations,
the act of any director may bind the
corporation even without a meeting,
unless the by-laws provide otherwise
(Section 100)
In the case of OPCs, when action is
needed on any matter, in lieu of
meetings, sufficient to prepare a
written resolution signed and dated by
the single stockholder and recorded in
the minutes book of the OPC (Section
128). The minute book contains all
Commercial Law Review I T a n g l a w N o t e s | 46

actions, decisions, and resolutions taken the SC or listed on a securities

by the OPC (Section 127) exchange: (Sec. 43)
a. If so resolved by the BOD and
agreed by a shareholder,
investor, or securities
CAPITAL AFFAIRS intermediary.
b. If so provided in the AOl and by-
CERTIFICATE OF STOCK
laws, such corporation may issue
A stock certificate is a written evidence all of the shares of a particular
of the shares of stock but is not the class in the form of
share itself. It is merely prima facie uncertificated securities and
evidence of ownership and evidence can subject to a condition that
be presented to determine the real investors may not require the
owner of the shares. corporation to issue a
certificate.
Stock certificates attest to the number
of shares that a person owns in a Under the SRC, transfer of
corporation. They also reflect the uncertificated shares shall only be valid,
features, preferences, and limitations, so far as the corporation is concerned,
if any, if the covered shares. when a transfer is recorded in the books
of corporation so as to show the names
The certificates must be signed by the of the parties to the transfer and the
president of vice-president, and sealed number of shares transferred.
with the seal of the corporation.
(Section 62)
REQUIREMENTS FOR VALID
No stock certificate shall be issued to a
TRANSFER
subscriber until the full amount of the
subscription together with interests Section 62. Shares of stock are
and expenses (in case of delinquent personal property and may be
shares), if any is due, has been paid. transferred by delivery of the
(Section 63) certificate indorsed by the owner, his
attorney-in-fact, or any other person
legally authorized to make the
UNCERTIFICATED SHARES transfer.

The Securities Regulation Code permits No transfer however shall be valid,

on a voluntary basis the issuance of except as between the parties, until the
uncertificated or scripless shares or transfer is recorded in the books of the
securities for corporations whose corporation.
securities are registered pursuant to

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Commercial Law Review I
No shares of stock against which the
corporation holds any unpaid claim shall
be transferable in the books of the
corporation.
NOTE: thus, transferee of unpaid
shares will not be recognized as
stockholder and could not exercise his
rights until transfer is duly recorded in
the stock and transfer book; thus he
cannot vote or be voted for and not
entitled to dividends
The SEC may require corps whose
securities are traded and which can
reasonably demonstrate their capability
to do so to issue their securities or
shares of stock in uncertificated or
scripless form. (new provision)
If represented by a certificate, the ff
must strictly be complied with:
1. delivery of certificate
2. indorsement by owner or his
attorney in fact or other persons
legally authorized to make the
transfer; and
3. to be valid to third parties,
transfer must be recorded in
books of corporation (Rural Bank
of Lipa v. CA, 2001)
b) if not represented by certificate
(such as when certificate has not yet
been issued or where for some reason is
not in possession of stockholder)
1. by a duly notarized deed of
assignment, and
2. such is duly recorded in books of
corporation.
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But SEC has ruled that when [the]
corporation has already issued stock
certificate, transfer can only by
endorsement and delivery.
No transfer shall be valid, except as
between the parties, until the transfer is
recorded in the books of the corporation
showing the names of the parties to the
transaction, the date of the transfer, the
number of the certificates, and the number
of shares transferred.
Here, even if it could be assumed that the
sale contained in the photocopies of the
deed of sale has transpired, such is valid
only as between the parties. (Tee Ling Kiat
vs Ayala Corp., 2018)
The purpose of registration is two-fold:
1. to enable the transferee to exercise
all the right of a stockholder,
including the right to vote and be
vote for, and
2. to inform the corporation of any
change in share ownership that it
can ascertain the persons entitled to
the rights and subject to the
liabilities of stockholder.
A person who has purchased stock and who
desires to be recognized as a stockholder
for purpose of voting, must secure such a
standing by having the transfer recorded on
the corporate books. Until the transfer is
registered, the transferee is not a
stockholder but an outsider. (Republic v.
Sandiganbayan, GR No. 107789, April 30,
2003)
DOCTRINE OF
INDIVISIBILITY OF
SUBSCRIPTION
Commercial Law Review I
No certificate of stock shall be issued
to a subscribed until the full amount of
subscription together with interest and
expenses (in case of delinquent shares),
if any is due, has been paid. (Section 63)
A subscriber may not demand the
application of his partial payment as full
payment against a fraction of the entire
subscription. It will diminish the
remedies of the corporation to collect
the balance of the subscription. When
the subscriber becomes delinquent, the
corporation may not be able to sell as
many of his subscribed shares as would
be necessary to cover the total amount
due from him (SEC-OGC Opinion 16-
05, March 31, 2016)
STOCK AND TRANSFER
BOOK
ENTRIES
1. all stocks in the name of the
stockholders arranged
alphabetically;
2. amount paid and unpaid on all
stocks and date of payment of
any installment;
3. alienation, sale or transfer of
stocks; and
4. other entries as by-laws may
prescribe
Who is authorized to make entries?
The corporate secretary; entries
made by chairman or president are
invalid (Torres v. CA, 1997)
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• Can be done by a stock transfer
agent which must be licensed by
SEC.
Probative value of stock and transfer
book
• It is the best evidence of the
transactions that must be
entered or stated therein.
Entries are prima facie evidence
only and may be subject to proof
to the contrary (Bitong v. CA,
1998)
LOST OR DETROYED
CERTIFICATES (Section 72)
One of the basic rights of a stockholder
is the right to be issued new stock
certificates if lost or destroyed.
REQUIREMENTS:
1. affidavit in triplicate filed with
corporation
2. publication by corporation in
newspaper of general circulation
once a week for 3 consecutive
weeks at the expense of
registered owner
3. if no contest presented after 1
year from date of last
publication, or registered owner
files a bond, a new certificate
shall be issued.
No action may be brought against
corporation which issued the stock
certificate in lieu of those lost, stolen
or destroyed except in case of fraud,
bad faith or negligence on the part of
corporation.
Commercial Law Review I
• Situs of the shares of stocks is
where the Corporation is situated.
WATERED STOCKS
Those issued not in exchange for its
equivalent either in cash, property,
share, stock dividends, or services;
thus, their issuance is prohibited.
These include stocks:
1. Issued without consideration
(Bonus shares)
2. Issued as fully paid when
corporation has received a lesser
sum of money than its par or
issued share (discounted share)
3. Issued for consideration other
than actual cash (i.e. property or
services), the fair value of which
is less than its par or issued
value; or
4. Issued as stock dividend when
there are no sufficient retained
earnings or surplus to justify it.
LIABILITY FOR WATERED
STOCKS
Under Section 64, directors or officers
who:
a. consented to its issuance for a
consideration less than its par or
issued value;
b. consents to the issuance of
stocks for a consideration other
than cash, valued in excess of its
fair value; or
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c. having knowledge of the
insufficient consideration, does
not file a written objection
• Are solidarily liable with the
stockholder concerned to the
corporation or its creditors for
the difference in value received
at the time of issuance of the
stock and the par or issued value
of the same.
• Liability for watered stock based
on trust fund doctrine since
their issuance constitutes fraud
on creditors.
EFFECTS OF ISSUANCE OF
WATERED STOCK
As to corporation – when corp guilty of
ultra vires or illegal acts which cause
injury or fraud upon the public, state
may institute quo warrant proceedings
to forfeit its charter
As between corporation and subscriber
– subscription is void, unless subscriber
pays the full par or issued value
As to consenting stockholders –
estopped from raising any objection
As to dissenting stockholder – In view
of dilution of their proportionate
interest in corp, they may compel the
payment of the water in the stock
solidarily against the responsible and
consenting directors and officers
inclusive of the holder of the watered
stock
Commercial Law Review I
As to creditors – they may enforce
payment of the difference, solidarily
against the responsible director/
officer and stockholder
As against transferee of watered
stock – It depends on whether he
acquired it with or without notice. If he
had knowledge, he is subject to same
liability as his transferor. If a stock
certificate has been issued and duly
indorsed to him, without his knowledge,
he cannot be held liable.
PAYMENT OF BALANCE OF
SUBSCRIPTION
Under Sec. 66, subject to the provisions
of the subscription contract, the BOD
may, at any time, declare due and
payable to the corporation unpaid
subscriptions and may collect the same
or such percentage thereof, in either
case, with accrued interest, if any, as it
may deem necessary.
• Unpaid subscription must be paid
in accordance with the terms of
the subscription contract.
• In the absence of such terms,
payment must be made upon call
by the board and on the date
specified in such call.
NOTICE:
• Notice of the call is necessary to
bind the stockholder (Baltazar
vs Lingayen Gulf, 1965)
• Stockholders must be given
notice of the board resolution by
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the corporate secretary, either
personally or by registered mail.
DELINQUENCY
Failure to pay on such date shall render
the entire balance due and payable and
shall make the stockholder liable for
interest at the legal rate on such
balance, unless a different interest rate
is provided in the subscription contract.
The interest shall be computed from the
date specified, until full payment of the
subscription.
If no payment is made within 30 days
from the said date, all stocks covered by
the subscription shall there upon
become delinquent and shall be subject
to sale as hereinafter provided, unless
the BOD orders otherwise.
The BOD may, by resolution, order the
sale of delinquent stock and shall
specifically state the amount due on
each subscription plus all accrued
interest, and the date, time, and place
of the sale which shall not be less than
30 days nor more than 60 days from the
date the stocks become delinquent.
(Section 67)
DELINQUENCY SALE
Unless the delinquent stockholder pays
the corporation on or before the date
specified for the sale of the delinquent
stock, the balance due on the former's
subscription, plus accrued interest, cost
of advertisement and expenses of sale,
or unless the BOD otherwise orders.
Commercial Law Review I
Notice of the sale, with a copy of the
resolution, shall be sent to every
delinquent stockholder either
personally, by registered mail, or
through other means provided in the
bylaws; publication of notice 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.
Unless the delinquent stockholder pays
the corporation on or before the date
specified for the sale of the delinquent
stock, or unless the BOD otherwise
orders, said delinquent stock shall be
sold at a public auction to such bidder
who shall offer to pay the full amount
of the balance on the subscription
together with accrued interest, costs
of advertisement and expenses of
sale, for the smallest number of
shares or fraction of a share.
Under Section 71, holders of
subscribed shares not full paid which
are not delinquent shall have the rights
of a stockholder.
Effects of Delinquency (Section 70)
a. Deprives stockholder the right:
1. to be voted for; t
2. to be entitled to vote; or
3. to representation at any
stockholders' meeting
b. Delinquent stockholder shall not be
entitled to any of the rights of a
stockholder but he shall be entitled
to receive dividends
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c. Delinquent stocks shall be subject to
delinquency sale
• If delinquent stockholder is a
director, he shall continue to be
a director but he cannot run for
re- election
Under Section 42, any cash dividends
due on delinquent stocks shall first be
applied on the unpaid balance on the
subscription plus costs and expenses,
while stock dividends shall be withheld
until unpaid subscription is fully paid.
Under Section 63, no stock certificate
shall be issued until the full amount of
subscription together with interest and
expenses in case of delinquent shares, if
any is due, has been paid.
COURT ACTION
• Instead of a delinquency sale,
the corporation can collect the
amount due on any unpaid
subscription, with accrued
interests, costs and expenses,
through a court action.
• This can also be resorted to if
there is a failure of bidding and
the corporation cannot acquire
the shares due to the absence of
unrestricted retained earnings.
ALIENATION OF
SHARES
Section 62 – Shares of stock are
personal property and may be
transferred by delivery of the
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certificate indorsed by the owner, his
attorney-in-fact, or any other person
legally authorized to make the transfer.
No transfer however shall be valid,
except as between the parties, until the
transfer is recorded in the books of the
corporation.
No shares of stock against which the
corporation holds any unpaid claim shall
be transferable in the books of the
corporation.
NOTE: thus, transferee of unpaid
shares will not be recognized as
stockholder and could not exercise his
rights until transfer is duly recorded in
the stock and transfer book; thus he
cannot vote or be voted for and not
entitled to dividends.
Requisites for valid transfer
a. if represented by a certificate,
the ff must strictly be complied
with:
1. delivery of certificate
2. indorsement by owner or his
attorney in fact or other
persons legally authorized to
make the transfer; and
3. to be valid to third parties,
transfer must be recorded in
books of corporation (Rural
Bank of Lipa v. CA, 2001)
b. if not represented by certificate
(such as when certificate has not
yet been issued or where for
some reason is not in possession
of stockholder)
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1. by a duly notarized deed
of assignment, and
2. such is duly recorded in
books of corporation
• The corporation cannot impose
unreasonable restrictions to the
right of the shareholders to
dispose their shares since it is a
right granted by law. However, the
corporation may impose valid
limitations.
VALID RESTRICTION ON RIGHT
TO TRANSFER
1. Transfer is not valid, except as
between the parties, until
recorded in the books of the
corporation
2. Shares of stock against which
the corporation holds any unpaid
claim shall not be transferred in
the books of the corporation
3. Restrictions required to be
indicated in AOI, bylaws, stock
certificate of close corporation
4. Restrictions imposed by special
law
.
5. Sale to aliens in violation of
maximum ownership under
nationalization laws
6. Those covered by reasonable
agreement of the parties
The SEC has taken the position that a
subscriber may not assign the balance of
his unpaid subscription to a third party,
and demand the issuance of stock
certificates relative to the paid portion
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of his subscription, based on the f. Copies of the latest reportorial

indivisibility of subscription.
But assignment of subscription,
according to the SEC, should be
permitted when the corporation through
the board gives consent. There is
novation in this case. There is a change
of debtor needing the consent of the
creditor corporation. But the board in
granting consent must consider the
interest of stakeholders, especially the
corporate creditors.
requirements submitted to the
SEC
.
g. Minutes of all meetings of
stockholders or members, or of
the BOD or trustees.
h. Stock and transfer book
DISSOLUTION
• Extinguishment of the franchise
of a corporation and termination
of its corporate existence

CORPORATE BOOKS AND MODES OF DISSOLUTION

a. Voluntary dissolution
RECORDS b. Involuntary dissolution
c. Shortening of term
BOOKS REQUIRED TO BE d. Expiration of term (may be
MAINTAINED BY CORPORATION AT considered voluntary since it is
ITS PRINCIPAL OFFICE (Section 73) the intention of the stockholders
a. AOI and bylaws and all that it shall exist only for such
amendments period)

b. Current ownership structure and

voting rights of the corporation, VOLUNTARY DISSOLUTION
including lists of stockholders or
members, group structures, a. Where no creditors are affected
intra-group relations, ownership (Sec. 134)
data, and beneficial ownership. • If dissolution does not prejudice
c. Names and addresses of all the the rights of any creditor having
members of the BOD or BOT and a claim against it.
the executive officers
b. Where creditors are affected
d. Record of all business (Sec. 135)
transactions
.

e. Record of resolutions of the BOD

or trustees and of the
DISSOLUTION BY
stockholders or members SHORTENING CORPORATE
TERM (Section 136)

Via amendment of AOI

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NOTE: Under Sec. 104, any
stockholder of a close corporation may,
by written petition to the SEC, compel
the dissolution of the corporation
whenever any acts of the directors,
officers, or those in control of the
corporation is illegal, fraudulent,
dishonest, oppressive, or unfairly
prejudicial to the corporation or any
stockholder, or whenever corporate
assets are being misapplied or wasted.
Under Sec. 103, the SEC shall have the
power to dissolve a corporation in case
of deadlocks in a close corporation, upon
written petition by any stockholder, in
the exercise of its power to arbitrate
the dispute.
INVOLUNTARY
DISSOLUTION
A corporation may be dissolved by the
SEC mot propio, or upon filing of a
verified complaint by any interested
party.
GROUNDS FOR DISSOLUTION:
Any ground provided by law or rules,
including:
a. Non-use of corporate charter as
provided under Sec. 21
b. Continuous inoperation of a
corporation as provided under Sec.
21
c. Upon receipt of lawful court order
dissolving corporation
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d. Upon finding by final judgment that
corporation procured its
incorporation through fraud
LIQUIDATION
• Is the settlement of corporate
affairs following dissolution of
the corporation.
For purposes of liquidation, the
corporation, whose existence has been
terminated, shall remain as a body
corporate for 3 years after the
effective date of dissolution, for the
purpose of prosecuting and defending
suits by or against it and enabling it to
settle and close its affairs, dispose of
and convey its property, and distribute
its assets, but not for the purpose of
continuing the business for which it was
established. (Sec. 139)
THREE METHODS OF CORPORATE
LIQUIDATION:
a. By the corporation through the
last board
b. Conveyance to a trustee within a
three-year period
c. By a management committee or
through a receiver
SPECIAL
CORPORATIONS
CLOSE CORPORATIONS
REQUIREMENTS FOR CLOSE
CORPORATIONS (Sec. 95)
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NOTE: All must be present
a. AOI must state that all the
corporation's issued stock of all
classes, exclusive of treasury
shares, shall be held of record by
not more than a specified number
of persons, not exceeding 20;
b. AOI must provide that all the
issued stock of all classes shall
be subject to one or more
specified restrictions on
transfer permitted by this Code
(which must appear in AOI, by-
laws and certificate of stock)
• But restriction on transfer must
not be more onerous than
granting the existing SH or
corporation the option to
purchase the shares;
c. Stocks cannot be listed in stock
exchange nor be publicly offered
Notwithstanding the foregoing, a
corporation shall not be deemed a close
corporation when at least 2/3 of its
voting stock or voting rights is owned or
controlled by another corporation which
is not a close corporation.
The ff cannot be close corporation:
• Mining companies
• Oil companies
• Stock exchanges
• Banks,
• Insurance companies
• Public utility,
• Education institution; and
• Other corporation declared to be
vested with public interest (Sec.
95)
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PREEMPTIVE RIGHT IN CLOSE
CORPORTATION
• Shall extend to all stocks to be
issued, including reissuance of
treasury shares, whether for
money or property or personal
services, or in payment of
corporate debts, unless AOl
provide otherwise (Sec. 101)
• Preemptive rights covers even
those that are excluded in Sec.
38 of CCP: (a) issued in
compliance with laws requiring
stock offering or minimum stock
ownership; (b) in exchange of
property needed for corporate
purposes upon 2/3 vote of OCS.
CHARACTERISTICS
1. AOl may provide for a class of
shares or rights, the
qualifications for owning or
holding the same, and
restrictions on their transfer;
2. AOI may provide for a
classification of director into
one or more classes, which may
be voted for and elected solely
by a particular class of stock;
3. AOI may provide for a greater
quorum or voting requirements in
meetings of stockholders or
directors;
4. AOI may provide that the
business of the corporation shall
be managed by the stockholders
in which case they will be subject
to all the liabilities of directors
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and will be personally liable for
corporate torts unless the
corporation obtains reasonably
adequate liability insurance;
5. AOI may provide that officers or
employees shall be elected or
appointed by the stockholders
instead of by the BOD;
6. Stockholders may enter into
written agreements regarding
business operations;
7. Directors can validly act even
without a meeting, unless by-laws
provide otherwise (Sec. 100);
8. Stockholder may withdraw and
compel purchase of his shares
for any reason, provided
corporation has sufficient assets
to cover its liabilities exclusive
of capital stock;
9. Proper forum may interfere in
mgt in case of deadlocks, even if
directors/stockholders acting in
good faith (exception to business
judgment rule)
10. Any stockholder may petition
SEC for corporate dissolution
for grounds provided for under
Sec. 104
DEADLOCKS
Notwithstanding any contrary provision
in the AOI, by laws, or stockholders
agreement, if the directors or
stockholders are so divided on the
management of the corporation's
business and affairs that the votes
required for a corporate action cannot
be obtained, with the consequence that
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the business and affairs of the
corporation can no longer be conducted
to the advantage of the stockholder
generally, the SEC, upon written petition
by any stockholder, shall have the power
to arbitrate the dispute.
In the exercise of such power, the SEC
shall have the authority to make
appropriate order, such as:
1. Cancel or alter any provision in
the AOI, bylaws, or any
stockholders' agreement;
2. Cancel, alter or enjoin a
resolution or act of the
corporation, or its BOD,
stockholder, or officers;
3. Direct or prohibit any act of the
corporation or its BOD,
stockholders or officers, or
other persons party to the
action;
4. Require the purchase at their
fair value of shares of any
stockholder, either by the
corporation regardless of the
availability of unrestricted
retained earnings in its books, or
by other stockholders;
5. Appoint a provisional director;
6. Dissolve the corporation;
7. Grant such other relief as the
circumstances may warrant
NON-STOCK
CORPORATIONS
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For the purposes of this Code, a non-
stock corporation is one where no part
of its income is distributable as
dividends to its members, trustees, or
officers. (Sec.86)
Also called non-profit corporations.
Any profit which a non-stock
corporation may obtain incidental to its
operations shall, whenever necessary or
proper, be used for the furtherance of
the purpose or purposes for which the
corporation was organized. (Sec. 86)
The provisions governing stock
corporations, when pertinent, shall be
applicable to non-stock corporations.
In BCDA vs CIR (2018), the SC held
that BCDA is not a stock corporation
because its capital is not divided into
shares nor is it authorized to distribute
dividends. However, BCDA is also not a
non- stock corporation because it is not
organized for any of the purposes
mentioned in Sec. 88 (87)
QUESTION:
Are non-stock corporation allowed to
have income?
ANSWER:
Yes. However, it is not allowed to
distribute it to its members.
RELIGIOUS CORPORATIONS
CORPORATION SOLE
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• For the purpose of administering
and managing, as trustee, the
affairs, property and
temporalities of any religious
denomination, sect or church, a
corporation sole may be formed
by the chief archbishop, bishop,
priest, minister, rabbi, or other
presiding elder of such religious
denomination, sect or church.
(Sec. 107)
• A corporation sole does not have
nationality but for purposes of
applying nationalization laws,
nationality is determined not by
the nationality of its head, but by
the nationality of the members
constituting the sect in the
Philippines.
ONE PERSON
CORPORATION
• A corporation with a single
stockholder
• Only natural persons, trust or
estate may form an OPC (trust
does not refer to a trust entity
but the subject being managed
by a trust)
• Banks and quasi-banks, preneed,
trust, insurance, public and
publicly listed companies, and
non- chartered GOCCs may not
incorporate as OPC (Sec. 116)
• A natural person licensed to
exercise a profession may not
organize as an OPC for the
purpose of exercising such
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profession except as otherwise
provided under special laws.
• OPC not required to have
minimum authorized capital stock
except as otherwise provided by
special law
• Term of existence perpetual but
for trust or estate, shall be co-
terminous with existence of
trust or estate (SEC MC 7)
• Foreign natural persons may
form PC subject to restrictions
on foreign participation in
certain investment areas (SEC
MC no. 7, 2019)
• OPC not required to submit and
file corporate bylaws.
• The single stockholder shall be
the sole director and president.
Single stockholder may not be
appointed as corporate
secretary. He may be the
treasurer but shall give bond to
the SEC.
• OPC shall maintain minutes book
containing all actions, decisions
and resolutions taken by OPC
• Written resolution, signed and
dated by single stockholder, and
recorded in minutes book, in lieu
of meetings when action needed
on any matter. Date of recording
deemed date of meeting.
• Single stockholder shall
designate nominee and alternate
nominee to take place as director
and to manage corporate affairs
in case of death or incapacity.
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• Sole shareholder claiming limited
liability has burden of showing
that corporation adequately
financed. Where single
stockholder cannot prove that
property of OPC is independent
of stockholder's personal
property, stockholder jointly and
severally liable for debts and
liabilities of OPC. The principles
of piercing the corporate fiction
applies with equal force to OPC.
(Sec. 130)
• OPC can be converted into an
ordinary stock corporation and
vice-versa (Sec. 131, 132)
• OPC as a General Secretary = NO
(Not Allowed)
• OPC as Treasurer = YES (Allowed)
FOREIGN
CORPORATIONS
For the purposes of this Code, a foreign
corporation is one formed, organized or
existing under any laws other than those
of the Philippines and whose laws allow
Filipino citizens and corporations to do
business in its own country or state.
(incorporation test)
It shall have the right to transact
business in the Philippines after it shall
have obtained a license to transact
business in this country in accordance
with this Code and a certificate of
authority from the appropriate
government agency. (Sec. 140)
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Under Sec. 150. no FC transacting
business in the Philippines without a
license shall be permitted to sue or
intervene in any action, suit or
proceeding in any court or
administrative agency in RP; but such FC
may be sued here (Doctrine of Quasi-
Estoppel by Acceptance of Benefits)
An FC must appoint a resident agent on
whom summons and other legal
processes may be served against such
corporation.
Failure to maintain and appoint a
resident agent is a ground for
revocation of license to do business.
• FC not doing business in the PH = no
need to get a license
• The number of transactions here in
the Philippines is irrelevant, as long
as the transaction is in relation to
the business or directly for the
purpose of the business, the FC
needs to get a license.
QUESTION:
What constitutes “doing business” in RP
for FCs?
ANSWER:
Under the continuity test, doing
business 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.
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Under the substance 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.
Where single or isolated transaction not
merely incidental or casual but indicates
FCs intention to do other business in RP,
said single act or transaction continues
doing business.
GROUNDS FOR REVOCATION OF
LICENSE – FCs
(Section 151)
1. Failure to file annual report or
pay fees as required by this Code
2. Failure to appoint and maintain
resident agent
3. Failure after change of resident
agent or of his address to submit
to SEC a statement of such
change
4. Failure to submit authenticated
copy of amendment to AOl or
bylaws or of any articles of
merger or consolidation
5. Misrepresentation of any
material matter in any
application, report, document
submitted
6. Failure to pay taxes, imposts,
assessments, penalties lawfully
due to government
7. Transacting business in RP
outside of purpose for which it is
authorized
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8. Transacting business in RP as
agent or acting on behalf of any
FC or entity not duly licensed to
do business in RP
9. Any other ground as would
render it unfit to transact
business in RP.
MERGERS AND
CONSOLIDATIONS
Two or more corporations may merge
into a single corporation which shall be
one of the constituent corporations or
may consolidate into a new single
corporation which shall be the
consolidated corporation. (Sec. 75)
MERGER
• One where a corporation
absorbs the other and
remains in existence while
the others are dissolved.
CONSOLIDATION
• One where a new corporation
is created, and consolidating
corporations are
extinguished.
EFFECTS:
The constituent corporations shall
become a single corporation which, in
case of merger, shall be the surviving
corporation designated in the plan of
merger; and, in case of consolidation,
shall be the consolidated corporation
designated in the plan of consolidation.
BANKING LAWS
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THE GENERAL BANKING
LAW OF 2000 (RA 8791)
• Governs universal banks and
commercial banks
• Has suppletory application to
thrift banks, rural banks, and
other banks
• But the entry of foreign banks is
governed by the Foreign Bank
Liberalization Act
BSP’s SUPERVISORY
POWERS
• The operations and activities of
banks shall be subject to the
supervision of the Bangko
Sentral ng Pilipinas. (Sec. 4,
GBL)
• Supervision includes the
issuances of rules of conduct or
establishment of standards of
operations, conduct of
examination to determine
compliance with laws and
regulations, overseeing, regular
investigation not oftener than
once a year to determine if
institution is conducting its
business in a safe or sound basis,
inquiring into the solvency and
liquidity of banks, and enforcing
prompt corrective action.
• The BSP shall also have
supervision over operations of
and exercise regulatory powers
over quasi-banks, trust entities,
and other financial institutions
subject to BSP supervision.
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1. Supervision of operations and
activities of banks (includes
examination and investigation,
inquiring into solvency and
liquidity, and enforcing prompt
corrective action (Sec. 4)
2. BSP shall also have supervision
over the operations of and
exercise regulatory powers over
quasi- banks, trust entities and
other financial institutions which
under special laws are subject to
BSP supervision. (Sec. 4)
3. BSP shall provide policy direction
in the areas of money, banking
and credit... prescribe ratios,
standards. (Sec. 5)
4. No person or entity shall engage
in banking operations or quasi-
banking functions without
authority from the Bangko
Sentral. (Sec. 6)
5. The Bangko Sentral shall, when
examining a bank, have the
authority to examine an
enterprise which is wholly or
majority-owned or controlled by
the bank. (Sec. 7)
QUESTION:
What are banks?
ANSWER:
Banks are entities engaged in the
lending of funds obtained in the form of
deposits from the public. (Sec. 3.1,
GBL)
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• Banks must be stock
corporations (only par value
shares); its funds must come
from the public, meaning
deposits of 20 or more persons;
must comply with the minimum
capital requirements
• Lending companies which are
corporations engaged in granting
loans from its own capital funds
or from funds sourced from not
more than 19 persons shall not be
deemed to include banks. (RA
9474 or the Lending Company
Regulation Act). They secure
their license from the SEC.
BANKING
• No person or entity shall engage
in banking operations or quasi-
banking functions without
authority from the BSP
• An entity authorized by the BSP
to perform universal or
commercial banking functions
shall likewise have the authority
to engage in quasi-banking
functions.
• The determination of whether a
person or entity is performing
banking or quasi-banking
functions without BSP shall be
decided by the Monetary Board.
• Upon issuance of this authority,
such person or entity may
commence to engage in banking
operations or quasi-banking
function and shall continue to do
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so unless such authority is sooner Monetary Board may determine,

surrendered, revoked, suspended and
or annulled by the BSP Persons or
d. The purpose of which is (1)
entities found to be performing
relending and (2) purchasing
banking or quasi-banking
receivables and other
functions without authority from
obligations.
the BSP shall be subject to
appropriate sanctions under the
New Central Bank Act and other Deposit substitutes
applicable laws. (Sec. 6 GBL) • Alternative forms of obtaining
funds from the public, other than
deposits, thru the issuance,
QUESTION: endorsement, or acceptance of
debt instruments for the
What are quasi-banks? borrower's own account for the
purpose of relending or purchasing
ANSWER: of receivables and other
obligations.
Entities engaged in the borrowing of NOTE: No bank shall engage in quasi-
funds thru issuance, endorsement or banking functions without authority from
assignment with recourse or acceptance the BSP. Banks authorized by the BSP to
of deposit substitutes for purposes of perform universal and commercial banking
relending or purchasing receivables and functions shall automatically have the
other obligations. authority to engage in quasi-banking
functions.
Essential Elements of Quasi-Banking:
a. borrowing of funds for the
borrower's own account;
TRUST ENTITIES
b. 20 or more lenders at any one TRUST ENTITY
time • A stock corporation or person
.

c. Methods of borrowing are duly authorized by the MB to

issuance, endorsement, or engage in trust business. (Sec.
acceptance of debt instruments 79)
of any kind, other than deposits, TRUST BUSINESS
such as acceptances, promissory • Acting as a trustee or
notes, participations, administering any trust or hold
certificates of assignments or property in trust or on deposit
similar instruments with for the use, benefit or behoof of
recourse, trust certificates, others. (Sec. 79)
repurchase agreements, and such
TRUST FUND
other instruments as the

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• Created for the purpose of
administering the property for
the use and benefit of the
trustor or of others. Because of
this, trust funds do not form
part of the bank's assets
NOTE: The law prohibits integrating
properties and funds of all other
businesses of the bank with those of the
trust business
TRUST (PRUDENT MAN
RULE)
Under this rule, the trust entity is
required to administer the funds or
property under its custody with the
skill, care, prudence, and diligence
necessary under the circumstances then
prevailing that a prudent man, acting in
the capacity and familiar with such
matters, would exercise in the conduct
of an enterprise of a like character and
with similar aims. (Sec. 80, GBL)
STAND ALONE TRUST
CORPORATIONS
• An entity which basically
performs the same functions of a
trust department of a bank or a
non-bank financial institution
with a trust license. It is a
separately incorporated entity
so that even insurance firms or
mutual fund companies can now
establish a trust entity
The BSP now allows the creation by
banks of spun-off trust corporations
with their own single borrower's limit
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separate from their parent/holding
companies.
TRUST SERVICES VS.
BANKING
• Trust services basically make the
institution a manager of the
client’s assets, either as trustee,
agent, custodian, or advisor.
Banking transactions with banks
or other financial institutions
almost always involve a creditor-
debtor relationship. The
depositor effectively extends a
loan to the financial institution.
• In trust services, the investor’s
money is not covered by the PDIC
insurance while deposits with
financial institutions up to P500,
000 are insured with the PDIC.
In case of bank closure, the trust
department continues to collect
an existing investment and/or
delivers assets/securities back
to clients or successor-trustees
or agents.
• The asset of the trust
corporation do not form part of
the relevant exposures of the
banks or quasi-bank for purposes
of calculating the SBL, ceilings
for accommodations to DOSRI.
DILIGENCE REQUIRED
• Banking is fiduciary in nature;
requires high standards of
integrity and performance;
Commercial Law Review I
highest degree of diligence
expected
• It is subject to heavy and close
supervision and/or regulation by
the BSP It is required to
exercise utmost diligence in the
handling of deposits; highest
degree of diligence (Citibank v.
Cabamongan)
• Special rules on strikes and
lockouts (if unsettled after 7
calendar days, BSP shall report
to DOLE Sec who may assume
jurisdiction; or certify to NRC
for compulsory arbitration;
President may also assume
jurisdiction). Sec. 22, GBL
FIDUCIARY NATURE OF
BANKING
Here, Simex sued Traders Royal Bank
for failing to credit to his account the
amounts that he deposited, resulting in
the cancellation of his credit line and
orders with suppliers because the
checks were issued by Simex to them
were dishonored for insufficiency of
funds.
HELD:
In every case, the depositor expects
the bank to treat his account with the
utmost fidelity. The bank must record
every single transaction accurately down
to the last centavo, and as promptly as
possible. A blunder on the part of the
bank, such as the dishonor of a check
without good reason, can cause the
depositor not only embarrassment but
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financial loss and even civil and criminal
litigation.
As a business affected with public
interest and because of the nature of
its functions, the bank is under
obligation to treat the accounts of its
depositors with meticulous care, always
having in mind the fiduciary nature of
their relationship. Here, the bank took
23 days to credit the deposit in
question. (Simex International vs. CA)
The diligence required of banks is more
than that of a good father of a family.
Banks are required to exercise the
highest degree of diligence in its
banking transactions. BDO should
recognize that it should be diligent and
circumspect in its dealings with its
clients, especially with regard to
transactions involving loans and credits.
If it only it had properly monitored the
accounts of its clients, the bank would
not have been remiss in assuring that
CSTC fulfills its end of the loan or even
in exercising its option to offset the
company's deposits with that of its
outstanding obligations in order to
protect the bank's interests. (Banco de
Ora Unibank vs. Ipil)
• Banks are responsible for the acts
of their employees.
DILIGENCE REQUIRED BY
BANKS
The public reposes its faith and
confidence upon banks, such that even
the humble wage-earner has not
hesitated to entrust his life's savings to
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the bank of his choice, knowing that
they will be safe in its custody and will
even earn some interest for him. That is
why the Court recognized the fiduciary
nature of the banks' functions, and
attached a special standard of diligence
for the exercise of their functions.
Here, PNB and Aguilar released Santos'
deposit to Manimbo without having been
presented the BIR-issued certificate of
payment of, or exception from, estate
tax. This is a legal requirement before
the deposit of a decedent is released.
The bank and its officer either have no
fixed standards for the release of their
deceased client's deposits or they have
standards that they disregard for
convenience, favor, or upon exercise of
discretion. Both are inconsistent with
the required diligence of banks. These
threaten the safety of the depositors'
accounts as they provide avenues for
fraudulent practices by third persons or
by bank officers themselves. (PNB vs
Santos, Dec. 10, 2014)
Respondent here complained about
questionable practices by Metrobank,
including failure to record payment on
their loans on time causing interest
rates to increase, failing to account for
a dacion en pago made, failing to issue
receipts for payments made, and failure
to record some checks received from
them.
HELD:
In view if the fiduciary nature of the
banking business, banks are mandated to
comply with two essential and
fundamental obligations - to treat their
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clients' accounts with utmost fidelity
and meticulous care, and to record all
transactions accurately and promptly.
Metrobank had the duty to accurately
and promptly record all payments made,
to conduct a precise and thorough
accounting of all payments, and to
furnish clients with copies of their loan
documents. This, the bank failed to do.
(Metrobank vs. Cruz, January 19,
2021)
SECRECY OF BANK
DEPOSITS
Sec. 2. All deposits in whatever nature
with banks or banking institutions,
including investments in bonds issued by
the government, are of an absolutely
confidential nature and may not be
examined, inquired, or looked into by any
person, government official, bureau or
office.
The phrase “of whatever nature” under
Section 2 proscribes any restrictive
interpretation of “deposits”. The law
applies not only to money which is
deposited but also to those which are
invested. Otherwise, there would have
been no need to add the phrase “or
invested”. Clearly, RA 1405 is broad
enough to cover Trust Account no. 858.
The money deposited under said trust
account was intended not merely to
remain with the bank to be invested by
it elsewhere. (People vs. Estrada,
2002)
EXCEPTIONS:
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1. Upon written permission of the

depositor
2. In cases of impeachment
3. Upon order of the court in cases
of bribery or dereliction of duty
4. Where the deposit is the subject
matter of litigation
GRAFT CASES
In PNB vs Gancayco (1965), the SC
held that Section 8 of the Anti-Graft
Law was intended to amend Sec. 2 of RA
1405 by providing additional exception
to the rule against the disclosure of
bank deposits.
Cases of unexplained wealth are similar
to cases of bribery or dereliction (under
Sec. 2) and no reason is seen why these
two classes of cases cannot be excepted
from the rule making bank deposits
confidential.
This policy expresses the notion that a
public office is a public trust and any
person who enters upon its discharge
does so with the full knowledge that his
life, in so far as relevant to his duty, is
open to public scrutiny.
(Here, the question arose when the DOJ
special prosecutors required PNB to
produce at a hearing the bank deposit
records of a public official who was
under investigation for unexplained
wealth.)
PLUNDER
In this case (Ejercito vs
Sandiganbayan, 2006), there was a
request for a subpoena directing the
President of EB (formerly Urban Bank),
to produce the documents in connection
with the trust and savings account of
Joseph Eiercito Estrada. A motion to
quash was filed saying these bank
accounts are covered by RA 1405 and do
not fall under the exceptions stated
therein. He claims plunder is neither
bribery nor dereliction of duty.
HELD:
Cases for plunder involve unexplained
wealth. An examination of the overt or
criminal acts constituting plunder would
make the similarity between plunder and
bribery even more pronounced.
Plunder being analogous to bribery, the
exception to RA 1405 applicable in cases
of bribery must also apply to cases of
plunder.
OTHER EXCEPTIONS –
BANK SECRECY LAW
1. Upon subpoena issued by the
Ombudsman conceming
investigation it is conducting
provided there is a case pending
in court
2. By the BIR in an application for
compromise of tax liability or
determination of decedent's
gross estate

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3. By the AMLC pursuant to a court
order where there is probable
cause that the deposits are
related to an unlawful activity or
money laundering offense
4. By AMLC, without court order,
when deposits are related to
kidnapping for ransom, violation
of dangerous drugs law,
hijacking, destructive arson,
murder
5. By BSP in the course of its
periodic or special examination
regarding compliance with AMLA
6. In case of DOSRI loans under
the General Banking Act
7. Under Sec. 35, RA 11479
(Anti-Terrorism Act of 2020),
the AMLC is authorized to
inquire into or examine deposits
and investments with any banking
institution or non-bank financial
institution and their subsidiaries
and affiliates without a court
order. Anti- Terrorism Act of
2020 (RA 11479)
8. Under RA 3591 or the PDIC
Charter where BSP and PDIC
authorized to look into deposits
in cases involving unsound or
unsafe banking
9. In case of unexplained wealth
under the Anti-Graft Law and in
plunder under RA 7080 since
these offenses are similar to
bribery and dereliction of duty
(PNB vs Gancayco, Ejercito vs
Sandiganbayan)
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10. Disclosure to the Treasurer of
the Philippines for dormant
deposits for at least 10 years
under the Unclaimed Balances
Act (RA 3936)
11. Report of banks to AMLC for
covered and/or suspicious
transactions (Sec. 11, RA
91601)
FOREIGN CURRENCY
DEPOSITS – EXCEPTIONS
1. When there is written consent of
the depositor under Sec. 8 of the
FCDA
2. Under Sec. 11 of the Anti-Money
Laundering Act (authority to
inquire into bank deposits when it
has been established that there
is probable cause that the
deposits involved related to a
money laundering offense; must
be upon order of competent
court)
.
3. Under the Anti-Terrorism Act of
2020
• on grounds of equity, deposit of a
foreign transient can be
proceeded against to prevent
injustice (Salvacion vs CB, 278
SCRA27)
GARNISHMENT
• Bank deposits may be garnished
by creditors of the depositor.
There is no violation of the bank
Commercial Law Review I
secrecy law if the accounts are
garnished. The amount of deposit
is actually. not disclosed
• Deposits exempt from
garnishment:
1. Foreign currency deposits
(Sec. 9, FCDA)
Exception: In Salvacion v.
Central Bank, the SC ruled
that the foreign currency
deposits of an American
tourist found guilty of
repeatedly raping a 12-year-
old is subject to garnishment
to avoid injustice against a
national and victim of a crime
2. Those exempt under the
Rules of Civil Procedure
like provision for the
family for 4 months (Sec.
13, Rule 39)
ANTI-MONEY
LAUNDERING ACT
(RA 9160 as amended by RA
9194, 10365 and 10167)
MONEY LAUNDERING
A crime committed by any person who
knowing that any monetary instrument
or property represents, involves, or
relates to the proceeds of any unlawful
activity:
1. transacts said monetary
instrument or property;
2. converts, transfers,
disposes of, moves,
acquires, possesses or
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uses said monetary
instrument or property;
3. conceals or disguises the
true nature, source,
location, disposition,
movement or ownership of
or rights with respect to
said monetary instrument
or property;
4. attempts or conspires to
commit money laundering
offenses referred to in
(1), (2), or (3);
5. aids, abets, assists in, or
counsels the commission
of the money laundering
offenses referred to in
(1), (2), or (3);
6. performs or fails to
perform any act as a
result of which he
facilitates the offense of
money laundering
referred to (1), (2) or (3);
7. committed by failure to
report to the AMLC by a
covered person knowing
that a covered or
suspicious transaction is
required under the AMLL
to be reported thereto
(RA 10365)
COVERED TRANSACTIONS
A transaction in cash or other equivalent
monetary instrument involving a total
Commercial Law Review I
amount in excess of P 500,000 within
one (1) banking day. (RA 9194)
Under the 2021 Revised IRR of RA
9160 as amended:
Covered transactions refers to:
1. a transaction in cash or other
equivalent money instrument
exceeding P500,000
.
2. a transaction with or involving
jewelry dealers, dealers in
precious metals and dealers in
precious stones in cash or other
equivalent monetary instrument
exceeding P1 million
3. a casino cash transaction
exceeding P5 million or its
equivalent in other currency.
4. A cash transaction with or
involving real estate developers
or brokers exceeding P7.5 million
or its equivalent in any other
currency.
5. Offshore gaming (POGO)
• If you exceed the Php500, 000, you
need to report it the AMLC even if
it’s not an illegal transaction.
SUSPICIOUS
TRANSACTIONS
Under 2018 Revised IRR of RA 9160 as
amended:
SUSPICIOUS TRANSACTION
• Refers to a transaction,
regardless of amount, where any
of the suspicious circumstances,
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as herein defined, is determined,
based on suspicion or, if available
reasonable grounds, to be
existing.
SUSPICIOUS CIRCUMSTANCE
• Refers to any of the following
circumstances, the existence of
which makes a transaction
suspicious:
(1) there is no underlying legal or
trade obligation, purpose or
economic justification
(2) the client is not properly
identified
(3) the amount involved is not
commensurate with the business
or financial capacity of the client
(4) taking into account all known
circumstances, it may be
perceived that the client's
transaction is structured in
order to avoid being the subject
of reporting requirements under
the AMLA
(5) any circumstance relating to
the transaction which is
observed to deviate from the
profile of the client and /or the
client's past transactions with
the covered person
(6) the transaction is in any way
related to ML/TF (money
laundering / terrorism financing)
or related unlawful activity that
is about to be committed, is being
or has been committed; or
NOTE: Terrorism financing refers to
the crime defined under Sec. 4 of RA
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10168 or the Terrorism Financing or issuers, and other similar

Prevention and Suppression Act. entities, and (iii) other entities
administering or otherwise
(7) any transaction that is
dealing in currency, commodities
similar, analogous, or identical to
or financial derivatives based
any of the foregoing, such as the
thereon, valuable objects, cash
relevant transactions in related
substitutes and other similar
and materially-linked accounts,
monetary instruments or
as herein defined.
property supervised or regulated
by the Securities and Exchange
COVERED PERSONS, Commission (SEC);
NATURAL OR JURIDICAL 4. jewelry dealers in precious
(RA 10365) metals, who, as a business, trade
in precious metals, for
1. persons supervised and / or transactions in excess of P1
regulated by BSP, including their million.
subsidiaries and affiliates, such
5. jewelry dealers in precious
as: banks, quasi-banks, trust
stones, who, as a business, trade
entities, pawnshops, non-stock
in precious stones, for
SLAs, other non-bank Fls,
transactions in excess of P1
electronic money issuers; and
million
foreign exchange dealers, money
changers, and remittance and 6. company service providers which,
transfer companies. as a business, provide any of the
following services to third
2. persons supervised or regulated
parties: (i) acting as a formation
by the IC, such as: insurance
agent of juridical persons; (ii)
companies, pre-need companies,
acting as (or arranging for
insurance agents, insurance
another person to act as) a
brokers, professional reinsurers,
director or corporate secretary
reinsurance brokers, holding
of a company, a partner of a
companies, holding company
partnership, or a similar position
systems, mutual benefit
in relation to other juridical
associations
persons; (iii) providing a
3. (i) securities dealers, brokers, registered office, business
salesmen, investment houses and address or accommodation,
other similar persons managing correspondence or
securities or rendering services administrative address for a
as investment agent, advisor, or company, a partnership or any
consultant, (i) mutual funds, other legal person or
open-end investment companies, arrangement; and (iv) acting as
close-end investment companies (or arranging for another person

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Commercial Law Review I
to act as) a nominee shareholder
for another person; and
7. persons who provide any of the
following services: (i) managing
of client money, securities or
other assets; (ii) management of
bank, savings or securities
accounts; (iii) organization of
contributions for the creation,
operation or management of
companies; and (iv) creation,
operation or management of
juridical persons or
arrangements, and buying and
selling business entities.
8. casinos, including internet-based
casinos and ship-based casinos,
with respect to their casino cash
transactions related to their
gaming operations. (See casino
IRR of RA 10927)
9. Real estate brokers and
developers
10. POGOs
• Covered persons must report
covered and suspicious
transactions
• It is the "covered persons"
board of directors, partners or
sole proprietors who are
ultimately responsible for the
covered persons' compliance with
the AMLA and TFPSA
Lawyers, accountants not covered
• The term 'covered persons' shall
exclude lawyers and accountants
acting as independent legal
professionals in relation to
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information concerning their
clients or where disclosure of
information would compromise
client confidences or the
attorney-client relationship:
Provided, That these lawyers and
accountants are authorized to
practice in the Philippines and
shall continue to be subject to
the provisions of their
respective codes of conduct and/
or professional responsibility or
any of its amendments.”
Suspicious transactions include those
which are related to an unlawful activity
or offense under AMLA that is about to
be, is being, or has been committed
UNLAWFUL ACTIVITY (predicate
offenses to ML) refers to any act or
omission or series or combination
thereof involving or having direct
relation to the following: (RA 10365)
1. Kidnapping for ransom
2. Violations of Comprehensive
Dangerous Drugs Act of
2002;
3. Anti-Graft and Corrupt
Practices Act;
4. Plunder
5. Robbery and extortion
6. Jueteng and Masiao punished
as illegal gambling
7. Piracy on the high seas
8. Qualified theft;
9. Swindling and Other Forms of
Swindling
10. Smuggling
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11. Violations of Electronic
Commerce Act of 2000;
12. Hijacking and other violations
under Republic Act No. 6235;
destructive arson and
murder,
13. Terrorism and conspiracy to
commit terrorism
14. Financing of terrorism
15. Bribery and Corruption of
Public Officers
JURISDICTION OVER
MONEY LAUNDERING
CASES
a. RTC shall have jurisdiction to try
ML cases committed by private
individuals, and public officers
not covered by the jurisdiction
of the Sandiganbayan
b. Sandiganbayan shall have
jurisdiction to try ML cases
committed by public officers
under its jurisdiction, and private
persons who are in conspiracy
with such public officers.
Prosecution of Money Laundering Cases
1. Prosecution of ML and the
associated unlawful activity shall
proceed independently.
2. The elements of ML are separate
and distinct from the elements
of the associated unlawful
activity. The elements of the
unlawful activity, including the
identity of the perpetrators and
the details of the commission of
the unlawful activity, need not be
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established by proof beyond
reasonable doubt in the case for
ML.
3. No ML case may be filed against
a candidate for an electoral
office during an election period.
PROHIBITED
COMMUNICATIONS UNDER
AMLA
1. Covered persons prohibited from
communicating, directly or
indirectly, by any means to any
person, the fact that a covered
or suspicious transaction report
was made, contents thereof
Safe Harbor Provision
• If reporting done in the regular
performance of his duties in good
faith, no admin, criminal or civil
proceedings shall lie against him,
even if reporting does or does
not result in criminal prosecution
2. Communicating to any person or
entity, media that a covered or
suspicious transaction has been
reported or is about to be
reported, contents of report
3. Publishing or airing by mass
media, electronic mail, or other
device
• In case of violation, concerned
officer or employee of covered
person and media criminally liable
(Sec. 7, RA 10365)
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4. to cause the filing of complaints

ANTI-MONEY
with the Department of Justice
LAUNDERING COUNCIL or the Ombudsman for the
prosecution of money laundering
The Anti-Money Laundering Council is offenses;
hereby created and shall be composed
of the Governor of the Bangko Sentral 5. to investigate suspicious
ng Pilipinas as Chairman, the transactions and covered
Commissioner of the Insurance transactions deemed suspicious
Commission and the Chairman of the after an investigation by AMLC,
Securities and Exchange Commission as money laundering activities and
members other violations of this Act;
6. to apply before the Court of
FUNCTIONS: Appeals, ex parte, for the
1. to require and receive covered or freezing of any monetary
suspicious transaction reports instrument or property alleged to
from covered institutions; be laundered, proceeds from, or
2. to issue orders addressed to the instrumentalities used in or
appropriate supervising intended for use in any unlawful
authority or the covered activity as defined in Section 3(i)
institutions to determine the hereof;
true identity of the owner of any 7. to enlist the assistance of any
monetary instrument or property branch, department, bureau,
subject of a covered transaction office, agency, or
or suspicious transaction report instrumentality of the
or request for assistance from a government, including
foreign State, or believed by the government-owned and -
Council, on the basis of controlled corporations, in
substantial evidence, to be, in undertaking any and all anti-
whole or in part, wherever money laundering operations,
located, representing, involving, which may include the use of its
or related to directly or personnel, facilities and
indirectly, in any manner or by resources for the more resolute
any means, the proceeds of an prevention, detection, and
unlawful activity. investigation of money laundering
3. to institute civil forfeiture offenses and prosecution of
proceedings and all other offenders; and
remedial proceedings through 8. to require the Land Registration
the Office of the Solicitor Authority and all its Registries
General; of Deeds to submit to the AMLC,
reports on all real estate

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Commercial Law Review I
transactions involving an amount
in excess of P500,000 within 15
days from the date of
registration of the transaction,
in a form to be prescribed by the
AMLC. The AMLC may also
require the Land Registration
Authority and all its Registries
of Deeds to submit copies of
relevant documents of all real
estate transactions.
FREEZING OF MONETARY
INSTRUMENT OR PROPERTY
a. Upon a verified ex parte petition
by the AMLC and
b. after determination that
probable cause exists that any
monetary instrument or property
is in any way related to an
unlawful activity
The Court of Appeals may issue a
freeze order which shall be effective
immediately, and which shall not exceed
6 months depending upon the
circumstances of the case. (RA10365)
If there is no case filed against a person
whose account has been frozen within
the period determined by the court, the
freeze order shall be deemed ipso facto
lifted
A person whose account has been frozen
may file a motion to lift the freeze
order and the court must resolve this
motion before the expiration of the
freeze order.
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No court shall issue a temporary
restraining order or a writ of injunction
against any freeze order, except the
Supreme Court.
• RA10927 covering casinos
provides that if a casino may be
involved in unlawful activity, the
CA may issue a freeze order
which shall be effectively
immediately for a period of 20
days. Within the period, the CA
shall conduct a summary hearing
to determine whether.or not to
modify or lift the freeze order.
The freeze order may be
extended up to 6 months.
When AMLC Authorized to Freeze
Funds
• Under RA 10168 (Terrorism
Financing Prevention and
Suppression Act of 2012), the
AMLC, either upon its own
initiative or at the request of the
ATC, is authorized to issue an ex
parte order to freeze the funds
of any person, group if there is
probable cause to believe that
they are committing or
attempting or conspiring to
commit or participating or
facilitating the commission of
financing of terrorism or acts of
terrorism.
• Freeze order is for period not
exceeding 20 days which may be
extended upon application with
the CA for a period not
exceeding 6 months.
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CASES
The primary objective of a freeze order
is to temporarily preserve monetary
instruments or property that are in any
way related to an unlawful activity or
money laundering, by preventing the
owner from utilizing them during the
duration of the freeze order. The relief
is preemptive in character, meant to
prevent the owner from disposing his
property and thwarting the State's
effort in building its case and eventually
filing civil forfeiture proceedings and/
or prosecuting the owner. (Ligot vs
Republic, 2013)
The AMLC, taking a cue from the Office
of the Ombudsman's findings,
conducted its own investigation and
found reasonable grounds to believe
that the monetary instruments and
properties in the name of Gen. Ligot and
his family, are related to unlawful
activities. The AMLC filed with the CA
an ex parte application for the issuance
of a freeze order with the court
granted and was initially valid for 20
days. The CA later extended the freeze
order until all the proceedings and
investigations being conducted are
terminated.
They questioned the order in the light
of AM 05-11-04 which limited an
extension to not more than six months.
HELD:
The SC said lifting the freeze order is
proper in view of the fact that a petition
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for forfeiture has already been filed by
the Republic with the Sandiganbayan.
This is without prejudice to other
preservation orders that the
Sandiganbayan may have issued relative
to the forfeiture case.
It said a freeze order cannot be issued
for an indefinite time and a continued
extension beyond six months violated
the Ligots' right to due process. These
periods of extension are beyond the
intent and purpose of a freeze order
which is intended solely as an interim
relief. Here, the Ligots have not been
able to access the properties for six
years simply on the basis of the
existence of probable cause to issue a
freeze order. It was never intended to
supplant or replace the actual
forfeiture cases. (Yambao vs. Republic,
January 26, 2021)
This case is in connection with the
hacking of the account of Bangladesh
Bank with the Federal Reserve Bank of
New York.
Upon finding probable cause that
Bloomberry Resorts and Hotels (BRHI)
BDO account was related to the hacking,
the AMLC authorized its secretariat to
file through the OSG an ex parte
petition for the issuance of a freeze
order. The CA issued the order
effective for 30 days. The AMLC also
filed an application for bank inquiry with
the CA which was granted.
BRHI claims it is the casino operator of
Solaire and as a casino operator, it is not
Commercial Law Review I
a covered institution at the time the
incident happened. The CA granted
BRHl's motion to lift the freeze order
due to AMLC's failure to establish
within the period given that the subject
account was acquired through unlawful
means or illegal activity.
HELD:
A freeze order may only be effective
for a maximum period of six months,
which in this case has already elapsed.
The Court cannot order refreezing of
the subject account for to do so would
be to put BRHI in an unfair situation
where its bank account is frozen for a
transaction that happened four years
ago and where it was not yet proven that
it indeed participated in money
laundering activities.
QUESTION:
Can the AMLC inquire and examine bank
deposits?
ANSWER:
As a general rule, no. Because of bank
secrecy. However, the AMLC may inquire
into or examine any particular deposit or
investment, including related accounts,
with any banking institution or non-bank
financial institution. This can be either
upon order of the court or even without
court order in certain exceptional cases.
The authority to inquire into or examine
the main account and the related
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accounts shall comply with the
requirements of Article III, Sections
2 and 3 of the 1987 Constitution,
which are hereby incorporated by
reference. (right against unreasonable
searches and seizures, privacy of
communications and correspondence)
(Estrada us Sandiganbayan, 2018)
• Inquiry into deposits under Sec.
11 does not require a preexisting
criminal case (Republic v
Eugenio, GR 174629, Feb. 14,
2008)
• Under the IRR, the RTC has
jurisdiction to try all cases on
money laundering.
• Those committed by public
officers and private persons in
conspiracy with such public
officers shall be under the
jurisdiction of the
Sandiganbayan.
• Voluntary citizens complaint or
government referral - basis for
AMLC to file a criminal complaint
with DOJ or Ombudsman for
prosecution of money laundering
offenses.
We subjected Sec. 11 of AMLA to
heightened scrutiny and found nothing
arbitrary in allowing and authorizing
AMLC to undertake an inquiry into
certain bank accounts and deposits. It
provides safeguards before a bank
inquiry order is issued, as follows:
a. AMLC required to establish
probable cause as basis for ex-
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parte application for bank inquiry
order
b. The CA, independent of the
AML's demonstration of
probable cause, itself makes a
finding of probable cause that
the deposits or investments are
related to an unlawful activity
under Sec. 3(i) or money
laundering offense under Sec. 4
of the AMLA
c. A bank inquiry court order ex
parte for related accounts is
preceded by a bank inquiry court
order ex parte for the principal
court which court order ex parte
for related accounts is
separately based on probable
cause that such related account
is materially linked to the
principal account inquired into;
and
d. The authority to inquire into or
examine the principal account
and related accounts shall comply
with the requirements of Art.
III, Sec. 2 and 3 of the
Constitution (Estrada vs.
Sandiganbayan, 2018)
be frozen is in any way related to said
unlawful activity and/or money
laundering offense.
The probable cause required for the
issuance of a freeze order differs from
the probable cause required for the
institution of a criminal action.
But there is nothing which precludes the
owner of the account from challenging
the basis for the issuance of the bank
inquiry order. (Subido vs. CA, 2016)
The application for the issuance of a
bank inquiry order was supported by only
two pieces of evidence (senate
committee report and testimony of one
witness).
Reports of the Senate stand on the
same level as other pieces of evidence
submitted by the parties and that the
facts and arguments presented therein
should undergo the same level of judicial
scrutiny and analysis. The courts have
the discretion to accept or reject them
or to refuse to give probative value to
such reports. (Republic vs Bolante,
2017)

The probable cause required for the

issuance of a freeze order refers to ###
"such facts and circumstances which
would lead a reasonably discreet,
prudent or cautious man to believe that
an unlawful activity and/or money
laundering offense is about to be, is
being or has been committed and that
the account or any monetary instrument
or property subject thereof sought to

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