Corporation Law Notes by DMG

Reference: Chavez (2018 ed) and Atty. Nick Gumabun’s Lectures UC JD2019

> Distinguish Partnership from Corporation

1. As to creation, a partnership is created by mere agreement between parties who bind themselves to contribute
to a common fund and to share in the profits. A corporation on the other hand is created by operation of law.
2. As to the governing laws, partnerships are governed by the Civil Code, while corporations are governed by the
Corporation Code.
3. As to who may form, a partnership may be formed by at least two consenting parties. A corporation may be
formed by any person, partnership, association, or corporation, singly or jointly, but not more than 15 in number.
4. As to purpose, a partnership is formed for profits or for the exercise of a profession, while a corporation is
formed either for profit or a benevolent purpose.
5. As to liability, partners are liable in a personal extent (except for limited partners), while stockholders are not
liable beyond their contribution.
6. As to their life, partnerships exist for the period agreed upon, while corporations have perpetual existence,
unless a definite period was stipulated in its Articles.
7. As to when it starts its existence, a partnership starts upon the meeting of mind of the partners, while a
corporation commences upon the issuance of its Certificate of Incorporation.
8. As to transfer of interest, a partner must always obtain the consent of all his partners before transferring his/her
interest, while for a stockholder, he/she may transfer his shares whenever, even without the others’ consent.
9. As to succession, death of a partner or a change in the partnership’s composition essentially dissolves it, while
a corporation enjoys the right of succession, thus, its existence is not affected by any change in its composing
members.
10. As to management, the partners themselves take care of the partnership’s undertakings, while in a
corporation, the management is entrusted to a Board of Directors or Trustees.
11. As to dissolution, a partnership may be dissolved without the consent of the State, while a corporation needs
the state’s consent to be dissolved.

> Definition of Corporation

Section 2, RCC: A corporation is an artificial being, created by operation of law, having the right of succession,
and the powers, attributes, and properties expressly authorized by law or incidental to its existence.

> Governing Law

The old Corporation Code was approved and became effective on May 1, 1980. It had been amended by RA
11232, signed to law on February 14, 2019.

> Constitutional Basis

Section 16, Article XII, 1987 Constitution: The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-owned or controlled corporations may
be created or established by special charters in the interest of the common good and subject to the test of
economic viability.

The general law referred to here is the Corporation Code. Private corporations cannot be created by special law.
They may only be formed by virtue of a general law that is applicable to all citizens. The ratio is inclusivity—
anyone who meets the requirements of starting a corporation may form one. Not allowing special laws to create
private corporations would help avoid giving advantage or favor to certain individuals or groups (usually the rich or
the influential).

This provision also highlights the two types of corporations:

1. Private corporations - those created by general law, for the purpose of creating gains for private interest or for
benevolent purposes. They are regulated by the Corporation Code.
 Atty G: A corporation need not be “for profit” to be categorized as private. Some private corporations are
created for benevolent or charitable purposes.
2. Public corporations - those created thru a special law or Act by Congress, for the common good. They are
governed primarily by the provisions of the special law, supplemented by the Corporation Code, whenever
applicable.
Example: barangays, cities, municipalities, provinces; these local government units are also called
“municipal corporations”

Atty. G: Why is it that private corporations can only be formed through a general law and not by special laws?
Two reasons:
1. to prevent corruption and undue advantages; and
2. to enforce uniformity on how private corporations are formed and regulated.

> What are the attributes of a corporation?

1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession.
4. It has the powers, attributes, and properties expressly authorized by law or incidental to its existence.

“Artificial Being”
- It is a juridical person.
- It only exists because of a law creating and recognizing it.
- It is not a natural person. It has no physical manifestations. (It doesn’t eat, it doesn’t sleep, it doesn’t fuck
charot)

“Creation of Law”
- Its life flows from the law creating it. Its birth requires an imprimatur, a positive act by the State, either by
general or special law.
- It cannot be created by mere agreement or consent between parties.

“Right of succession”
- Any change in the persons composing the corporation, or any change in its ownership, will not affect the
corporation’s existence.

“Powers, attributes, and properties expressly authorized by law or incident to its existence”
- A corporation has limited powers.
- A corporation cannot perform acts foreign to its primary purpose.
- The doctrine of limited capacity states that a corporation is restricted by the law, its Articles of
Incorporation, its by-laws, SEC regulations, and other pertinent laws and rules.

> Ultra vires acts of a corporation

Section 44, RCC: No corporation shall possess or exercise corporate powers other than those conferred by this
Code or by its articles of incorporation, and except as necessary or incidental to the exercise of the powers
conferred.

Atty. G: Ultra vires acts are not automatically illegal acts.

> Government corporations

Case: Carandang v Desierto (GR no 148076; January 2, 2011)

Facts: Antonio Carandang was the general manager and chief operating officer of Radio Philippines Network (RPN) in 1998.
Backstory: Before Carandang joined the company, RPN’s assets were sequestered by the government in 1986, when the Cory
Administration created the PCGG, tasked with the seizing of ill-gotten wealth of Marcos’ cronies. Among the unfortunate crooks stripped of
wealth was Roberto Benedicto, stockholder of RPN. He entered into a compromise agreement with PCGG and ceded all of his shares in
RPN. The court issued an order for the transfer of Benedicto’s shares amounting to 72.4% of RPN’s total shares. However, Benedicto filed
a motion for reconsideration, alleging that his shares only comprise 32.4% of RPN’s total shares. This motion was still pending at the time
Carandang’s case reached the SC. Bottomline: 40% of the government’s claim over RPN’s shares (72.4 minus 32.4) was still being
contested. Only 32.4% was conclusive.

In 1999, Carandang and other RPN officials were charged with grave misconduct by the Ombudsman, on account of having entered into a
contract with a corporation (AF Broadcasting Inc.) where he was an incorporator, director, and stockholder, contrary to the Code of Conduct
and Ethical Standards for Public Officials and Employees.

In 2000, he was found guilty by the Sandiganbayan and was dismissed.

Carandang argues that the Office of the Ombudsman had no jurisdiction over him because RPN was not a government corporation, and
thus, he was not a public official.

Issue: Whether RPN is a government corporation which would put Carandang within the authority of the Ombudsman, and within the
jurisdiction of the Sandiganbayan.

SC’s Ruling: No, RPN is not a government corporation. Hence, the Ombudsman and Sandiganbayan had no administrative authority and
jurisdiction over Carandang.

Definition of a government corporation: A government-owned or -controlled corporation (GOCC) is an agency

organized as a stock or non-stock corporation, vested with functions relating to public need, whether
governmental or proprietary in nature, and owned by the government directly or through its instrumentalities,
either wholly or in case of a stock corporation, to the extent of at least 51% of its capital stock.

In this case, the government’s 72.4% claim over RPN was still under contest. In order to qualify as a GOCC, the government’s stake must
at least be 51%. Here, only 32.4% of the government’s stake on RPN was conclusive. Hence, RN cannot be considered a GOCC.

What are the 2 conditions for the creation of a GOCC?

1. It must be created for the common good or public purpose.
2. It must pass the test of economic viability. This means it must be self-sustaining. GOCCs don’t receive
allocations or subsidy from the government. It must operate efficiently.

> Stock and non-stock corporations

Case: MIAA v CA (GR no. 155650; July 20, 2006)

Backstory: By virtue of EO no. 903 (1983), the Manila International Airport Authority was created to operate and administer the lands,
improvements, and equipment of the NAIA Complex. The MIAA charter transferred to MIAA hectares of land, runways, and buildings which
were then under the Bureau of Air Transportation.

Facts: In 1997, the Office of the Government Corporate Counsel issued an Opinion, stating that the Local Government Code (1991) had
withdrawn the exemption from real estate tax granted under the MIAA Charter.

MIAA paid some of the real estate tax already due. But in 2001, it received final notices of real estate tax delinquency from the City of
Paranaque for the years 1992-2001.

The City then issued notices of levy on the airport lands and buildings, and threatened a public auction.

MIAA filed a petition for prohibition and injunction, seeking to restrain the City’s imposition of the real estate tax. But this was dismissed for
being filed late.

MIAA’s contention: It shouldn’t be taxed because although its charter placed the title of the airport lands in MIAA’s name, it cannot claim
ownership over them. The charter mandated that they be devoted for the benefit of the general public. Thus, their ownership remains with
the State, and as such, the lands cannot be the subject of real estate tax by the local governments, because of the principle that the
government cannot tax itself.
The City’s contention: The Local Govt Code expressly withdrew the tax exemption privileges of GOCCs. The MIAA is a GOCC.

Issue: Whether MIAA is a GOCC and whether the airport lands and buildings it administers may be subject to real estate tax by a local
government unit.

SC’s Ruling: No. MIAA is not a GOCC. The airport lands and buildings cannot be taxed by the City of Paranaque.

MIAA is not a GOCC. It is an instrumentality of the national government and is thus exempt from local taxation.

A GOCC is an agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental
or proprietary in nature, and owned by the government directly or through its instrumentalities, either wholly or in case of a stock
corporation, to the extent of at least 51% of its capital stock.

MIAA cannot be considered a GOCC because it is neither a stock nor a non-stock corporation.

A stock corporation is one whose capital stock is divided into shares and is authorized to distribute dividends or
allotments of the surplus profits to the holders of such shares. (Section 3, RCC)

MIAA is not a stock corporation because although it has capital, such capital is not divided into shares of stock.

A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees,
or officers. (Section 86, RCC) Any profit it may obtain incidental to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which it was organized.

MIAA is not a non-stock corporation because it has no members. Moreover, non-stock corporations are organized for charitable, religious,
educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes like trade, industry, etc.
(Section 87, RCC)

MIAA is not organized for any of these purposes. It is a public utility organized to operate an airport for public use.

What MIAA is is a government instrumentality vested with corporate powers to perform governmental function efficiently. Just because it
has corporate powers doesn’t make it a corporation.

> De jure and de facto corporations

- A de jure corporation is one that strictly complies with the law.
- A de facto corporation is one with a defect or flaw in its incorporation; Its compliance with the law is only
colorable.

Can the legal personality of a de jure corporation be attacked directly?

No.

Who may attack the legal personality of a de facto corporation?

The State through the Solicitor General. Private persons cannot attack the legal personality of a de facto
corporation.

Section 19, RCC: The due incorporation of any corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which
such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto
proceeding.

> Requisites of a de facto corporation

Case: Seventh Day Adventist Conference Church of Southern Philippines vs Northeastern Mindanao
Mission of Seventh Day Adventist Inc. (G.R. No. 150416; July 21, 2006)

Facts: The subject of this case is a land situated in Bayugan, Agusan del Sur.
It was owned by Spouses Felix & Felisa Cosio.
In 1959, the spouses donated the land to the South Philippines Union Mission of Seventh Day Adventist Church of Bayugan (SDA
Bayugan). A Deed of Donation was executed. The donation was allegedly accepted by one Liberato Rayos, an elder of the church.

Twenty-one years later (1980), this land was sold by the spouses to the Seventh Day Adventist Church of Northeastern Mindanao Mission
(SDA-NEMM). A TCT was issued in its name.

In 1987, SDA Conference Church of Southern Philippines (SDA CCSP) filed a suit for cancellation of title, quieting of ownership and
possession, declaratory relief and reconveyance with prayer for preliminary injunction and damages in the RTC of Bayugan, Agusan del
Sur.

The SDA CCSP claimed to be the SDA Bayugan’s successors-in-interest, and claimed ownership over the land.

SDA-NEMM opposed this, alleging that SDA Bayugan could not legally be a donee back then because it was not yet incorporated then,
thus, it had no juridical personality.

The RTC ruled against SDA CCSP and upheld the validity of the sale to SDA NEMM. The CA affirmed. Hence this petition.

Issue: Who is the legal owner of the land?

SC’s ruling: SDA-NEMM is the legal owner. SDA CCSP cannot claim ownership.

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another person who accepts it. The
donation could not have been made in favor of an entity yet inexistent at the time it was made. Nor could it have been accepted as there
was yet no one to accept it.

When the deed of donation was executed, SDA Bayugan had no juridical personality and therefore had no capacity to accept.

SDA CCSP also argued that SDA Bayugan should be considered as a de facto corporation.

SC: SDA Bayugan is not a de facto corporation.

Requisites of a de facto corporation:

1. the existence of a valid law under which it may be incorporated;
2. an attempt in good faith to incorporate; and
3. assumption of corporate powers.

In this case, there was no proof that SDA Bayugan attempted to incorporate at the time. They were not registered with the SEC.

The filing of the articles of incorporation and the issuance of the certificate of incorporation are essential for the existence of a de facto
corporation. These are manifestations of the corporation’s “attempt in good faith to incorporate”.

Corporate existence begins only from the moment a certificate of incorporation is issued.

Since SDA Bayugan was not a corporation, SDA CCSP cannot claim to be its successor in interest with regard to the land.

Moreover, there is sufficient basis to affirm the title of SDA-NEMM. A Certificate of Title is conclusive evidence of ownership of the land. The
TCT in this case was issued in favor of SDA NEMM based on a valid sale that was executed in a public instrument

> Corporation By Estoppel

- It is neither a de jure nor a de facto corporation.
- It has no personality per se, but it is only regarded as a corporation by virtue of a person/group’s conduct,
admission, or agreement.
- It becomes a “corporation” when liabilities are invoked.

Section 20, RCC: All persons who assume to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities, and damages incurred or arising as a result thereof. When
any ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it
as such, it shall not be allowed to use its lack of corporate personality as a defense. Anyone who assumes an
obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in
fact no corporation.

Liability of a corporation by estoppel

Case: Lim Tong Lim vs. Philippine Fishing Gear Industries Inc. (G.R. No. 136448; November 3, 1999)

Facts: On behalf of "Ocean Quest Fishing Corporation” (OQFC), Antonio Chua and Peter Yao entered into a Contract for the purchase of
fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (PFG).

Chua and Yao claimed that they were in a business venture with Lim Tong Lim, who was not a signatory to the agreement.

The buyers failed to pay for the fishing nets and floats; hence, PFG filed a collection suit against Chua, Yao and Lim. PFG brought this suit
against the 3 in their capacities as general partners. PFG alleged that OQFC was a nonexistent corporation as shown by a Certification
from the SEC.

The trial court ruled against Chua, Yao, and Lim, and declared that they, as general partners, were jointly liable to pay PFG. This finding
was based on a Compromise Agreement (in another case) where it could be presumed from the equal distribution of the profit and loss that
they had joint liability.

The CA affirmed, agreeing that the 3 undertook a partnership for a specific undertaking (that is, commercial fishing) and had the goal of
dividing profits which is an essential feature of a partnership.

Hence this petition by Lim. He contends that he had no direct participation in the purchase, that only Chua and Yao took part in the
negotiations, and that he has not met any of PFG’s representatives. Thus, he shouldn’t be liable for the unpaid purchase.

He also invokes the doctrine of corporation by estoppel, arguing that only Chua and Yao should be liable for this contract, because his
name does not appear on any of the contracts and he never directly transacted with PFG.

Issues:
A. Were Chua, Yao, and Lim in a partnership? (An affirmative answer would mean they are jointly liable to PFG for the unpaid fishing gear.)
B. May Lim avoid liability by invoking the doctrine of corporation by estoppel?

SC’s Ruling:

A. Yes. Article 1767 of the NCC states: By the contract of partnership, two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves.

The lower courts were correct in finding that a partnership exists between the 3, based on their previous activities (they decided to engage
in a fishing businesss, they had verbal agreements to purchase boats and gear, they entered into loans to finance their venture, etc.).

They had a common fund, comprising of the boats, purchases, and the loans.
The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. They also agreed that any
loss or profit from the sale and operation of the boats would be divided equally among them.

B. No, he cannot invoke that doctrine. Lim should still be liable.

Section 21 (now Section 20 in the RCC) of the Corporation Code states: Corporation by estoppel. — All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

This means that persons who enter into a transaction as a “corporation”, knowing it is legally nonexistent, cannot later on use lack of
juridical personality as a defense in order to evade liability.

Ratio for this doctrine: An unincorporated association has no personality and would be incompetent to act and
appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or
agents do so without authority and at their own risk.

A person acting or purporting to act on behalf of a corporation which has no valid existence becomes personally
liable for contracts entered into or for other acts performed as such agent.

This doctrine also extends to a third party who, knowing an association to be unincorporated, nonetheless treated
it as a corporation and received benefits from it.

In this case, Lim might not have entered into the contract with PFG personally, but he benefited from the use of the nets that were
purchased.

Under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.

> Other classes of corporations

Domestic - created or organized in the Philippines or under its laws

Foreign - organized under the laws of another state, whose laws allow Filipino citizens and corporations to do
business in its own country or state.
Note: It shall have the right to transact business in the Philippines after it obtains a license to transact
business in accordance with the Corporation Code and a certificate of authority from the appropriate
government agency.

Holding - a parent corporation that controls or owns a controlling share of stock and holds the assets of other
companies called subsidiary corporations
Subsidiary - a corporation owned and controlled by another corporation
Affiliate - only a minority of its shares is controlled by a parent corporation

Close – one wherein all the outstanding stock is owned by the persons who are active in the management and
conduct of the business; the offer of outstanding shares is limited (example: family corporations)
Open – one in which all the members or corporations have a vote in the election of the directors and other
officers; the offer of shares is open and not limited

> Doctrine of corporate fiction

- A corporation has a personality that is distinct and separate from that of its individual members and
stockholders.
- By legal fiction and convenience, it is an entity shielded by a protective mantle and imbued with a
character alien to the persons comprising it.
- However, this shield is not completely impenetrable. When the separate personality of a corporation is
abused and used for wrongful purposes, this veil of corporate fiction must be pierced and liabilities must be
imposed accordingly.

> What is the nature of a stockholder’s right over corporate properties?

A stockholder only has an inchoate right over corporate property. Such right is a mere expectancy. A stockholder
needs to wait for liquidation of the corporation before it may have a claim over the properties.

Case: Sulo Ng Bayan (G.R. No. L-31061; August 17, 1976)

Facts: Sulo Ng Bayan Inc (SNB) is a non-stock corporation whose membership is composed of natural persons. They pioneered in the
clearing of the subject land, cultivated it since the Spanish regime and continuously possessed it openly and public under concept of
ownership adverse against the whole world.

SNB alleged that in 1958, Gregorio Araneta Inc. (GA) ejected the members of SNB from a land in Bulacan, through force and intimidation;
and that in 1961, they found out that their land had been fraudulently included in an Original Certificate of Title.

They claimed that this OCT is void because no survey or plan was submitted as its basis and that the CFI that issued its Decree of
Registration did not validly acquire jurisdiction for failing to give notice of the proceeding to SNB’s members who were the actual
possessors of the land.

They claimed that because the OCT is void, all subsequent TCTs (including the one issued in the name of GA), should also be declared
void.

SNB filed an accion de revindicacion against GA, et al., to recover the ownership and possession of the land.

The trial court ruled against SNB and dismissed the case for lack of cause of action.

Issue: Whether a corporation may institute an action* on behalf of its individual members.

(*Action for the recovery of certain parcels of land allegedly owned by said members; for the nullification of the TCTs; for a declaration of
said members as absolute owners of the property; and the issuance of the corresponding certificate of title; and for damages.)

SC’s Ruling: No. The corporation cannot institute this action because it is not a real party in interest in this case, and its personality is
separate from the personalities of its members. The real parties in interest are its members.

Cause of action is composed of two elements: (1) the right of the plaintiff and (2) the violation of such right by the defendant. Every action
must be prosecuted and defended in the name of the real party in interest. All persons having an interest in the subject of the action and in
obtaining the relief demanded shall be joined as plaintiffs.

In this case, the people whose rights were alleged to have been violated are the members of the corporation and not the corporation itself.

The corporation has a separate and distinct personality from its individual members.

A corporation has no interest in the individual property of its members unless transferred to the corporation.

There is no allegation that the members have assigned their rights to the corporation or any showing that the corporation has in any way or
manner succeeded to such rights.

The corporation did not have any rights violated by the defendants. Even if the Court rules against GA, the plaintiff corporation would not be
entitled to the reliefs prayed for. Neither can reliefs be awarded to the members, since they are not parties to the suit.

Since the action was not filed in the names of the real parties in interest, the complaint must be dismissed for lack of cause of action.

Case: Stronghold Insurance v Cuenca (G.R. No. 173297; March 6, 2013)

Facts: Maranon filed a suit for the collection of a sum of money and damages against the Cuencas in the RTC. This included a writ of
preliminary attachment (PA), which the RTC granted, conditioned upon the posting of a bond of ₱1M executed in favor of the Cuencas.
Maranon posted such bond, issued by Stronghold Insurance Inc.

The sheriff enforced the writ of PA and levied upon properties owned by Arc Cuisine, Inc. (ACI), found in the leased corporate office-cum-
commissary or kitchen of the corporation.

The Cuencas filed a motion to dismiss and to quash the writ of PA, on the ground that the action involved intra-corporate matters that were
within the original and exclusive jurisdiction of the SEC, and not the RTC. The RTC denied the motion and ruled that since the action is for
the recovery of a sum of money and damages, it had jurisdiction.

The RTC ultimately held Stronghold and Maranon jointly and solidarily liable for damages to the Cuencas.

Issue: May the Cuencas, stockholders of Arc Cuisine, claim damages from the levy of Arc’s properties?

SC’s Ruling: No. The properties subject to the levy on attachment belonged to Arc Cuisine, Inc. alone, not to the Cuencas in their own
right. They were only stockholders of Arc Cuisine, Inc., which had a personality distinct and separate from that of any or all of them.

Only Arc Cuisine, Inc. had the right under the substantive law to claim and recover such damages. This right could not also be asserted by
the Cuencas unless they did so in the name of the corporation itself. But Arc Cuisine, Inc. was not joined in the action either as an original
party or as an intervenor.

The Cuencas lacked the legal personality to claim the damages sustained from the levy of the Arc Cuisine’s properties.
The personality of a corporation is distinct and separate from the personalities of its stockholders. Hence, its stockholders are not
themselves the real parties in interest to claim and recover compensation for the damages arising from the wrongful attachment of its
assets. Only the corporation is the real party in interest for that purpose.

It is true, too, that the Cuencas could bring in behalf of Arc Cuisine, Inc. a proper action to recover damages resulting from the attachment.
Such action would be one directly brought in the name of the corporation. Yet, that was not true here, for, instead, the Cuencas and
Tayactac presented the claim in their own names.

> Rights of a corporation

May a corporation be held criminally liable?

- If a crime is committed by a corporation or other juridical entity, the directors, officers, or employees
responsible for the offense may be charged and penalized for the crime.
- A corporation cannot be arrested and imprisoned, since it is not a natural person who may be put behind
bars. Hence, it cannot be penalized by a crime punishable only by imprisonment. However, a corporation
may be charged and prosecuted for a crime if the imposable penalty is a fine, or imprisonment and fine.

Does a corporation have a right against unreasonable searches and seizures?

- No. An officer of a corporation cannot refuse to produce its record in its possession upon the plea that
such records will either incriminate him or may incriminate it.
- Since a corporation is a creature of the state, and it received its special privileges and franchises from the
state, it is subject to the laws of such state and the limitations of its charter. The state may inquire into how
the franchises had been employed, find out whether they had been abused, and demand the production of
the corporate books and papers.

Does a corporation have a right against self-incrimination?

- No because this right—the right of a person to not be compelled to testify against himself—only covers
testimonies. Only a natural person may invoke this right.

May a Corporation be liable for tort?

- Yes. A corporation may be held solidarily liable for tortious acts (quasi-delicts) committed by its officers or
employees who were performing acts related to their employment, and where the corporation did not
exercise due diligence in their selection and supervision.

> Are corporations entitled to moral damages?

Case: FBNI v AMEC (G.R. No. 141994; January 17, 2005)

Facts: Filipinas Broadcasting Network Inc. (FBNI) owns radio station DZRC-AM which airs the radio documentary “Expose” every morning,
hosted by Mel Rima and Jun Alegre, and heard by Albay municipalities, and other Bicol areas.

In 1989, Expose covered various complaints from students, teachers, and parents against Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC) and its administrators.

Claiming that the broadcasts were defamatory and injurious to their institution’s reputation, AMEC and Angelita Ago, as Dean of AMEC's
College of Medicine, filed a complaint for damages against FBNI, Rima, and Alegre.

FBNI, Rima, and Alegre argued that the exposes were fair and true. They claimed that they were plainly impelled by a sense of public duty
to report the goings-on in AMEC, an institution imbued with public interest.

The trial court ruled against Alegre, finding that his reports were libeous per se due to them having no factual basis. It also held FBNI liable
for failing to exercise diligence in the selection and supervision of its employees. As for Rima, the trial court absolved him because his only
participation was that he agreed with Alegre. His statements were within the bounds of freedom of speech, expression, and of the press.

Alegre and FBNI were ordered to pay, jointly and severally, P300k moral damages to AMEC; P30,000 reimbursement of attorney's fees;
and the costs of suit.
On appeal, the CA made Rima solidarily liable with FBNI and Alegre. The CA also denied Dean Ago's claim for damages and attorney's
fees because the broadcasts were directed against AMEC, and not against her.

FBNI brings the petition to the SC, contending that, among others, AMEC is not entitled to moral damages because it is not a natural
person.

Issue: Is AMEC, a juridical person, entitled to moral damages?

SC’s Ruling: Yes.

A juridical person is generally not entitled to moral damages (MD) because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral
shock.

But the SC had previously justified the award of MD to a corporation in Mambulao v. PNB: “a corporation may
have a good reputation which, if besmirched, may also be a ground for the award of moral damages”.

This claim for MD finds legal basis under Art. 2219 (7) of the NCC which expressly authorizes the recovery of MD
in cases of libel, slander, or other forms of defamation.

The NCC does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person can
validly complain for libel and claim for MD.

However, the MD in this case should be reduced from 300k to 150k, since AMEC has not suffered any substantial damage to its reputation.

Issue: What is the nature of FBNI, Rima, and Alegre’s liabilities in this case?

SC: The basis of the present action is a tort. Joint tortfeasors are jointly and severally liable for the tort which they commit.

Joint tortfeasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit.

As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages arising from the libelous
broadcasts.

Recovery for defamatory statements published by radio or television may be had from the owner of the station, a licensee, the operator of
the station, or a person who procures, or participates in, the making of the defamatory statements.

An employer and employee are solidarily liable for a defamatory statement by the employee within the course and scope of his or her
employment, at least when the employer authorizes or ratifies the defamation.

> Doctrine of piercing the veil of corporate fiction

Case: PNB v Hydro Resources (G.R. No. 167530; March 13, 2013)

Facts: DBP and PNB foreclosed on mortgages made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a
result, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by
organizing NMIC.

DBP owned 57% of the shares of NMIC, while PNB owned 43% of the shares of NMIC. The members of the Board of Directors of NMIC
were either from DBP or PNB.

NMIC engaged the services of Hercon, Inc., for its Mine Stripping and Road Construction Program. The services remain unpaid despite
Hercon’s several demands. After sending its final demand letter, Hercon filed a complaint for sum of money in the RTC, seeking to hold
NMIC, DBP, and PNB solidarily liable

Subsequent to the filing of the complaint, Hercon was acquired by HRCC in a merger. The complaint was amended to substitute HRCC for
Hercon.
Later, pursuant to Proclamation No. 50 by Pres. Aquino, creating the Asset Privatization Trust (APT) for the expeditious disposition and
privatization of certain government corporations, DBP and PNB transferred certain assets and liabilities to the National Government,
including their stakes in NMIC. The National Government then transferred these assets and liabilities to the APT as trustee under a Trust
Agreement. Thus, the complaint was amended for the second time to implead and include the APT as a defendant.

(So the case is now HRCC vs NMIC, DBP, PNB, and APT.)

DBP and PNB both raised the defense that HRCC had no cause of action against it because they werew not privy to HRCC’s contract with
NMIC. Moreover, NMIC’s juridical personality is separate from that of DBP and PNB.

The RTC ruled in favor of HRCC. It pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC.

The RTC held that NMIC is owned by DBP and PNB, all the members of NMIC’s Board of Directors are either from DBP or PNB, and the
business of NMIC was being conducted and controlled by both DBP and PNB. In fact, it was the Governor of DBP who was signing and
entering into contracts with third persons on behalf of NMIC.

RTC: In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the rights of third persons, disregard legal fiction that two corporations are
distinct entities, and treat them as identical."

The CA afirmed, adding that to treat NMIC as a separate legal entity from DBP and PNB, and then using such separate entity to evade the
payment of a just debt, would be the height of injustice and iniquity.

Hence this petition.

Petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from both PNB and DBP. They insist that
the majority ownership by DBP and PNB of NMIC is not a sufficient ground for disregarding the separate corporate personality of NMIC
because NMIC was not a mere adjunct, business conduit or alter ego of DBP and PNB.

Issue: Should the doctrine of piercing the veil of corporate fiction be applied in this case?

SC’s Ruling: No. NMIC is separate and distinct from DBP and PNB.

The doctrine of piercing the corporate veil applies only in 3 basic areas:
1. defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation;
2. fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
3. alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another corporation.
Alter ego is a legal doctrine whereby the court finds that a corporation lacks a separate identity from an individual or corporate shareholder.
The court applies this rule to ignore the corporate status of a group of stockholders, officers, and directors of a corporation with respect to their limited liability.
The SC discussed the three-pronged test to determine the application of the alter ego theory (also known as
the instrumentality theory) namely:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal
right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss
complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under
the control and domination of the parent.

It examines the parent corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is
so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct corporate entity will be ignored. It seeks to
establish whether the subsidiary corporation has no autonomy, and whether the parent corporation, though acting
through the subsidiary in form and appearance, "is operating the business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful.

It examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of
"an element of injustice or fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection between
the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established.

The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of 3 elements:
control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on
the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation.

The absence of any of these elements prevents piercing the corporate veil.

In this case, not one of the tests was satisfactorily met.

Both the RTC and the CA applied the alter ego theory and penetrated the corporate cover of NMIC based on two factors: (1) the ownership
by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.

Ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may only serve as
indicia of control. By themselves and without more, these circumstances are insufficient to establish an alter ego relationship or connection
between the two banks and NMIC.

Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality. Nor is the existence of interlocking directors, corporate officers and
shareholders.

The unpaid services of HRCC here concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised by
DBP and/or PNB over NMIC’s affairs, policies, and practices.

Hence, the corporate veil of NMIC must not be pierced. DBP and PNB cannot be held solidarily liable with NMIC for its unpaid obligations.

What is the effect of the piercing of the veil of corporate fiction?

The corporation would be treated as a mere aggrupation of persons. The separate juridical personality of the
corporation will be disregarded.

What is the extent of the application of the doctrine of piercing the veil of corporate fiction?
It is only limited to the matter resolved in the case. Its corporate existence is not necessarily abrogated. It
continues for other legitimate purposes. It is only pierced in the interest of justice.

The determination of whether the veil must be pierced is judicial in nature. It requires a full-blown trial and
presentation of evidence. Only a judge can declare the piercing of the veil of corporate fiction. (Case: Cruz v
Dalisay)
> Process of Incorporation
It is the process of drafting the Articles of Incorporation, its submission to the SEC, and the subsequent approval
of the SEC.

> What are the mandatory items in the Articles of Incorporation?

Section 13, RCC:
1. The name of the corporation
2. The specific purpose or purposes for which it is being formed
Note: if the corporation has more than one purpose, it must state its primary and secondary
purposes. A nonstock corporation may not include a purpose which would change or contradict its
nature as a nonstock corporation.
3. The place where the principal office will be located
Note: It must be within the Philippines.
4. The term for which it is to exist, if it has not elected perpetual existence
5. The names, nationalities, and residence addresses of the incorporators
6. The number of directors, which must not be more than 15, or the number of trustees which may be more
than 15
7. The names, nationalities, and residence addresses of the persons who shall act as directors or trustees
until the first regular ones are elected and qualified
8. If it is a stock corporation, the amount of its authorized capital stock number of shares into which it is to be
divided, par value, the names, nationalities, and residence addresses of the original subscribers, and the
amount they subscribed and paid
9. If it is a nonstock corporation, the amount of capital contribution, and the names, nationalities, and
residence addresses of the contributors, and the amount they contributed
10. Such other matters consistent with law, and which the incorporators may deem necessary and convenient

An arbitration agreement may also be provided. (Section 181, RCC)

What is the form?

The Articles of Incorporation must be in the form of an electronic document.

> Corporate name

What is the relevance of a corporate name?
It is in that name by which the corporation will be known.

What are the limitations as to the adoption of a corporate name?

Section 17, RCC: The Commission cannot allow a corporate name that is:
1. Not distinguishable from that already reserved or registered for the use of another corporation
2. Already protected by law
3. Contrary to law, rules, and regulations

A name is not distinguishable even if it contains the following:

1. The word “corporation”, “company”, “incorporated”, “limited”, “limited liability” or an abbreviation of such
2. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, other tenses, spaces, or number
of the same word or phrase

What happens if the corporation does not follow the rule on corporate names?
The SEC will first conduct a summary investigation. If it finds that the corporation’s name violated the limitations, it
will issue a Cease and Desist Order. It may also cause the removal of visible signages, marks, advertisements,
labels, prints, and other effects bearing the corporate name.
If the corporation fails to comply with the Order, the SEC may:
1. Hold the responsible officers in contempt
2. Hold them administratively, civilly, or criminally liable
3. Revoke the registration of the corporation

For the updated specific rules regarding corporate name, see:

1. SEC Memorandum Circular No. 13, 2019: https://1drv.ms/b/s!AjgHSho4K72Tnmg70ydUe6-G8WOf
2. SEC Memorandum Circular No. 16, 2019: https://1drv.ms/b/s!AjgHSho4K72Tnml8RGqmTFbXZbFz

> Prior Right of First Registrant

Case: Ang Mga Kaanib v Iglesia sa Dios (G.R. No. 137592 December 12, 2001)

Facts: Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Suhay), is a non-stock religious society or corporation registered
in 1936.

In 1976, Eliseo Soriano and other members of corporation disassociated themselves from the church. In 1977, they succeeded in
registering a new non-stock religious society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan
(Saligan).

In 1979, Suhay filed with the SEC a petition to compel Saligan to change its corporate name,

The SEC rule in favor of Suhay, ordering Saligan to change its corporate name to another name that is not similar or identical to any name
already used by a corporation, partnership or association registered with the Commission. No appeal was taken from said decision.

During its pendency, however, or in 1980, Soriano, et al., registered Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa
Bansang Pilipinas (Kaanib). The acronym "H.S.K." stands for Haligi at Saligan ng Katotohanan.

In 1994, Suhay filed another petition with the SEC, praying that Kaanib be compelled to change its corporate name and be barred from
using the same or similar name on the ground that the same causes confusion among their members as well as the public.

Kaanib filed a motion to dismiss on the ground of lack of cause of action. The motion to dismiss was denied.

SEC ruled against Kaanib and ordered it to change its corporate name.

SEC En Banc and the CA affirmed. Hence this petition.

Issue: Should Kaanib be allowed to use the name it registered?

SC’s Ruling: No.

SEC Guidelines on Corporate Names states:

“If the proposed name contains a word similar to a word already used as part of the firm name or style of a registered company, the
proposed name must contain two other words different from the name of the company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation,
whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent,
may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the
name.”

Kaanib claims that it complied with the SEC guideline by adding not only 2 but 8 words to their registered name, to wit: "Ang Mga Kaanib"
and "Sa Bansang Pilipinas, Inc.," which, Kaanib argues, effectively distinguished it from Suhay.

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." are merely descriptive of and also referring to the members, or
kaanib, who are residing in the Philippines. These words can hardly serve as an effective differentiating medium necessary to avoid
confusion or difficulty in distinguishing petitioner from respondent.

This is especially so, since both petitioner and respondent corporations are using the same acronym — H.S.K.; not to mention the fact that
both are espousing religious beliefs and operating in the same place.

Significantly, the only difference between the corporate names of petitioner and respondent are the words SALIGAN and SUHAY. These
words are synonymous — both mean ground, foundation or support.

No corporate may be allowed if it is identical or deceptively or confusingly similar to that of any existing corporation or to an other name
already protected by law. The policy behind this is to avoid fraud among the public, the evasion of legal obligations, and the reduction of
difficulties in the administration and supervision over corporations. (Case: Lyceum v CA)

Doctrine of Secondary Meaning

A word or phrase originally incapable of exclusive appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that trade or branch of the purchasing public, the word or
phrase has come to mean that the article was his product.

Does a change in corporate name create a new corporation?

Case: Zuellig Freight v NLRC (G.R. No. 157900, July 22, 2013)

San Miguel’s contentions: The amendments of the articles of incorporation of Zeta were for the purpose of changing the corporate name,
broadening the primary functions, and increasing the capital stock; and that such amendments could not mean that Zeta had been thereby
dissolved.

Zuellig’s contentions: San Miguel’s termination from Zeta had been for a cause authorized by the Labor Code; its predecessor-in-interest
had complied with the requirements for termination due to the cessation of business operations; it had no obligation to employ San Miguel
in the exercise of its valid management prerogative

The Labor Arbiter (LA) ruled in favor of San Miguel, holding that he had been illegally dismissed.

LA: There was no valid cause for termination because Zeta did not really cease its operations. It merely changes itsbusiness name and
primary purpose and upgrading of stocks of the corporation. Zuellig and Zeta arelegally the same person and entity.

The NLRC affirmed the LA’s decision. Zuellig elevated the case to the CA, which also ruled against it.

CA: The closure of business operation was not validly made.The amendment of the articles of incorporation merely changed its corporate
name, broadened its primary purpose and increased its authorized capital stocks. There being no valid closure of business operations, the
dismissal of San Miguel on alleged authorized cause of cessation of business was illegal.

Hence this appeal to the SC.

Issue: Was San Miguel’s termination legal?

SC’s Ruling: No, because there was no valid just or authorized cause for his termination, because there was no “cessation” of business.
There was only a change in the corporate name.

The Labor Code states: “Article 283. Closure of establishment and reduction of personnel. — The employer may also terminate the
employment of any employee due to the installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking xxx”

The amendments of the articles of incorporation of Zeta to change the corporate name to Zuellig Freight and Cargo Systems, Inc. did not
produce the dissolution of the former as a corporation.

The Corporation Code defined and delineated the different modes of dissolving a corporation, and amendment of the articles of
incorporation was not one of such modes.

The effect of the change of name was not a change of the corporate being.

The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the
same corporation with a different name, and its character is in no respect changed.

In short, Zeta and petitioner Zuellig remained one and the same corporation. The change of name did not give petitioner the license to
terminate employees of Zeta without just or authorized cause.
Zuellig, despite its new name, was the mere continuation of Zeta’s corporate being, and still held the obligation to honor all of Zeta’s
obligations, one of which was to respect San Miguel’s security of tenure.

> Principal Office

What is the importance of a principal office?
Case: Young Auto Supply v CA (G.R. No. 104175 June 25, 1993)

Facts: In 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia (its president), Nelson Garcia and Vicente Sy, sold
all of their shares of stock in Consolidated Marketing & Development Corporation (CMDC) to George Roxas.

The purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00 and the balance of P4,000,000.00 in four
post dated checks of P1,000,000.00 each.

Immediately after the execution of the agreement, Roxas took full control of the four markets of CMDC. However, the vendors held on to the
stock certificates of CMDC as security, pending full payment of the purchase price.

The first check representing the downpayment was honored by the drawee bank but the four other checks representing the balance were
dishonored.

In 1988, YASCO filed a complaint against Roxas in the RTC in Cebu City, praying that Roxas be ordered to pay petitioners P3,400,00.00 or
that full control of the three markets be turned over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial
payment of P4,600,000.00 and the payment of attorney's fees and costs.

Roxas’ Contention: Venue was improperly laid.

The RTC ruled in favor of YASCO, et al., but on appeal, the CA dismissed the case on the ground of improper venue.

Issue: Whether the CA erred in holding that the venue should be in Pasay City, and not in Cebu City, where the petitioners/plaintiffs are
residents.

SC’s Ruling: Yes. The CA erred in holding that the venue was improperly laid in Cebu City.

In holding that the venue was improperly laid in Cebu City, the CA relied on the address of YASCO, as appearing in the Deed of Sale: "No.
1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters and several commercial documents in the
possession of Roxas.

In the case of Garcia, the CA said that he gave Pasay City as his address in 3 letters which he sent to Roxas' brothers and sisters. Roxas
was led by petitioners to believe that their residence is in Pasay City and that he had relied upon those representations.

In the Regional Trial Courts, all personal actions are commenced and tried in the province or city where the defendant or any of the
defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff (Revised Rules of
Court).

There are two plaintiffs here: a natural person and a domestic corporation. Both plaintiffs aver in their complaint that they are residents of
Cebu City, thus:

Plaintiff YASCO is a domestic corporation duly organized and existing under Philippine laws with principal place of business at M.
J. Cuenco Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City, Metro Manila.

Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address at Young Auto Supply Co., Inc., M. J.
Cuenco Avenue, Cebu City. . . .

The Article of Incorporation of YASCO states: “That the place where the principal office of the corporation is to be established or
located is at Cebu City, Philippines”

A corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation
is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation.

The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of
the corporation is to be located which must be within the Philippines”. The purpose of this requirement is to fix the residence of a
corporation in a definite place, instead of allowing it to be ambulatory.
In Clavencilla Radio System v. Antillon, 19 SCRA 379 (1967), the SC explained why actions cannot be filed against a corporation in any
place where the corporation maintains its branch offices.

The Court ruled that to allow an action to be instituted in any place where the corporation has branch offices
would create confusion and work untold inconvenience to said entity. By the same token, a corporation cannot be
allowed to file personal actions in a place other than its principal place of business unless such a place is also the
residence of a co-plaintiff or a defendant.

If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on the ground that its principal place of business was in
Cebu City, Roxas could argue that YASCO was in estoppel because it misled Roxas to believe that Pasay City was its principal place of
business. But this is not the case.

With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal place of business is located, it
becomes unnecessary to decide whether Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the
choice of Cebu City as the venue.

> Classification of shares

Section 6, RCC:
- The Articles of Incorporation must indicate:
1. classification of shares;
2. their rights, privileges, or restrictions; and
3. their stated par value, if any.
- Doctrine of equality of shares: Each share shall be equal in all respects to every other share, except as
otherwise provided in the Articles of Incorporation and in the stock certificate.
- The shares in stock corporations may be divided into classes or series of shares, or both.
- No share may be deprived of voting rights except those classified and issued as “preferred” or
“redeemable” shares, unless otherwise provided in the RCC.
- There shall always be a class/series of shares with complete voting rights.

Preferred shares
These are shares that may be given preference in the:
1. Distribution of the corporation’s assets in case of liquidation;
2. Distribution of dividends; or
3. Other preferences as may be stated in the Articles, which shouldn’t violate RCC provisions.

Non-voting shares still have the right to vote in the: ABP-BAM-ID

1. Amendment of the Articles of Incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge, or other disposition of all or substantially all of the corporate
property;
4. Incurring, creating, or increasing bonded indebtedness;
5. Increase or decrease of authorized capital stock;
6. Merger or consolidation of the corporation with another;
7. Investment of corporate funds in another; and
8. Dissolution of the corporation.

Treasury shares
Section 9, RCC:
- These are shares which have been issued and fully paid for, but subsequently reacquired by the issuing
corporation.
- They were reacquired by the corporation through purchase, redemption, donation, or other lawful means.
- They may be disposed of again for a reasonable price fixed by the Board.
Section 56, RCC:
- Those treasury shares that remain in the Treasury shall have no voting rights.

Redeemable shares
Section 8, RCC:
- They are shares which may be purchased by the corporation from the holders upon the expiration of a
fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation,
and upon such other terms and conditions stated in the Articles and the stock certificate of such shares.
- These may be issued when expressly provided in the Articles of Incorporation.

Founders’ shares
- These are shares which may be given certain rights and privileges not enjoyed by the owners of other
stocks.
- Owners of these may have the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not exceeding 5 years from the date of incorporation.
- But this exclusive right cannot be allowed if it will violate the Anti-Dummy Law (CA No. 108), the Foreign
Investments Act (RA No. 7042), and other pertinent laws.

> Corporate Term

Section 11, RCC: A corporation shall have perpetual existence, unless the Articles of Incorporation provide
otherwise.

> Grounds for denial of Articles of Incorporation

Section 16, RCC:
1. The Articles of Incorporation or any amendment to it is not substantially in accordance with the form
prescribed in the RCC
2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to
government rules and regulations
3. The certification (Treasurer’s Affidavit) concerning the amount of capital stock subscribed and/or paid is
false
4. The required percentage of Filipino ownership of the capital stock wasn’t met

There can be no outright denial of the AoI by the SEC. Opportunity must be given to the corporation to remedy the
questioned portions of its proposed AoI.

Dual Franchise Requirement

- For some industries, the SEC won’t approve a corporation’s AoI if it is not accompanied by a Certificate of
Authority or Recommendation from the concerned regulatory agency.
- These industries include:
1. Banks, banking and quasi-banking institutions;
2. Preneed, insurance, and trust companies;
3. Nonstock savings and loan associations (NSSLA); and
4. Other financial intermediaries.
- Ex: Before an insurance company’s AoI may be approved by the SEC, it must first secure a
recommendation from the Insurance Commission.

> Capital requirement

Section 12, RCC: Stock corporations shall not be required to have a minimum capital stock, except as otherwise
specifically provided by special law.

Is full Filipino ownership a requirement in a corporation? No.

Is foreign ownership over corporation allowed? Yes, except in industries where the law requires corporations
to be partially nationalized.

Re: meaning of “capital” in the constitutional provision that limits foreign ownership over public utilities
Case: Gamboa v Teves (G.R. No. 176579; June 2011)

Facts: In 1928, Act No. 3236 was enacted, granting PLDT a franchise and the right to engage in the telecommunications
business.

In 1969, General Telephone and Electric Corporation (GTE), an American company and a major stockholder of PLDT, sold
26% of the outstanding capital stock (OCS) of PLDT to Philippine Telecommunications Investment Corporation (PTIC).

In 1977, Prime Holdings Inc. (PHI) was incorporated. It later became the owner of 111,415 shares of PTIC thru 3 Deeds of
Assignment executed by PTIC’s stockholders.

In 1986, those 111, 415 shares were sequestered by the PCGG. This represented 46.125% of PTIC’s OCS.

In 1999, First Pacific, a company registered in Bermuda and based in Hong Kong, acquired the remaining 54% of PTIC.

In 2006, the government, thru the Inter-Agency Privatization Council (IPC), caused a public bidding for the sequestered
shares. Parallax Venture Fund won the bid. However, First Pacific announced that it would exercise its right of first refusal
and buy the sequestered shares by matching Parallax’s bid. It later entered into a conditional sale and purchase agreement
with the government. The sale to First Pacific was completed in 2007.

Since PTIC is a stockholder of PLDT, the sale by the government is actually an indirect sale of PLDT’s shares (specifically, 12
million shares representing 6.3% of its OCS).

This sale increased First Pacific’s common shareholdings in PLDT from 30.7% to 37%, thereby increasing the common
shareholdings of foreigners in PLDT to 81.41%. This violates Section 11, Article XII of the Constitution.

Section 11, Article XII, Constitution states: “No franchise, certification, or any other form of authority for the operation of a
public utility shall be granted except to citizens of the Philippines, or to corporations or associations organized under
Philippine laws, at least 60% of whose capital is owned by such citizens.” —This means that foreign ownership of a public
utility is limited to not more than 40%. 60% must be Filipinos.

This provision was included in the Constitution as a recognition the sensitive and vital position of public utilities both in the
national economy and for national security. This ensures that the Filipinos will have “effective control” over public utility
companies.

Later, the House of Representatives Commission on Good Governance conducted a public hearing regarding the sale and
concluded that it followed due diligence and conformed to the legal procedures. It also concluded that First Pacific’s
acquisition will not violate the constitutional limitation since PTIC only holds 13.847% of PLDT’s OCS.

Pablito and Arno Sanidad joined themselves as petitioners-in-intervention, claiming that as PLDT subscribers, they have a
stake in the outcome of the controversy.

Main issue: Whether the term “capital” in Sec. 11, Art. XII of the Constitution refers to total common shares only or to total
OCS (which includes both common and non-voting preferred shares).

Sub-issue: Whether Gamboa, a stockholder of PLDT, has locus standi (legal standing).

Ruling on the sub-issue: Yes. As stockholder of PLDT, he has the right to question the sale because the possible
unconstitutionality of such sale can result to revocation of PLDT’s franchise, which would then directly affect his interest as
stockholder.

Also, the SC mentioned the doctrine of transcendental importance. This case involves a public utility company, and thus, it
would affect national economy and the economic welfare of the Filipino people.

Petitioners’ argument on the main issue: “Capital” should only mean the total common shares because such shares are
entitled to vote and it is through voting that control over a corporation is exercised.

Respondent’s contention: “Capital” should include preferred shares since the Constitution does not distinguish among
classes of stock.

Ruling on the main issue: The “capital” in the provision should be construed to mean only the voting shares (common
shares) of the corporation.

Owning a voting share means having a “controlling” interest in the corporation. Non-voting shares are not included
in the “capital” mentioned in the constitutional limitation on foreign ownership of public utilities.

One of the rights of a stockholder is the right to participate in the control or management of the corporation. This is
exercised through his vote in the election of directors because it is the board of directors that controls or manages
the corporation.

In the absence of provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares have the same voting
rights as common shares. However, preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income
in the same manner as bondholders.

In fact, under the Corporation Code, only preferred or redeemable shares can be deprived of the right to vote. Common shares cannot be
deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.

Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting
rights, the term capital refers only to common shares. However, if the preferred shares also have the right to vote in the election of
directors, then the term capital shall include such preferred shares because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of directors.

In short, the term capital in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the Constitutional Commission, capital refers to the voting stock or
controlling interest of a corporation.

This interpretation is reinforced by the definition of “Philippine national” in the Foreign Investments Act of 1991: “Philippine national shall
mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; xxx”

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is considered as non-Philippine national.

Motion for Reconsideration (October 2012): Movants contend that the term "capital" has long been settled and defined to refer to the
total outstanding shares of stock, whether voting or non-voting.

They claim that the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement, has consistently adopted
this particular definition in its numerous opinions.

SC: MRs are denied, with finality.

For more than 75 years since the 1935 Constitution, the SC has not interpreted or defined the term "capital" found in various economic
provisions of the 1935, 1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term "capital" until now.
The opinions of the SEC, as well as of the DOJ, on the definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place, conflicting and inconsistent. There is no
basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary
to the definition that this Court adopted in its June 2011 Decision.

The SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted even
the Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the
Constitution for certain economic activities.

“The Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business. Compliance with the constitutional limitation(s) on engaging in nationalized
activities must be determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is owned by "Filipino citizens",
or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by another investing
corporation, the same process must be observed. One must not stop until the citizenships of the individual or natural stockholders of layer
after layer of investing corporations have been established, the very essence of the Grandfather Rule.”

It was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule.

Section 19, Article II of the 1987 Constitution declares: The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve
to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the
formation and operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified
Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national
goals and priorities.

Thus, in numerous laws, Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of
the "capital" of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No.
5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977;
(4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6)
Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital
is owned by such citizens; xxx

> How is a corporation created?

Section 18, RCC:
1. Submission of corporate name: A person or group of persons desiring to incorporate shall submit the
intended corporate name to the Commission for verification.
2. Reservation of name: If the Commission finds that the name is distinguishable from a name already
reserved or registered for the use of another corporation, not protected by law and is not contrary to law,
rules and regulations, the name shall be reserved in favor of the incorporators.
3. Submission of AoI and bylaws: The incorporators shall then submit their articles of incorporation and
bylaws to the Commission.
4. Issuance of Certification of Incorporation: If the Commission finds that the submitted documents and
information are fully compliant with the requirements of this Code, other relevant laws, rules and
regulations, the Commission shall issue the certificate of incorporation.

> When can a corporation commence its business?

Section 18, RCC: A private corporation organized under the RCC commences its corporate existence and juridical
personality from the date the SEC issues the certificate of incorporation under its official seal xxx
Note: The birth of the corporation is the date stated in its Certificate of Incorporation, not the actual date of giving
or delivery of said certificate.

Concession Theory
The authority of a corporation comes from the State. Hence, a corporation only attains its juridical personality
when the State, through the SEC, issues its approval through the Certificate of Incorporation.

> When should a corporation commence its business?

Section 21, RCC: A corporation must formally organize and commence its business within 5 years from the date of
incorporation. If it does not, its Certificate of Incorporation shall be deemed revoked on the day following the end
of the 5-year period.

Subsequent inoperation / Delinquent Corporation

- If a corporation has commenced its business but subsequently becomes inoperative for at least 5
consecutive years, the SEC may place the corporation under delinquent status, after due notice and
hearing.
- The delinquent corporation has 2 years to resume its operations and comply with the SEC’s requirements.

When do we say that a corporation has formally organized? What are the manifestations that a
corporation has officially commenced its business?
A corporation is deemed to have formally organized when it has formed its Board of Directors/Trustees, or when it
has adopted its by-laws, or when it has entered into a contract.

> Amendment of Articles

Section 15, RCC:
- Amendment may be done by: a majority vote of the Board of Directors or Trustees, and the vote or written
assent of the stockholders representing at least ⅔ of the outstanding capital stock, or by ⅔ of its members.
- Amendments to the articles shall be indicated by underscoring the changes.
- A copy of it must be duly certified under oath by the corporate secretary and a majority of directors/
trustees, with a statement that the changes have been approved by the required vote of stockholder/
members.
- It must be submitted to the SEC.

The amendments will take effect in 2 ways:

1. Upon the approval of the SEC; or
2. Upon the SEC’s inaction, 6 months after the date of filing, for a cause not attributable to the corporation.

> By-laws
These are the internal rules of the corporation. They provide for the corporation’s “government”.

Section 45, RCC: Submission of by-laws may either be during:

1. Pre-incorporation - It may be submitted by the incorporators together with the Articles of Incorporation
before the corporation's formal registration; or
2. Post-incorporation - It may be adopted thru an affirmative vote of stockholders representing at least a
majority of the outstanding capital stock, or a majority of its members.

Process of adoption (post-incorporation) of bylaws:

1. Vote of majority of OCS or members
2. Signing by the stockholders or members who voted
Note: The bylaws must be kept in the principal office.
3. Certification of its copy by majority of directors/trustees, countersigned by the secretary
 4. Filing of certified copy, and attaching to the original Articles of Incorporation, with the SEC

Is the filing of the bylaws a condition precedent for the valid existence of a corporation?
Case: Loyola Grand Villas Homeowners South Association v CA (G.R. No. 117188; August 7, 1997) - Digest
by Ericha Gonadan, Edited by DMG

Facts: Loyola Grand Villas Homeowners Association, Inc. (LGVHAI) was organized in 1983 as the association of homeowners and
residents of a subdivision called Loyola Grand Villas.

It was registered with the Home Financing Corporation, the predecessor of Home Insurance and Guaranty Corporation (HIGC), as the sole
homeowners' organization in the said subdivision. Its first president was Victorio Soliven, owner of the developer of LGV.

In 1988, the officers of the LGVHAI tried to register its by-laws but failed. They discovered that there were two other organizations within the
subdivision: the North and the South Association. The North Association was registered with the HIGC in 1989. It submitted its by-laws in
1988.

In 1989, Soliven inquired about the status of LGVHAI. HIGC informed him that LGVHAI had been automatically dissolved (its certificate
revoked) for two reasons:
1. It did not submit its by-laws within the period required by the Corporation Code; and
2. There was non-user of corporate charter because HIGC had not received any report on the association's activities.
This information resulted in the registration of the South Association with the HIGC in 1989. It filed its by-laws the same year.

These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAI's
certificate of registration without due notice and hearing, and prayed for the cancellation of the certificate of registration of the North and
South Associations.

After due notice and hearing, HIGC ruled in favor of LGVHAI, recognizing it as the duly registered and existing homeowners association for
LGV homeowners, and revoking the Certificates of Registration of the North and South Associations.

The South Association appealed to the Appeals Board of the HIGC, which dismissed the appeal for lack of merit. Thus, it appealed to the
CA. The CA affirmed the HIGC Appeals Board, adding that, there being no showing that the registration of LGVHAI had been validly
revoked, it continued to be the duly registered homeowners' association in the Loyola Grand Villas.

LGVHAI’s Contention: Requirement of adoption of by-laws is not mandatory.

Citing Chung Ka Bio v. Intermediate Appellate Court, they contend that Section 6(I) of that PD No. 902-A provides that non-filing of by-laws
is only a ground for suspension or revocation of the certificate of registration of corporations and, therefore, it may not result in automatic
dissolution of the corporation.

Section 9 of the Corporation Code provides that the corporate existence and juridical personality of a corporation begins from the date the
SEC issues a certificate of incorporation under its official seal. Consequently, even if the by-laws have not yet been filed, a corporation may
be considered a de facto corporation.

South’s Contention: The use of the word “must” in Sec. 46 of the Corporation Code is no exception — it means file the by-laws within one
month after notice of issuance of certificate of registration OR ELSE.

The OR ELSE, though not specified, is inextricably a part of MUST.

Hence, South Association filed this petition for review on certiorari with the SC.

Issue: May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by Section 46 of
the Corporation Code, result in its automatic dissolution?

SC’s Ruling: No.

The failure to file the by-laws within that period does not imply the "demise" of the corporation.

By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes.
There are cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate
powers.

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the
same within the period provided for in Section 46.

Under PD No. 902-A, the SEC may suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law, including the failure to file by-laws within the required
period under Section 45 of the (old) Corporation Code.

Note: Section 45 of the RCC deleted the one-month filing period of by-laws which used to be stated under Section
46 of the Old Corporation Code.
Atty G: Therefore, corporations may file their bylaws “within a reasonable time”, which may be interpreted
as, within the period by which a corporation must formally organize, that is, within 5 years from issuance of
its Certificate of Incorporation.

Atty G: The filing of bylaws is not mandatory. It is merely directory. The non-filing of bylaws may be a ground for
the revocation of a corporation’s Certificate of Incorporation, but it will not result in the automatic dissolution of a
corporation. It is not even a requirement for it to acquire juridical personality, provided that the Articles of
Incorporation is complete.

Contents of By-laws
Section 46, RCC: TTQ-MFQ-TMP-IO
1. Time, place, and manner of calling and conducting regular or special meetings of directors/trustees;
2. Time and manner of calling and conducting meetings of stockholders/members; and the mode of notifying
them;
3. Required quorum and the manner of voting in meetings of stockholders/members;
4. Modes by which a stockholder, member, director, or trustee may attend meetings and cast votes;
5. Form of proxies of stockholders/members;
6. Qualifications, duties, and responsibilities of directors/trustees; the guidelines for their compensation; and
the maximum number of other board representations that an independent director/trustee may have;
7. Time for holding the annual election of directors/trustees; and the mode of notice;
8. Manner of election; and the term of office of all officers other than directors/trustees;
9. Penalties for violation of bylaws;
10. In case of stock corporations, manner of issuing stock certificates; and
11. Other matters as may be necessary for the proper or convenient transaction of its corporate affairs, for the
promotion of good governance and anti-graft and corruption measures.

Amendment of by-laws
Section 47, RCC: Amendment may be done in 2 ways:
1. By majority vote of the Board of Directors/Trustees and vote of the owners of majority of the outstanding
capital stock/members, at a regular or special meeting duly called for the purpose; or
2. By delegation of the power to amend, repeal, or adopt new bylaws to the Board of Directors/Trustees, by
owners ⅔ of the outstanding capital stock/members.
Note: Such delegation is deemed revoked whenever a majority of the outstanding capital stock/
members shall so vote at a regular or special meeting.
The amended/new bylaws will only be effective upon the issuance of the SEC of a certification that the bylaws is
in accordance with the RCC and relevant laws.

Requirements of valid by-laws

1. It must be consistent with the Corporation Code, other laws, morals, and public policy.
2. It must be in harmony with the Articles of Incorporation.
 3. It must be general and uniform in its application, such that it is not directed towards particular individuals
only.
4. It must not impair obligations and contracts. It must not impair vested rights.
5. It must be reasonable and non-discriminatory.

May third persons be affected by a corporation’s by-laws?

No because the the by-laws are only for a corporation’s internal governance. The exception is when such third
person has actual knowledge of the by-laws.

> Levels of corporate control

1. Stockholders/Members - How do stockholders/members exercise their control over the corporation?
They exercise control and participate in the management of the corporation thru the election of the Board,
who will actually govern the corporation.
2. Corporate officers - These positions are named in the RCC and in the corporation’s by-laws. They are in
charge of the day-to-day operations of the corporation.
3. Board of Directors/Trustees - It is the collegial body exercising control over the business and affairs of the
corporation

> Board of Directors

General Powers of the Board
Section 22, RCC: The Board exercises the corporate powers, conduct all business, and control all properties of
the corporation.

Atty. G: Board Resolutions are the express acts of the Board. The directors/trustees don’t act individually. The act
of one director does not bind the corporation. Every act must be passed upon by the members of the Board,
unlike in a partnership where there is mutual agency, which means the act of one agent will bind the partners and
the partnership.

Business Judgment
Case: Saber v CA (GR no. 132981)

Facts: Marcos appointed Dr. Mamitua Saber, then Dean of Research at the Mindanao State University and Acting Director of National
Science Museum, as Executive Vice-President of the Philippine Amanah Bank (PAB). He was also designated as the Officer-in-Charge of
the bank pending the election of its president by the BoD.

Saber was sent to Malaysia to study how its government prepared and managed the annual Muslim pilgrimage (Hajj) to Mecca, and thus,
avoid the fiascos that plagued pilgrimages of Filipino Muslims in the past. After his stint in Malaysia, Saber resumed his duties at the PAB.

Thereafter, the PAB BoD Chairman directed him to undertake the appropriate arrangement for the Hajj.

Saber decided to charter the M/V Sweet Homes. In behalf of the PAB, Saber executed a Uniform Time-Charter to transport the pilgrims, as
well as a Rider to Charter Party in which the PAB was allowed to load cargoes.

The PAB conducted a massive information drive to urge people to join the Hajj through the bank. Prospective pilgrims, including PAB
depositors, made reservations for the voyage and made partial payments for their tickets.

Saber wrote to Marcos, requesting that other parties not be allowed to charter any ship or aircraft bringing pilgrims to Jeddah, to avoid
unfair competition with the PAB.

However, Marcos granted some politicians permission to charter a plane to transport the pilgrims.

Because of this, many prospective passengers withdrew their reservations; and about 200 cabin accommodations were rendered vacant.

Rather than allow the vessel to leave with many vacant cabins, Saber decided to sell tickets to AGEAC (via Basman) on credit: 40 first
class cabin accommodations and 30 second class accommodations, paid via postdated checks.
Basman loaded exportable goods on board the vessel. When the vessel arrived in Saudi Arabia, the authorities did not allow the M/V Sweet
Homes to dock. Its passengers were boarded on boats and transported to the pier. Basman failed to unload and sell the exportable goods.

When the postdated checks were deposited on the due dates in the account of the PAB, they were dishonored. Consequently, PAB
sustained a huge financial loss.

During a meeting of the PAB BoD, where Saber was present, a Resolution was approved, declaring Saber liable for the losses on the
ground that the Board did not authorize him to sell tickets on credit, payable via postdated checks, and to execute the Freight Contract with
AGEAC.

The Board directed Saber to collect the receivables himself, because of its perception that if the PAB were to collect the receivables, it
would, thereby, be ratifying the unauthorized acts of Saber.

The PAB BoD issued another Resolution, creating an Investigating Committee, chaired by Aradji, to look into the administrative and/or
criminal liabilities of the persons involved in the Pilgrimage.

During the formal investigation, Saber testified and submitted documentary evidence. Aradji submitted his Report that there was basis for
Saber to be charged with violation of RA No. 3019 (Anti-Graft and Corrupt Practices Act) and recommended that the proper criminal
complaint be filed.

Thus, PAB BoD issued a resolution to authorize the filing of a criminal complaint against Saber.

Saber filed a civil complaint for damages in the RTC against PAB, its BoD, and its officers, claiming that the complaint caused him dishonor,
shame, discredit and contempt, shock, besmirched reputation, and wounded feelings. He also alleged that because of his preventive
suspension, he failed to receive his salary from the University, causing him and his family severe economic losses.

Three Informations were filed against Saber, et al., for violation of Section 3(e) of RA 3019—causing undue injury to any party, or giving
unwarranted benefits, advantage, or preference through manifest partiality, evident bad faith, gross inexcusable negligence.

After trial, the Sandiganbayan rendered a Decision acquitting all the accused.

In acquitting Saber of the charge, the Sandiganbayan ruled that no undue injury was caused to PAB nor were unwarranted benefits,
advantage, or preference given to anyone. It also held that Dr. Saber, who was then the EVP and OiC must be deemed to have been
impliedly clothed with authority to enter into any contract related to the pilgrimage. A corporate officer, entrusted with the general
management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate
to the conduct of the ordinary business of the corporation.

As for the civil case, the RTC also ruled in favor of Saber, thereby holding PAB and Aradji solidarily liable to pay Saber: 900k moral
damages, 100k nominal damages, and 70k attorney’s fees.

The RTC based the judgment partly on the Sandiganbayan’s ruling, and on the following: (1) Malicious Prosecution of the criminal cases;
(2) Libel arising from derogatory and malicious publications; and (3) willful injury against plaintiff under the provisions of the New Civil Code
on Human Relations.

On appeal, however, the CA reversed the RTC, ruling that Saber failed to prove bad faith and malice against the PAB and Aradji; and that
they could not be blamed for acting the way they did for they were charged with the duty to act for the bank with loyalty and dedication.

Questions of policy or of management are left solely to the honest decisions of officers and directors of a
corporation, and so long as they act in good faith, their orders are not reviewable by the courts. (Concept of
Business Judgment)

According to the CA, PAB and Aradji were not motivated by any malicious intent or by a sinister design to unduly harass Saber, but only by
a well-founded anxiety to protect the interests of the bank.

In the meantime, Saber died intestate. His heirs filed this petition for review on certiorari before the SC, alleging that, among others, Saber
acted in good faith as OiC of the PAB, that he suffered damages from the malicious prosecution, and that PAB made Saber as a scapegoat.

Issue: Is Saber entitled to damages? Was there malice on the part of PAB when it filed the criminal complaint against Saber?

SC’s Ruling: No and no.

Saber anchored his claim for damages on Abuse of right under Article 19 of the New Civil Code: “Every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.”

The elements of abuse of rights are the following: (a) the existence of a legal right or duty which is exercised in bad faith; and (b) for the
sole intent of prejudicing or injuring another.

Malice or bad faith is at the core of said provision. Good faith is presumed and he who alleges bad faith has the duty to prove the same.
Good faith refers to the state of the mind which is manifested by the acts of the individual concerned. It consists of the intention to abstain
from taking an unconscionable and unscrupulous advantage of another.

Bad faith does not simply connote bad judgment to simple negligence, dishonest purpose or some moral obloquy and conscious doing of a
wrong, a breach of known duty due to some motives or interest or ill-will that partakes of the nature of fraud. Malice connotes ill-will or spite
and speaks not in response to duty. It implies an intention to do ulterior and unjustifiable harm.

The BoD of PAB did not act in bad faith or with malice in designating Aradji as chairman. There were 4 other members of the Investigating
Committee, all of whom could’ve ruled in favor of Saber based on the evidence on record. Moreover, the report and recommendations of
the committee were still subject to the review of the BoD, who could’ve also ruled in his favor.

Even though the Sandiganbayan ruled that Saber had the implied authority to do those acts and thus he cannot be held criminally liable, it
cannot be concluded that the PAB BoD acted in bad faith or with malice when it initiated the criminal case.

To constitute malicious prosecution, there must be proof that the prosecutor was prompted by a sinister or devious design to vex and
humiliate a person, and that it was initiated deliberately, knowing that the charges are false and groundless.

One cannot be held liable for damages for malicious prosecution where he acted with probable cause.

Probable cause is that which engenders a well-founded belief that a crime has been committed and that the respondent is probably guilty
thereof and should be held for trial. A finding for probable cause needs only to rest on evidence showing that in all probability, a crime has
been committed by the respondent.

In this case, there was probable cause to initiate a case against Saber. The Tanodbayan found probable cause based on the evidence,
particularly the following: (1) Saber allowed Basman of AGEAC to buy tickets worth P756,000 payable on credit via postdated checks that
were blank as to the amounts; and (2) Saber allowed the AGEAC to pay freight charges of P178K via post-dated checks although the
balance of the account of Basman was only P1,834.55.

That the Sandiganbayan later on acquitted him does not automatically mean that the prosecution against him had no probable cause.

Saber failed to prove that the criminal complaints against him were filed with malice on the part of PAB and despite lack of probable cause.
Hence, he (through his heirs) is not entitled to damages.

Qualifications of a Director/Trustee
Section 2, RCC: The only requirement needed for one to qualify as a director/trustee is that he/she must own at
least one share (stock corporation), or be a member (nonstock). This is a continuing requirement, which means
that a director/trustee will cease to be such when he/she ceases to own a share or be a member.

There is no citizenship requirement.

Term of Office of a Director/Trustee

Section 22, RCC:
- Directors have a term of 1 year.
- Trustees may be elected for a term not exceeding 3 years.
- Each shall hold office until a successor is elected and qualified.

Independent directors
- An independent director is a person who 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 his/her responsibilities as director.
 - Corporations vested with public interest shall have independent directors that comprise at least 20% of the
Board.
- These corporations include:
1. Those covered by the Securities Regulation Code (RA no. 8799), with securities registered with the
SEC, listed with an exchange or with assets of at least 50M and having at least 200 holders with at
least 100 shares each
2. Banks, quasi-banks, NSSLAs, pawnshops, corporations engaged inn money service business,
trust and insurance companies, and other financial intermediaries
3. Other corporations engaged in businesses vested with public interest as may be determined by the
SEC
- SEC’s criteria in determining whether an entity is vested with public interest: (a) extent of
minority ownership; (b) type of financial products or securities issued or offered to investors;
(c) nature of business operations; and other relevant factors germane to the objective and
purpose of requiring independent directors.

Election of Directors/Trustees
Section 23, RCC:
- Each stockholder/member has the right to nominate any qualified director/trustee, except when the
exclusive right is reserved for holders of founder’s shares.
- Required attendees: At all elections, the owners of majority of the outstanding capital stock, or majority of
the members, must be present, either:
1. In person;
2. Through a representative authorize to act by written proxy; or
3. Through remote communication or in absentia—but only when so authorized by the by-laws or by a
majority of the Board, or when it is a corporation vested with public interest.

Atty G: Majority shall mean 50% plus 1.

Quorum
Section 51, RCC: A quorum shall consist of the stockholders representing a majority of the outstanding capital
stock (stock corporation) or a majority of the members (nonstock), unless otherwise provided in the RCC or in the
bylaws.

Atty G: Regarding quorum/required attendees in elections, “majority of the outstanding capital stock” does not
pertain to the nominal stockholders. It pertains to the capital stock.
Hence, if there are 6 stockholders: A with 5 shares, B with 1 share, C with 1 share, D with 2 shares, and E
with 1 share, majority of the OCS does not mean 4 stockholders.
Majority could be A and B only (5+1 shares = 6 shares) because they already represent the majority of the
10 outstanding total shares.
There is no quorum even if B, C, D, and E are present (1+1+2+1) because 5 shares doesn’t represent the
majority of the total outstanding shares.

> How can stockholders vote?

Section 23, RCC:
- Stockholders are entitled to vote the number of shares they own as per the books at the time fixed in the
bylaws, or if the bylaws are silent, at the time of the election.
- The total votes of one stockholder cannot be greater than the shares he/she owns multiplied by the
number of directors to be elected.

SH’s total votes = (No. of shares owned) x (No. of directors to be elected)

Illustration: SH owns 1,000 shares. There are 5 directors to be elected.
SH’s total votes = 1,000 x 5 = 5,000
There are 3 modes by which a stockholder may vote, namely:

1. Straight voting - A stockholder may vote his/her number of shares for as many persons as there are
directors to be elected.
Same illustration: SH can vote for A, B, C, D, and E in the following manner:
A - 1,000 votes
B - 1,000 votes
C - 1,000 votes
D - 1,000 votes
E - 1,000 votes

2. Cumulative voting - A stockholder may cumulate his/her shares and give 1 candidate as many votes as
the number of directors to be elected multiplied by the number of shares owned.
Same illustration: SH can use all 5,000 votes for A alone.

3. Distributed cumulative voting - A stockholder may distribute his/her total votes among as many
candidates he/she sees fit.
Same illustration: SH can vote in the following manner:
A - 500 votes
B - 3,000 votes
C - 500 votes
D - 1,000 votes
E - 0 votes because he’s a lil bitch

Atty G: Majority shall be determined by plurality of votes. Just because a nominee was able to garner votes equal
to the majority stock doesn’t mean he/she’s elected already. The ones with the highest votes will be elected.

Disqualifications of directors/trustees
Section 26, RCC: A person cannot be a director, trustee, or officer if, within 5 years prior to the election, he/she
was:
1. Convicted by final judgment of:
a. an offense punishable by imprisonment exceeding 6 years;
b. a violation of the Corporate Code; or
c. a violation of the Securities Regulation Code (RA no. 8799);
2. Found administratively liable for any offense involving fraudulent acts; or
3. Found liable by a foreign court or equivalent foreign regulatory authority for acts, violations, or misconduct
similar to (1) or (2).

Section 27, RCC: If a director/trustee is elected despite having a disqualification, or if the disqualification arose or
is discovered subsequent to election, the SEC may motu proprio or upon verified complaint, and after due notice
and hearing, order the removal of such director/trustee.

Removal of Directors/Trustees
Section 27, RCC: Removal of a director/trustee may be done:
1. By a vote of stockholders holding or representing at least ⅔ of the outstanding capital stock or ⅔ of the
members.
○ Where/when: At a regular meeting or a special one called for the purpose, and always after
previous notice to stockholders/members
2. By the SEC motu proprio or upon verified, after due notice and hearing

Vacancies in the Office of Director/Trustee

Section 28, RCC: General rule—Vacancy in the Board may be filled by the vote of at least a majority of the
remaining directors/trustees, provided that they still constitute a quorum.

Exceptions—Vacancy can’t be filled by a majority vote of the remaining directors or trustees when the vacancy
was because of:
1. Removal from office
2. Expiration of term
3. Increase in the number of directors/trustees
In these cases, vacancy will instead be filed by an election at a regular or at a special meeting of stockholders/
members.

Emergency Board
When the remaining directors cannot constitute a quorum and there is an emergency event that requires
immediate action 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 (called an emergency board).

The action by the designated director or trustee shall be limited to the emergency action necessary, and his/her
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.

> Corporate Officers

Section 24, RCC: Who elects them?—They are elected by the directors; When?—immediately after the directors’
election.

Who are the corporate officers?

They are persons designated as corporate officers in the RCC or in the By-Laws. The RCC mentions the
following:
1. President who must be a director
2. Treasurer who must be a resident
3. Secretary who must be a citizen and resident of the Philippines
Why? Because the secretary is the keeper of the corporation’s books. These books must always be
accessible.
4. Such other officers as may be provided in the bylaws.
5. If the corporation is vested with public interest, there must also be a compliance officer.

Atty G: If a position is not in the bylaws, it is not a “corporate officer” position even if such position is called “VP”
or “SVP”, etc. This officer not mentioned in the bylaws is just an “employee”, technically.

How is an Office created then?

An office/corporate officer other than a president, treasurer, or secretary, is created by an amendment of the
bylaws, thru a Board Resolution. Amendment of bylaws is done: (a) by a majority vote of the board and a majority
vote of the outstanding capital stock/members; or (b) by delegation of the power to amend to the board by a ⅔
vote of the outstanding capital stock/members.

Case: Easycall v King (GR no. 145901; December 15, 2005)

Facts: Edward King was the assistant to the General Manager of Easycall. He rose to ranks and became the “VP for nationwide
expansion”.

Later, he was scrutinized for his poor performance and for spending 40% of his work days for field works. Eventually, he was terminated on
the ground of loss of confidence.
He filed a complaint for illegal dismissal. The Labor Arbiter ruled against him and declared that his dismissal was valid.

The NLRC affirmed the LA’s decision but with modification: that he be indemnified (P10,000) for the violation of his right to due process.
King filed a MR but it was denied for lack of cause of action and lack of jurisdiction, because as a case involving a corporate officer, the
NLRC had no jurisdiction over the subject matter.

The applicable law at the time was PD 902-A (SEC Reorganization Act) which states that the SEC has original and exclusive jurisdiction
over cases involving removal of corporate officers.

King elevated the case to the CA and his petition was granted there. The CA held that he was not a corporate officer, that the NLRC had
jurisdiction, and that King’s dismissal was illegal.

Hence the petition to the SC by Easycall. Easycall contends that King was a corporate officer.

Issue: Was King a corporate officer (under SEC’s jurisdiction) or an employee (under NLRC’s jurisdiction)?

SC’s Ruling: King was only an employee. The NLRC had jurisdiction over his illegal dismissal case.

Corporate officers are those given that character by the Corporation Code or by the By-Laws. The Code mentions: President, Secretary,
Treasurer, and such other officers as may be provided for in the by-laws.

Easycall failed to prove that its bylaws provided for the office of the “VP for nationwide expansion”.

An office is created by the charter of the corporation. An officer is elected by the directors/the Board.

An employee occupies no office and is employed not by the Board or stockholders, but by the managing officer of the corporation.

Here, King was appointed “VP” by Easycall’s general manager, not its Board. Hence, King was an employee, and not an officer.

Case: Nacpil v CA (GR no. 144767; March 21, 2002)

Facts: Dily Dany Nacpil was the Assistant General Manager for Finance and Administration and Comptroller of IBC. He had beef with
Emiliano Templo who told the Board that when he assumes presidency, he would terminate Nacpil’s services. He blamed Nacpil for the
prior mismanagement of IBC.

Upon assumption of presidency, Templo harassed Nacpil and pressured him into resigning. Nacpil succumbed and resigned. Templo
refused to pay Nacpil his retirement benefits and to acknowledge his employment, claiming that he was not IBC’s comptroller and merely
usurped the powers of a comptroller.

Nacpil filed a complaint for illegal dismissal and non-payment of benefits. The LA ruled in his favor. IBC appealed to the NLRC which
dismissed the appeal. And so the case was raised to the CA.

The CA ruled in favor of IBC this time and reversed the NLRC. Hence this petition to the SC.

Nacpil’s contention: He was not a corporate officer but an employee. He was not elected by the Board as comptroller. Such position isn’t
even in the bylaws of IBC. He was appointed by the general manager. The labor courts, and not the SEC, have jurisdiction.

Issue: Was Nacpil a corporate officer?

SC’s Ruling: Yes. Nacpil was a corporate officer. SEC has jurisdiction.

There are two elements in determining whether the SEC has jurisdiction:
1. Status/relationship of the parties
2. Nature of the question that is the subject matter of the controversy.

Nacpil was a corporate officer even if he was appointed by the general manager, because his appointment was subsequently approved by
the Board.

It also doesn't matter that the comptroller position was not expressly mentioned in the bylaws, because under the bylaws, the Board Is
empowered to appoint such other officers as it may deem necessary.
Nacpil’s appointment required the approval and formal action of IBC’s Board. Thus, he was a corporate officer.

Dismissal of a corporate officer is an intra-corporate matter within the SEC’s jurisdiction under PD 902-A, Section 5. Note however that this
jurisdiction has been transferred to the RTCs by virtue of RA 8799 (Securities Regulation Code, Section 5.2)

Personal Liability of Directors/Officers

Atty G: First—what is the basis or source of the authority of an officer to act on behalf of the corporation?

Section 24, RCC: “The officers shall manage the corporation and perform such duties as may be provided in the
bylaws and/or as resolved by the board of directors.”

So, officers may perform the acts stated in the (a) bylaws; or (b) Board Resolutions. They are considered the acts
of the corporation.

General rule: Absent the authority from the bylaws or Board Resolutions, the corporate officer’s acts will not bind
the corporation.
Exceptions: The act of the officer will bind the corporation despite the absence of authority when—
1. the act was ratified or confirmed by the corporation. Here, it will be as if there was a prior authority for that
act.
2. the doctrine of apparent authority (also called the holding out theory or the doctrine of ostensible authority)
applies. This is based on the principle of estoppel. It imposes liability not because of a contract but
because because of a principal’s act. This is evidentiary and applies on a case-to-case basis.

Holding out theory; Doctrine of ostensible agency or apparent authority

Case: Lapulapu Foundation Inc. v CA (GR no. 126006; January 29, 2004)

Facts: Elias Tan, President of LLF obtained 4 loans from Allied Banking Corporation, through 4 promissory notes for 100k each. Later,
despite demands, Tan failed to pay. The bank filed a complaint in the RTC, praying that Tan and LLF be held jointly and solidarily liable to
pay the rnite obligation.

LLF denied incurring the debts, claiming that Tan obtained the loans in hid personal capacity and for his own use and benefit. LLF never
authorized Tan to co-sign any promissory note. Thus, LLF interposed a cross claim against Tan, alleging that he exceeded his authority, and
that he should be solely liable for the loans.

Tan admitted that he obtained the loan in his personal capacity, but that they agreed that the loans were to be paid from the proceeds of
Tan’s shares of common stock in the Lapu-Lapu Industries Corp., a real estate firm.

The RTC ruled against Tan and LLF and found them solidarily liable.

Issue: Should Tan and LLF be solidarily liable?

SC’s Ruling: Yes. Corporate fiction on the part of LLF must be pierced in this case.
Tan represented himself as the President of LLF, opened accounts in the name of LLP. He submitted a Secretary’s Certificate attesting that
he is authorized to sign for and on behalf of LLF any check, and to transact business with the bank. All the while, LLF never questioned
Tan’s acts except no when court action has been initiated.

LLF is liable for the transactions entered into by Tan on its behalf.

Per the Secretary’s Certificate, LLF gave Tan ostensible and apparent authority to deal with the bank. The corporation is estopped from
questioning Tan’s authority to obtain the loans.

If a corporation knowingly permits one of its officers or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts, and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s
authority.
Additional discussion on estoppel from the case of Megan Sugar Corporation:
The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its
purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to
whom they were directed and who reasonably relied thereon.

A corporation may be held in estoppel from denying as against innocent third persons the authority of its officers
or agents who have been clothed by it with ostensible or apparent authority.

A corporate officer may not have been armed with a board resolution, but when the previous acts of a corporation
could make third parties assume that the corporation had knowledge of the officer’s actions such acts of the
corporation has clothed the officer with apparent authority.

Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of ostensible agency,
imposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of a
principal or an employer in somehow misleading the public into believing that the relationship or the authority
exists.

One of the instances of estoppel is when the principal has clothed the agent with indicia of authority as to lead a
reasonably prudent person to believe that the agent actually has such authority.

In the Megan case, the corporation had all the opportunity to repudiate the authority of the lawyer (representative) since all motions,
pleadings, and court orders were sent to the corporate office. However, it never questioned the acts of said lawyer and even took time and
effort to forward all the court documents to him. Hence, Megan cannot feign knowledge of the acts of the lawyer.

Atty G: Second—All acts of an officer/director/trustee must be sanctioned by the corporation thru a Board
Resolution, the bylaws, the Articles of Incorporation, or the RCC. The instances (Sec 30, RCC) when they become
personally liable are exceptions to the concept of separate personality of corporations.

Chavez Notes:
General rule—A corporate officer cannot be held liable for acts done in his official capacity because a corporation
has a separate and distinct personality from that of its officers and members/stockholders.

Exceptions—Section 30, RCC: Directors or trustees will be jointly and severally liable for damages when:
1. They willfully and knowingly vote for or assent to patently unlawful acts of the corporation;
2. They are guilty of gross negligence or bad faith in directing the affairs of the corporation; or
3. They acquired any personal or pecuniary interest in conflict with their duty as such directors or trustees.

They shall also not attempt to acquire, or acquire any interest adverse to the corporation in respect of any matter
which has been reposed in them in confidence. If they do, they shall be liable as a trustee for the corporation and
must account for the profits which otherwise would have accrued to the corporation.

Other instances where a director/trustee will be solidarily liable with the corporation (not under Section 30;
jurisprudential):
4. When he/she consents to the issuance of watered stocks* or does not object thereto;
5. He/she agrees to hold himself/herself personally and solidarily liable with the corporation; or
6. A provision of law makes him/her personally answerable for the action.

*A watered stock is a stock issued below its par value. (See Section 65, RCC)

Atty G: Those 6 instances breach the fiduciary trust, confidence, and duty entrusted to the officers of a
corporation.
Requisites to hold a director personally liable for corporate obligations
1. It must be specifically alleged 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.
2. There must be clear and convincing proof that the officer acted in bad faith.

Chavez: Bad faith does not connote bad judgment or negligence. It imports a dishonest purpose or some moral
obliquity and conscious wrongdoing. It means breach of a known duty through some ill motive or interest.

Case: Lanuza v BF Corporation (G.R. No. 174938, October 01, 2014)

Facts: Gerardo Lanuza, Jr. and Antonio Olbes are members of the Board of Directors of Shangri-La Properties, Inc.

BF Corporation entered into agreements with Shangri-La wherein it undertook to construct a mall and a multilevel parking structure along
EDSA.

Shangri-La had been consistent in paying BF Corp in accordance with its progress billing statements. However, Shangri-La started
defaulting in payment.

BF Corp filed a complaint against Shangri-La and its board of directors. BF Corp alleged that Shangri-La misrepresented that it had funds
to pay and that it was simply a matter of delayed processing of BF’s progress billing statements.

Construction eventually was completed but despite demands, Shangri-La refused to pay the balance. BF also alleged that Shangri-La’s
directors were in bad faith so they should be held jointly and severally liable with Shangri-La.

Shangri-La and respondent board members filed a motion to suspend the proceedings in view of BF’s failure to submit its dispute to
arbitration. RTC denied the motion. Petitioners filed an answer saying they are resigned members of the board since July 15, 1991.

Shangri-La and respondents then filed certiorari with CA which granted their petition and ordered submission of the directors to arbitration.

Issue: Whether the directors can be made parties to the arbitration proceedings, pursuant to the arbitration clause provided in the contract
between BF Corporation and Shangri-La.

SC’s Ruling: Yes.

Lanuza, et al., argue that their personalities as directors of Shangri-La are separate and distinct from Shangri-La.

Because a corporation's existence is only by fiction of law, it can only exercise its rights and powers through its
directors, officers, or agents, who are all natural persons. A corporation cannot sue or enter into contracts without
them.

A consequence of a corporation's separate personality is that consent by a corporation through its representatives is not consent of the
representative, personally. Its obligations, incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract.

However, when there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of courts or
tribunals to determine if these persons and the corporation should be treated as one.

The Corporation Code provides the instances when directors, trustees, or officers may become solidarily liable for corporate acts:
a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties as a director or trustee.

When the courts disregard the corporation’s distinct and separate personality from its directors or officers, the courts do not say that the
corporation, in all instances and for all purposes, is the same as its directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons composing or representing it.

Courts merely discount the distinction and treat them as one, in relation to a specific act, in order to extend the terms of the contract and the
liabilities for all damages to erring corporate officials who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the corporate veil, parties who are normally treated
as distinct individuals should be made to participate in the arbitration proceedings in order to determine if such distinction should indeed be
disregarded and, if so, to determine the extent of their liabilities.

> Self-dealing directors

A self-dealing director is a director (or his spouse/relative within the 4th civil degree) who contracts with the
corporation where he is a director.

Section 31, RCC: A contract between the corporation and its (a) director/trustee; or (b) a director/trustee’s spouse
and relatives within the 4th civil degree of consanguinity or affinity is voidable*, at the option of the corporation,
unless the following conditions are present:
*A contract is voidable when there is vice of consent.
1. The presence of such director/trustee in the meeting in which the contract was approved wasn’t necessary
to constitute a quorum;
2. The vote of such director/trustee was not necessary for the approval of the contract;
3. The contract is fair and reasonable.

If all 3 are present, the contract is valid. If any of 1, 2, or 3 is absent, the contract may be ratified by ⅔ vote of the
outstanding capital stock or ⅔ of the members, provided that: (a) there is a full disclosure of adverse interest; and
(b) the contract is fair and reasonable.

4. In case of a corporation vested with public interest, material contracts are approved by at least ⅔ of the
entire membership of the board, with at least a majority of the independent directors voting to approve
such material contracts.
5. In case of a corporate officer, the contract has been previously authorized by the Board of Directors/
Trustees.

> Interlocking directors

An interlocking director is a director of one, some, or all corporations entering into a contract.

Section 32, RCC: A contract between 2 or more corporations having interlocking directors shall not be invalidated
on that ground alone, provided that:
1. The contract is not fraudulent; and
2. The contract is fair and reasonable.

Atty G: The status of contracts involving interlocking directors is valid, provided that the contract is not fraudulent
and it is fair and reasonable. If the two requisites are not present, the contract cannot be ratified.

But if the interest of the interlocking director in one corporation is substantial* and the interest in the other is
merely nominal, the rule on self-dealing directors (Section 31) will apply. This means that ratification becomes
necessary for the contract to be valid.
*Substantial means the person’s total stockholdings in that corporation exceeds 20% of the outstanding
capital stock. Nominal means less than 20%.
Which corporation will ratify the contract?—The nominal corporation will ratify.

Chavez: The purpose of this rule is to prevent officers from taking advantage of information on the different
corporations or trade secrets in order to promote individual interests. Officers are not permitted to use their
position of trust and confidence to further private interests.

> Disloyalty of a director (Doctrine of corporate opportunity)

Section 33, RCC: Requisites—
 1. A director, by virtue of his/her office;
2. Acquires a business opportunity which should belong to the corporation;
3. Thereby obtaining profits to the prejudice of such corporation.
This rule applies even if the director risked his/her own funds in the venture.

Atty G: When is there corporate opportunity? There is one when the following requisites are present—
1. When the corporation is financially able to undertake an opportunity;
2. The opportunity is consistent with the nature of business of the corporation; and
3. There is an expectation of profits from undertaking that opportunity.
What’s the consequence?—He/she must account for, and refund to the corporation all profits made in that
business opportunity. Exception—When the act is ratified by a vote of ⅔ of the outstanding capital stock.

> Special Committees

Section 34, RCC: If the bylaws so provide, the Board may create an Executive Committee composed of at least 3
directors.

Atty G: This is like a “Mini Board”. It is not inferior to the Board. It is as powerful as the Board, except when it
comes to the 5 acts that the RCC states the Committee cannot act on.

Section 34, RCC: This Committee may act, by a majority vote, on specific matters within the competence of the
Board as may be delegated to it in the bylaws or by majority vote of the Board, except on the following matters:
AFAAD
1. Approval of any option for which the shareholders’ approval is also required;
2. Filling of vacancies in the Board
Why?—Because this requires a majority vote of stockholders in a meeting called for the purpose of
filling a vacancy.
3. Amendment or repeal of bylaws or the adoption of a new one
Why?—Because this requires either: (a) majority vote of the Board and a majority vote of the
outstanding capital stock; or (b) delegation to the Board by a ⅔ vote of outstanding stock.
4. Amendment or repeal of any Board Resolution which by its express terms is not amenable or appealable
5. Distribution of cash dividends
Atty G: What about distribution of stock dividends?—The Committee is allowed to do this because
this provision specifically mentioned cash dividends only.

> Powers of a Corporation

Under the doctrine of limited capacity, corporations cannot act beyond the authority given to it by law. Acts done
beyond the powers given to it by law are ultra vires acts. (Section 44)

What are the kinds of powers of a corporation?

1. Express powers - those that can be found in the RCC or in the Articles of Incorporation
2. Implied powers - those that can be deduced from, or are necessarily included in, the express powers
Note: The legal basis is Section 35(k), RCC—“to exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as stated in the articles of incorporation.”
3. Incidental powers - those that are based on its existence

What are the corporation’s express powers?

A. General powers, enumerated under Section 35, RCC.
B. Specific express powers under Sections 11, 15, 36, 37, 38, 39, 40, 41, 42, and 43, RCC.

A—General powers
Section 35, RCC:
1. To sue and be sued in its corporate name
 Atty G: This is an incidental power. It is incidental in its existence as a juridical person.
2. To have perpetual existence, unless the certificate of incorporation provides otherwise
Atty G: In the absence of a term in the articles, the corporation has perpetual existence.
3. To adopt and use a corporate seal
4. To amend its articles of incorporation
5. To adopt bylaws and to amend or repeal them
6. If a stock corporation, to issue or sell stocks to subscribers and sell treasury stocks; if a non-stock
corporation, to admit members to the corporation
7. To purchase, receive, take or grant, old, convey, sell, lease, pledge, mortgage, and otherwise deal with
such real and personal property
Atty G: This is different from the power under Section 39 (sale and disposition of assets).
Section 35 does not require stockholder participation, as implied in the clause “as the transaction of
the lawful business of the corporation may reasonably and necessarily acquire”.
Section 39 requires stockholder participation because this provision talks about the sale or
disposition of the whole business.
8. To enter into a partnership, joint venture, merger, consolidation, or any other commercial agreement with
natural or juridical persons
Atty G: A joint venture is a partnership of corporations. It may be unincorporated/unregistered. The
effect of non-registration is that the Boards of the corporations will stay separate, whereas if the
joint venture is incorporated and registered, they will have to form one Board.
9. To make reasonable donations, for public welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes
Note: Foreign corporations cannot give donations in aid of any political party or candidate or for
partisan political activity.
Atty G: Domestic corporations used to be included in the prohibition but the RCC has deleted this—
hence, the RCC now effectively allows domestic corporations to donate for political reasons.
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers, and
employees

B—Specific express powers

1. To have perpetual existence unless its articles of incorporation provides otherwise (Section 11)
2. To amend the Articles of Incorporation (Section 15)
3. To extend or shorten corporate term (Section 36)
4. To increase or decrease capital stock (Section 37)
5. To incur, create, or increase bonded indebtedness (Section 37)
6. To deny preemptive right (Section 38)
7. To sell or dispose of assets (Section 39)
8. To acquire own shares (Section 40)
9. To invest corporate funds in another corporation or business or any other purpose (Section 41)
10. To declare dividends (Section 42)
11. To enter into management contract (Section 43)

Power Required vote / How Is appraisal right available? Other notes

Extend or shorten corporate
term
Increase or decrease capital
stock
Majority vote of Board +
Ratification by 2/3 of OCS/M
at a duly called meeting
Majority vote of Board +
Ratification by 2/3 of OCS +
Approval of SEC
Yes Shortening the term of the
corporation is one mode of
dissolving a corporation.
No The application for approval of
the SEC must be are within 6
months from approval of
Board and SH.
Power
Incur bonded indebtedness
Deny Pre-emptive right
Sale or Disposition of
individual corporate assets
Sale of all or substantially all
of corporation’s properties,
including goodwill
Acquire own shares
Invest in another corporation
or business
Declare cash or property
dividends
Declare stock dividends
Required vote / How
Majority vote of Board +
Ratification by 2/3 of OCS/M
Provision in the Articles
Majority vote of Board
Majority vote of Board +
Authorization by 2/3 OCS/M
at a meeting duly called for it
Abandonment of sale may be
done by the Board alone
There must be unrestricted
Retained Earnings; and it must
be for a legitimate corporate
purpose, including:
(1)to eliminate fractional
shares;
(2)To collect or compromise
indebtedness because of
unpaid subscription, in a
delinquency sale;
(3)To pay dissenting or
withdrawing SH
Majority of Board +
Ratification by 2/3 OCS/M
Majority vote of Board
Majority vote of Board +
Approval of 2/3 OCS at a
regular/special meeting duly
called for the purpose
Is appraisal right available? Other notes
No
No Right of pre-emption need not
be stated in the Articles. It is
the power to deny that must
be stated in the Articles.
Yes - Substantially all = if
the corporation would
be rendered incapable
of continuing the
business or
accomplishing the
purpose for which it
was incorporated.
- It must be computed
based on its Net Asset
Value per its FS.
No
Yes If investment is reasonably
necessary to accomplish it’s
primary purpose, only majority
vote of Board is required.
No It will be based on the SH’s
outstanding shareholding.
No
Power Required vote / How Is appraisal right available? Other notes

Enter into management Majority vote of Board + No Approval of 2/3 OCS/M is

contract Majority vote of OCS/M of required instead when:
- It is one where a BOTH the managing and the 1. SHs representing the same
corporation managed corporation interest of both
undertakes to manage corporations own or control
or operate all or more than 1/3 of OCS of
substantially all of the the managing corporation;
business of another or
corporation. 2. Majority of the Board of the
- It cannot be for a managing also constitute
period longer than 5 majority of the Board of the
year for any 1 term. managed

Stock corporations are prohibited from retaining surplus profits more than 100% of their paid-in capital, except:
1. When justified by definite corporate expansion projects or programs approved by the Board;
2. When the corporation is prohibited from declaring dividends without creditor’s consent and no consent has
been secured yet; or
3. When it can be clearly shown that retention is necessary (e.g., need for special reserve for probable
contingencies).

Corporation Law (Finals) Notes by DMG

Reference: Villanueva (2018 ed) and Atty. Nick Gumabun’s Lectures UC JD2019

> MEETINGS

A. Stockholders/Members’ Meeting

Kinds of Stockholder Meetings (Section 48-49, RCC)

1. Regular - held annually, either (a) at a date fi xed by the bylaws; or (b) if not fi xed by the bylaws, on any
date after April 15 every year, as determined by the Board. These are usually held for the election of
directors.
2. Special - held (a) at any time deemed necessary; or (b) as provided in the bylaws.

Notice requirement in Meetings

- For regular meetings, written notice must be sent to all stockholders on record at least 21 days prior,
unless a different period is required in the bylaws, the law, or regulation. Electronic mail or other means
may be used if allowed by the SEC under its guidelines.
- For special meetings, written notice must be sent at least 1 week prior, unless a different period is given in
the bylaws, or by law or regulation.

Waiver of Notice of meeting

- Waiver of notice may be done by any stockholder, expressly or impliedly.
- But general waivers of notice in the Articles or By-laws shall not be allowed.
- General rule—Attendance shall constitute as a waiver of notice or defect of notice.
- Exception—Attendance will not constitute as waiver if it is for the express purpose of objecting to the
transaction because the meeting was not called in a lawful manner.

Who calls for a meeting?

 - The person authorized to call for a meeting. He/she is generally the person designated in the bylaws. If
there is no provision, a director or officer entrusted with the management of the corporation may call a
meeting, unless otherwise provide by law. Presumably, it is the president.
- If there is no such person, or if such person unjustly refuses to call a meeting, a stockholder may bring a
petition to the SEC, showing good cause, and the SEC may issue an order directing the petitioner to call a
meeting. The petitioner will preside the meeting until a majority of the stockholders present have chosen a
presiding officer.

Postponement of meeting
⁃ Written notice and reason shall be sent to stockholders of record at least 2 weeks prior to the date of the
meeting, unless the bylaws, law, or regulation requires a different period.

Closing of Books
⁃ The Stock and Transfer Book* or Membership Book shall be closed at least:
⁃ (a) 20 days before a regular meeting; and
⁃ (b) 7 days before a special meeting.
⁃ *The Stock and Transfer Book is a record of all stocks in the names of the stockholders alphabetically
arranged; the installments paid and unpaid on all stocks; every alienation, sale or transfer of stock made;
and such other entries as the bylaws may prescribe. (Section 73, RCC)

Where should meetings be held?

⁃ They are to be held: (a) in the principal office as set forth in the Articles; or (b) in the city or municipality
where the office is located, if not practicable in the office. (Section 50, RCC)

Validity of irregularly called meetings — Are the transactions made in a meeting that was improperly held/
called automatically or always invalid?
⁃ No. If the meeting is improperly held or called (due to an irregularity in the sending of notices), the
proceedings or transactions made at that meeting may still be valid, provided that:
⁃ (a) Such proceedings or transactions are within the powers of the corporation;
⁃ (b) All the stockholders are present or duly represented; and
⁃ (c) Not one expressly states at the beginning of the meeting that they are only attending to object to the
transaction because the meeting was not lawfully called.

Quorum (Section 51, RCC)

⁃ There is quorum when the stockholders representing majority of the outstanding capital stock, or majority of
the members, are present, unless otherwise provided in the RCC or in the bylaws.

B. Directors/Trustees’ Meeting

When?
⁃ Regular meetings shall be held: (a) monthly; or (b) as provided in the bylaws.
⁃ Special meetings may be held: (a) at any time, upon the call of the President; or (b) as provided in the
bylaws.

Where?
⁃ They may be held anywhere in or outside the country, unless the bylaws provide otherwise.
⁃ Atty G: The bylaws shall always be superior (always followed), as long as they do not contradict the RCC. In
most rules, we should first look at the bylaws. Then the RCC.

Notice requirement
⁃ Notice must be sent at least 2 days prior, unless a longer period is provided in the bylaws.
⁃ Notice may be waived, expressly or impliedly.

Rule on directors/trustees who cannot physically attend or vote

⁃ They may participate through remote communication.
⁃ May directors/trustees execute a proxy agreement? No. They cannot attend or vote by proxy. No person
can act on behalf of the director.
⁃ Is Teleconferencing allowed? Yes. (Expertravel Tours v CA)
- It is an interactive group communication, between three or more people in two or more locations, through
electronic medium. There are 3 basic types: (1) video; (2) computer-printed communication through
keyboard terminals; and (3) audio-conferencing or verbal communication via telephone.
- Teleconferencing and videoconferencing of members of the board of directors of private corporations are
permitted in light of the Electronic Commerce Act (RA 8792).

Rule on directors/trustees with potential interest in any related party transaction

⁃ Such director/trustee must refuse to vote, without prejudice to the rule on Self-Dealing Directors (Section 31,
RCC) which states that self-dealt contracts are voidable, at the option of the corporation, unless all of the
following are present:
⁃ (a) His presence in the meeting in which it was approved wasn’t necessary to constitute a quorum;
⁃ (b) His vote was not necessary;
⁃ (c) The contract is fair and reasonable;
⁃ (d) If vested with public interest, 2/3 of the entire Board and majority of the independent directors voted
to approve; and
⁃ (e) If he is an officer, the contract was authorized by the Board.

Who shall preside in meetings?

1. The chairman; or
2. If the chairman is absent, the President;
3. Unless the bylaws provide otherwise. (Section 53, RCC)
- This applies to both Stockholders’ Meeting and Directors’ Meeting.

When is there quorum in directors/trustees’ meetings?

⁃ There is quorum when there is presence of the majority of the directors/trustees as fixed in the Articles.

What is the required vote in order for a corporate act to be valid?

1. Majority of directors/trustees who constitute a quorum, that is, majority of those present during the meeting;
but
2. If it is for the election of officers, majority of all the members of the Board.

Rule on Abstention
⁃ It is counted in favor of the issue that won the majority vote. By abstaining, the director is deemed to be
abiding by the rule of the majority. (Lopez v Ericta [1972])

Minutes of the Meeting

⁃ It is a brief statement off wheat transpired at a meeting.
⁃ Signing of all the Board members isn’t required.
⁃ Signature of the Corporate Secretary gives it probative value and credibility.
⁃ Entries in the minutes are prima facie evidence of what actually took place during the meeting.
⁃ The Minutes is different from a Resolution. A Resolution is a formal action by a Board or a corporate body,
authorizing an act, appointment, or transaction. (People v Dumlao)

Who may vote sequestered shares?

- General rule: The registered owners retain the right to vote their shares, even if sequestered. The
government, through the PCGG, is a mere conservator and thus cannot exercise acts of dominion.
- Exception: The government has the authority to vote when the sequestered shares were acquired with
public funds. (Republic v Cocofed)
- The government is authorized to vote if the two-tiered test is satisfied:
 - 1. Is there prima pace evidence showing that the shares are ill-gotten and thus belonging to the
State?
- 2. Is there an imminent danger of dissipation, necessitating their continued sequestration and
voting by the PCGG, while the main case is pending in the Sandiganbayan?

> RIGHTS OF STOCKHOLDERS/MEMBERS

1. To attend meetings (Section 48, RCC)
2. To vote
3. To inspect corporate books (Section 73, RCC)
4. To the financial records (Section 74, RCC)
5. To execute a proxy
6. To execute a voting trust agreement
7. Of pre-emption
8. Of appraisal
9. To file suit

RIGHT TO INSPECT BOOKS

What are the corporate books?

- They include: the Articles of Incorporation, by-laws, information on current ownership, information on the
Board and the officers, transaction records, Resolutions, and the Stock and Transfer Book*.
- Section 73, RCC: Every corporation shall keep and carefully preserve at its principal office all information
relating to the corporation including, but not limited to:
⁃ (a) The articles of incorporation and bylaws of the corporation and all their amendments;
⁃ (b) The current ownership structure and voting rights of the corporation, including lists of stockholders or
members, group structures, intra-group relations, ownership data, and beneficial ownership;
⁃ (c) The names and addresses of all the members of the board of directors or trustees and the executive
officers;
⁃ (d) A record of all business transactions;
⁃ (e) A record of the resolutions of the board of directors or trustees and of the stockholders or members
⁃ (f) Copies of the latest reportorial requirements submitted to the Commission; and
⁃ (g) The minutes of all meetings of stockholders or members, or of the board of directors or trustees.
*The stock and transfer book shall be kept in the principal offi ce of the corporation or in the offi ce of its stock
transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable
hours on business days. (Ibid)

What are the requirements before a person may assert this right to inspect?
1. He must be a stockholder on record at the time of request/demand.
2. The request/demand must be done at a reasonable hour.
3. The inspection must be germane to his interest as a stockholder; it must be proper and lawful; and it
must not be inimical to the interests of the corporation. (Gokongwei v SEC)
4. He must not have been guilty of improperly using prior information and he must be acting in good faith
in making the demand now. If the right is to be denied by the corporation based on these grounds, the
burden of proof is upon the corporation. (Terelay Investment v Yulo)
5. He must be acting for a legitimate purpose in making the demand. The purpose must be specific and
honest. The purpose must not be just to gratify curiosity. It must not be for speculative or vicious
purists. (Gonzales v PNB) The inspection must not be for the purpose of harassing the corporation.
(Ang-Abaya v Ang)
6. The confidentiality of the records must not be violated.

RIGHT TO FINANCIAL STATEMENTS

- A corporation shall furnish a stockholder or member, within ten 10 days from receipt of their written
request, its most recent financial statement, in the form and substance of financial reporting required by
the SEC.
 - At the regular meeting of stockholders or members, the board of directors or trustees shall present a
financial report of the operations of the corporation for the previous year, which shall include financial
statements, duly signed and certified by an independent CPA.
- However, if the total assets or total liabilities of the corporation are less than Php600K, or such other
amount as ma be determined by the Department of Finance, the financial statements may be certified
under oath by the treasurer and the president.

RIGHT TO VOTE

How may a stockholder (in a stock corporation) exercise his voting rights?
A stockholder may exercise his right to vote:
1. In person;
2. Through a proxy; or
3. Through remote communication or in absentia, if the bylaws authorized such means.

How may a member (in a non-stock corporation) exercise his voting rights?
A member may exercise his right to vote:
1. In person;
2. Through a proxy, unless the Articles or bylaws provide otherwise; or
3. Through remote communication or in absentia, but only if the bylaws authorized such means.

On Secured Creditors (Section 54, RCC)

⁃ General rule: When a stockholder grants security interest in his shares to a creditor, such stockholder still
has the right to attend and vote at meetings.
⁃ Exception: when the stockholder expressly gives that right to the creditor, in writing and recorded in the
appropriate corporate books.

On Administrators (ibid)
⁃ Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend
and vote in behalf of the stockholder, without the need of a written proxy.

Rule when stocks are jointly-owned (Section 55, RCC)

⁃ General rule: All co-owners must give consent in voting.
⁃ Exceptions:
⁃ 1. When there is a written proxy, signed by all co-owners, authorizing one of them or some of them or
any third person to vote such share.
⁃ 2. When the shares are owned in an “and/or” capacity, any one of them can vote or appoint a proxy.

Treasury shares
⁃ They are shares which have been issued and paid for, but subsequently reacquired by the issuing
corporation by redemption, purchase, donation, or through other lawful means.
⁃ They may be disposed of for a reasonable price fixed by the Board.
⁃ They have no voting rights as long as they remain in the treasury.

RIGHT TO A PROXY (Section 57, RCC)

Requirements in the making of proxy:

1. It must be in writing;
2. It must be signed and filed by the stockholder;
3. It must be in the form authorized in the bylaws; and
4. It must be received by the Corporate Secretary, within reasonable time before the meeting.
5. It is only valid for the meeting for which it is intended.
6. It is only valid for a period not longer than 5 years at any one time.
VOTING TRUST AGREEMENT (Section 58, RCC)
⁃ It is an agreement whereby a stockholder confers upon the trustee the right to vote and other rights
pertaining to his share.

How long may a Voting Trust Agreement (VTA) last?

- General rule: It must be for a period not exceeding 5 years.
- Exception: If it is specifically required as a condition in a loan agreement, the agreement may exceed 5
years but it shall automatically expire upon full payment of the loan.

What is the nature of a stockholder’s ownership of the stock under a VTA?

- Under a VTA, the status of a stockholder from “legal titleholder” or owner of the shares, becomes
“equitable or beneficial owner”. The trustee becomes the legal titleholder. (Lee and Lacdao v CA, et al.)

Requirements in making a VTA:

1. It must be in writing;
2. It must be notarized;
3. It must specify the terms and conditions;
4. A certified copy must be filed with: (a) the corporation; and (b) the SEC. If not, it is ineffective and
unenforceable.
5. It must not be entered into for circumventing laws against: (a) anti-competitive agreements; (b) abuse of
dominant position; (c) anti-competitive mergers and acquisitions; (d) violation of nationality and capital
requirements; and (e) fraud.

What happens when a VTA is executed?

1. The stock certificate covered by the voting trust shall be cancelled and a new stock certificate shall be issued
in the name of the trustee.
2. The books of the corporation shall state that the transfer is made pursuant to the voting trust agreement.
3. The trustee shall execute and deliver to the trustor (original stockholder) a Voting Trust Certificate, which shall
be transferable in the same manner and with the same effect as a Stock Certificate.
4. The right to inspect books is available for both trustor and trustee.
5. All rights granted in the VTA will automatically expire at the agreed period, unless expressly renewed.
6. Upon expiry of the VTA, the Voting Trust Certificate and the stock certificate in the name of the trustee will be
cancelled and a new certificate of stock will be reissued in the name of the trustor (original stockholder).

How may trustees vote?

1. In person
2. By proxy
3. Other manner authorized in the bylaws

RIGHT OF PRE-EMPTION
⁃ It is the right to subscribe to all issues or disposition of shares of any class in proportion to his shareholding.
⁃ The right doesn’t apply to:
⁃ 1. Shares issued in compliance with laws requiring stock offerings or minimum stock ownership by the
public; and
⁃ 2. Shares issued in good faith with the approval of the stockholders representing 2/3 of the outstanding
capital stock, in exchange for property needed for corporate purposes or in payment of a debt.

For which kind of issuances is the pre-emptive right available?

- The right of pre-emption is recognized only with respect to a new issuance of shares, not with respect to
additional issues of originally authorized shares.

What is the purpose of this pre-emptive right?

- It is there to prevent the dilution of a stockholder’s interest in the corporation. It is there to protect his
stake/shareholding.
RIGHT OF APPRAISAL
⁃ It is the right to dissent and demand payment of the fair value of his shares.
⁃ This right applies in the following instances:
⁃ 1. The amendment of Articles, when it has the effect of: (a) changing or restricting the rights of any
stockholder or class of shares; or (b) authorizing preferences; or (c) extending or shortening the term of
corporate existence;
⁃ 2. Sale, lease, exchange, transfer, mortgage, pledge, or disposition of all or substantially all of the
corporate property and assets
⁃ 3. Merger or consolidation; and
⁃ 4. Investment of corporate funds for a purpose other than its primary purpose.

How may appraisal right be exercised?

- By a written demand for payment of fair value of shares on the date of vote.
- It should be given within 30 days from the date of vote. If no written demand is given within those 30 days,
it shall be deemed as a waiver of the right of appraisal.

What is the effect of exercising the right of appraisal?

- When the right of appraisal is exercised, there shall be a suspension of all his rights as a stockholder,
including voting and dividend rights.

RIGHT TO FILE SUIT

Kinds of suit:
1. Individual suit — one brought by a stockholder in his own name against the corporation for direct violation of
his contractual rights such as right to vote, to dividends, etc.
2. Derivative suit — one brought by one or more stockholders or members in the name and in behalf of the
corporation to redress wrongs committed against it or to protect or vindicate corporate rights.
- It is an action filed by stockholders to enforce a corporate action. It is an exception to the general
rule that a corporation’s power to sue should be exercised by the Board. Stockholders may be
allowed to sue on behalf of the corporation whenever the directors or officers refuse to sue in order
to vindicate the rights of the corporation. (Villamor v Umale)
- The real party in interest is the corporation. The suing stockholder is a mere nominal party.
- What are the requirements in order for a stockholder to file a derivative suit?
- 1. He was a stockholder at the time the acts occurred and the action was filed;
- 2. He exerted all reasonable efforts to exhaust all remedies available under the Articles,
bylaws, laws or rules governing the corporation or partnership to obtain the relief he
desires; and such is alleged and stated in particularity in the complaint. (Ching v Subic Bay)
- 3. No appraisal rights are available for the acts complained of;
- 4. The suit is not a harassment or nuisance suit; and
- 5. The action is brought in the name of the corporation.
3. Representative suit — one brought by a group of stockholders when a wrong is committed against said
group of stockholders.

> SUBSCRIPTION (Section 59, RCC)

⁃ It is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be
formed, even if the parties refer to it as a purchase or some other contract.
⁃ There are two kinds: (1) pre-incorporation; and (2) post-incorporation.

Pre-incorporation subscription (Section 60, RCC)

⁃ General rule: It shall be irrevocable for at least 6 months from subscription.
⁃ Exceptions: (a) when all other subscribers consent to the revocation; or (b) when the corporation fails to
incorporate within the same period or a longer one stipulated in the contract.
⁃ After the Articles have been submitted to the SEC, the pre-incorporation subscription cannot be revoked.
Consideration (Section 61, RCC)
⁃ Stocks shall not be issued for a price less than their par/issued price. Otherwise, they shall be watered
stocks.
⁃ Liability of directors for watered stocks (Section 64, RCC): A director is liable to the corporation or its
creditors, solidarily with the stockholder concerned, for the difference between the value received at
issuance and the par/issued value when:
⁃ (a.1) The Director consents to the issuance of stocks for a consideration less than its par/issued value; or
⁃ (a.2) He consents to the issuance of stocks for a consideration other than cash, valued in excess of its fair
value; and
⁃ (b) Having knowledge of the insufficient consideration, he does not file a written objection with the
corporate secretary.

Modes of Consideration (Section 61, RCC)

1. Actual cash
2. Property: (a) actually received by the corporation; (b) necessary or convenient; and (c) at a fair valuation
equal to the par/issued value.
3. Labor performed or services rendered to the corporation
4. Previously incurred indebtedness of the corporation
5. Amounts transferred from the unrestricted Retained Earnings to stated capital
6. Outstanding shares exchanged for stocks reclassified or converted
7. Shares of stock in another corporation
8. Other generally accepted form of consideration

Who shall determine the value of consideration other than cash?

⁃ The valuation shall initially be determined by the stockholders or the Board, subject to the approval of the
SEC.

What cannot be a consideration in exchange for stocks?

1. Promissory notes
2. Future service

What determines the issued price of no-par value shares?

1. It may be fixed in the Articles;
2. It may be fixed by the Board pursuant to authority conferred by the Articles or bylaws;
3. If not fixed, it may be determined by the stockholder representing majority of the outstanding capital stock at a
meeting duly called for the purpose.

Issuance of Certificate of Stock (Section 63, RCC)

⁃ No Certificate of Stock shall be issued until the full amount of the subscription plus interest plus expenses
has been paid.

Period and rate of interest on unpaid subscription (Section 65, RCC)

⁃ Interest starts from the date of subscription, if required by the contract, at the rate fixed, or if there is no rate
fixed in the contract, the prevailing legal rate.

Payment of balance (Section 66, RCC)

⁃ Subject to the subscription contract, the Board may declare unpaid subscription due and demandable at any
time, and may collect with accrued interest.
⁃ When? (a) Date specified in the subscription contract; or (b) Date stated in the call made by the Board.
⁃ Failure to pay would render the entire balance due and payable plus liability on interest. The interest shall be
computed from the date specified, until full payment.
⁃ If no payment is made within 30 days from the date specified, all stocks covered by the subscription shall
become delinquent.
What is the effect of delinquency? (Section 70, RCC)
⁃ No delinquent stock shall be voted for, be entitled to vote, or be represented at any meeting, nor shall the
holder be entitled to stockholder rights, except the right to dividends.
⁃ If the stock is delinquent, cash dividends will be applied to the unpaid balance. Stock dividends will be
withheld until full payment.

Are unpaid shares also deprived of stockholder rights? (Section 71, RCC)
⁃ No. Holders of unpaid shares must be distinguished from holders of delinquent shares.
⁃ Holders of delinquent shares do not have rights except the right to dividends, but the holders of subscribed
shares not fully paid but not delinquent, possess all the rights of a stockholder.

Delinquency Sale (Section 67, RCC)

⁃ The Board may order the sale of delinquent stock in a Resolution, specifically stating: (a) the amount due on
each subscription plus all accrued interest; and (d) the date, time, and place of sale which shall not be less
than 30 days nor more than 60 days from date of delinquency.
⁃ Notice must be sent to every delinquent stockholder, together with a copy of the Resolution: (a) personally,
(b) by registered mail, or (c) other means provided in the bylaws.
⁃ The Notice shall be published once a week for 2 consecutive weeks in a newspaper of general circulation in
the province or city where the principal office is located.
⁃ Unless the delinquent stockholder pays on or before the date of sale, the delinquent stock shall be sold at a
public auction to a bidder who offers to pay the full balance plus interest plus cost of advertisement plus
expenses, for the smallest number of shares or fraction of shares. The stock purchased shall be transferred
to the purchaser in the books, and a certificate of stock shall be issued in his name.
⁃ If there are remaining shares, they shall be credited in favor of the delinquent stockholder who shall be
entitled to the issuance of a certificate of stock.
⁃ May the corporation bid in the public auction of delinquent shares? Yes. Title to the shares shall be
vested in the corporation as treasury shares.

Irregular sale (Section 68, RCC)

⁃ An action to recover delinquent stock sold (on the ground of irregular or defective notice or sale) may only
be sustained if:
⁃ 1. The party first pays or tenders to the holder of the delinquent stock sold the sum for which it was sold,
with interest from the date of sale, at the legal rate; and
⁃ 2. The complaint is is filed within 6 months from the date of sale.

Recovery of unpaid subscription (Section 69, RCC)

⁃ The corporation may collect the amount due on an unpaid subscription plus interest, costs, and expenses,
through court action.

> CERTIFICATE OF STOCK (Section 62, RCC)

A certificate of stock should be:

1. Signed by the President or Vice President;
2. Countersigned by the Secretary or Assistant Secretary;
3. Sealed with the corporate seal; and
4. Issued in accordance with the bylaws.

⁃ Corporations whose securities are traded in trading markets and which can reasonably demonstrate
capability to do so, may be required to issue their shares in uncertified or scripless form in accordance with
the SEC Rules.

What is the nature of issued shares?

⁃ Shares issued by corporations are personal property.
How may shares be transferred?
⁃ Shares may be transferred by delivery of the certificate of stock, endorsed by the owner, his attorney in-fact,
or any other person legally authorized.
⁃ No shares against which the corporation holds any unpaid claim shall be transferable in the books of the
corporation.

What are the requirements for valid transfer of stocks? (Rural Bank of Lipa City v CA)
1. There must be delivery of the stock certificate. Title would only be vested upon the transferee after
delivery.
2. The certificate must be endorsed by the owner or his attorney-in-fact, or other persons legally
authorized to make the transfer.
3. To be valid against third parties, the transfer must be recorded in the books of the corporation.

What is a street certificate? (Guy v Guy)

- It is a stock certificate endorsed in blank by its owner.
- Upon its face, the holder is entitled to demand its transfer his name from the issuing corporation. The
exception to this rule is when the certificates endorsed in lank were stolen from the possession of the
beneficial owner.

Lost Certificate (Section 72, Certifi cate of Stock)

What must a stockholder do when he loses his stock certificate?
⁃ First: The registered owner or his legal representative shall file wit the corporation an affidavit in triplicate,
setting forth:
⁃ 1. Circumstances as to how the certificate was lost, stolen, or destroyed;
⁃ 2. Number of shares;
⁃ 3. Serial number of certificate; and
⁃ 4. Name of issuing corporation plus such other information as evidence as may be necessary.
⁃ Second: The corporation will verify the affidavit.
⁃ Third: The corporation will publish a notice in a newspaper of general circulation in the place of principal
office, once a week for 3 consecutive weeks, at the owner’s expense.
⁃ Fourth: After one year from last publication, if no contest is presented, the right to contest shall be barred
and the corporation shall cancel the lost certificate in its books.
⁃ Fifth: The corporation will then issue a new certificate, unless the owner files a bond or other security
effective for 1 year.
⁃ Alternative fourth: If there is a contest, the issuance of the new certificate shall be suspended until the court
renders a final decision regarding the ownership of the certificate.
⁃ No action may be brought against an corporation who has issued a rectification of stock in lieu of those
lost, stolen, or destroyed, except in cases of: (a) fraud; (b) bad faith; or (c) negligence on the part of the
corporation and its officers.

NON-STOCK CORPORATION (Section 86, RCC)

- It is one where no part of its income is distributable as dividends to its members, trustees, or officers.
- Any profit gained shall be used for the furtherance of the purpose for which it was organized.
- Purposes may be: charitable, religious, educational, professional, cultural, fraternal, literary, scientific,
social, civic, or similar purposes like trade, industry, agricultural, etc.

Right to vote in nonstock corporations

- Each member, regardless of class, is entitled to one vote.
- This right may be limited, broadened, or denied to the extent specified in the Articles or bylaws.

May membership be transferred to another person?

- No. Membership in a nonstock corporation is personal and non-transferable, unless the Articles or bylaws
so provide.
Should dead members be included in the determination of a quorum? (Tan v Sycip)
- It depends on what is provided in the Articles or bylaws.
- If there is no provision, the dead members will no longer be counted in the determination of quorum.
- Voting rights in nonstock corporations attach to membership.

CLOSE CORPORATION (Section , RCC)

- It is one whose Articles provides that:
- (1) all of its issued stock of all classes, exclusive of treasury shares, shall be held by not more tan a
specified number of persons, not to exceed 20;
- (2) all issued stock shall be subject to specified restrictions on transfer; or
- (3) the corporation shall not list in an stock exchange or make public offering of its stocks.
- When at least 2/3 of its voting stock is owned or controlled by another corporation, such corporation is not
deemed as a close corporation.
- Mere ownership of a stockholder of all of its stock, or a narrow distribution of ownership, does not, by itself,
make a close corporation. (San Juan Structural v CA)
- The following cannot be close corporations:
- (1) mining or oil companies
- (2) stock exchanges
- (3) banks
- (4) insurance companies
- (5) public utilities
- (6) educational institutions
- (7) corporations declared to be vested with public interest

When may a stockholder compel a close corporation to purchase his shares?

- When the corporation has sufficient assets to cover its liabilities, exclusive of capital stock.

When may a stockholder compel the dissolution of a close corporation?

- By written petition to the SEC: (a) whenever acts of directors or officers are illegal, fraudulent, dishonest,
oppressive, or unfairly prejudicial to the corporation or any SH; or (b) whenever corporate assets are being
misapplied or wasted.

ONE PERSON CORPORATION (Section , RCC)

- It is a corporation with a single stockholder.
- Only a natural person, trust, or an estate may form a OPC.
- There is no minimum authorized capital stock required.
- It is not required to submit bylaws.
- The single stockholder is the sole director and President. He may also be the treasurer as long as gives a
bond to the SEC. He cannot be the corporate secretary because the latter has special functions under the
RCC which cannot be done by the single stockholder.
- The following cannot incorporate as OPC:
- (1) banks and quasi-banks;
- (2) preneed, trust, insurance;
- (3) public and publicly listed companies;
- (4) non-chartered GOCCs; and
- (5) a natural person licensed to exercise a profession.

Nominee
- He shall take the place of the single stockholder as director ad manage the affairs of the OPC, in the event
that the stockholder dies or becomes incapacitated. He shall sit as such until the legal heirs of the
stockholder have been lawful determined.
- His name, residence and contact details, and the extent of his authority, shall be stated in the Articles.
- An alternate nominee takes his place in case of his inability, incapacity, death or refusal.
 - There must be a written consent by the nominee an alternate nominee attached to the application for
incorporation.
- His consent may be withdrawn at any dime before the death or incapacity of the stockholder.
- The single stockholder may at any time change the nominees.

Liabilities
- A sole stockholder claiming limited liability has the burden of proving that the OPC was adequately
financed.
- He shall be jointly and severally liable for the OPC’s liabilities, if he cannot prove that the property of the
OPC is independent of his personal property.

Conversion
- When a SH acquires all the stocks of a corporation, he may apply for conversion into a OPC.
- Such new OPC shall succeed the stock corporation and be legally responsible for all the latter’s
outstanding obligations as of the date of conversion.
- A OPC may also be converted to an ordinary stock corporation after due notice to the SEC and after
compliance with the requirements for stock corporation.

DISSOLUTION
- It is the extinguishment of a corporate franchise.
- Liquidation is the conversion of its assets into cash for distribution.
- The following are voluntary modes of dissolution:
- (1) through a certificate of dissolution;
- (2) shortening of a corporate term; and
- (3) merger or consolidation.

Liquidation
- The corporation shall remain as a corporate body for 3 years after the effective date of dissolution for
purposes of:
- (1) prosecuting and defending suits;
- (2) settling and closing its affairs;
- (3) disposing of and conveying its property; and
- (4) distributing its assets.
- The corporation is authorized to convey all of its property to a trustee, ad the trustee may carry on even
after the lapse of the 3-year period, in case where a case that was existing before its dissolution is still
pending judgment 3 years after dissolution.
- Dissolution done not result in termination of liabilities.

FOREIGN CORPORATION
- It is one:
- (1) formed, organized, and existing under foreign law; and
- (2) whose laws allow Filipino citizens and corporations to do business in its ow state.
- It will have the right to transact here after obtaining a licensee to transact business in the Philippines.

May an unlicensed foreign corporation not doing business here file suit?
- Yes. Just because it has no license to do business here does mean that it is ipso facto incapacitated from
brining an action in Philippine courts. A license is necessary only if a foreign corporation is transacting or
doing business here. (Agilent Technologies Singapore v Integrated Silicon)
- The rules are:
- (1) If it is doing business here without a licensee, it cannot sue here.
- (2) If it is not doing business and it has no license, it may sue on an isolated translation or on a cause of
action entirely independent of any business transaction.
- (3) If it is doing business here without a license, a Filipino citizen or entity which contracted with it may be
estopped from challenging its corporate personality in a suit brought before a Philippine court.
 - (4) If it is doing business here with a license, it can sue here on any transaction.

What is the test of “doing business”?

- The test is whether the foreign corporation is continuing the body or substance of the business or
enterprises for which it was organized; or whether it has substantially retired from it and turned it over to
another. (Mentholatum Co. v Mangaliman)
- Under RA 5455, doing business includes: (a) soliciting orders, purchases, or service contracts; (b)
appointing a representative or distributor domiciled in the Philippines; (3) opening offices—liaison offices,
agencies, or branches; (4) other acts that imply a continuity of commercial dealings and contemplate
commercial gain. (Facilities Management Corp v De La Rosa)
- The foreign corporation must actually transact business within the territory on a continuing basis in its own
name and for its own account. This is essential in order for the Philippines to acquire jurisdiction and
require it to secure a license. (Cargill Inc v Intra Strata Assurance)
- A foreign company that merely imports good from a Philippine exporter, without opening an office or
appointing an agent here, is not “doing business” in the Philippines. (Ibid)
- The perfection and consummation of transactions must’ve been done inside the Philippines. The mere act
of exporting from its own country cannot be deemed as doing business in the importing country. (B. Van
Zuiden Bros. v GTVT Maufacturing)

What are the 2 tests in determining nationality?

1. Control Test - shares belonging to corporations at least 60% of the capital of which is owned by Filipinos shall
be considered as Philippine nationality.
2. Grandfather Test - If the percentage of Filipino ownership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality. It applies only when the 60-40
Filipino-foreign equity is in doubt. The combined totals in the investing corporation and the investee corporation
must be traced to determine the total percentage of Filipino ownership.

SECURITIES AND REGULATIONS CODE

xx to complete xx

Reference: Villanueva (2016 ed) and Atty. Nick Gumabun’s Lectures UC JD2019

Disclaimer: Absolute correctness of these notes are not guaranteed. If you’re in doubt, verify. The statutory provisions, as well as Atty. G’s addendums are
not verbatim and have been reworded/rewritten. Feel free to share. / dianegarduce@gmail.com