Day 1. 8.22.2023

lOMoARcPSD|28917416
CLASSIFICATION OF CORPORATIONS
A. In relation to the State
1. Public – those formed or organized for the government or for a portion of

the State (municipal corporations)
2. Private
3. Quasi-Public
National Coal Co. vs. CIR

46 PHIL 583 (1924)
National Coal Co., v. CIR: What distinguishes a public corporation from a private
corporation owned by the government is not ownership of the controlling interest.
The mere fact that the Government happens to the majority stockholder does not
make it a public corporation, especially when its charter provides that it is subject to
all provisions of the Corporation Law.
In this case, National Coal Co., was created by Act. No. 2705 for the purpose of
developing the coal industry, with the Government owning almost all of the
shareholdings of the company. The company was created with the general powers of
a corporation and such other powers as may be necessary to enable it to prosecute
the business of the development. The Legislature subsequently passed a law providing
for the leasing and development of coal lands and exempted the same from specific
taxes. On the basis thereof, National Coal Co., took possession of coal lands
belonging to the government and began to extract coal. The Collector levied against
the company specific tax coal extracted from coal land. National Coal claimed
exemption from specific taxes stating that it is the owner of the land which it has
mined the coal in question, being a government corporation.
The plaintiff is a private corporation. The mere fact that the Government happens to
the majority stockholder does not make it a public corporation. Act No. 2705, as
amended by Act No. 2822, makes it subject to all of the provisions of the Corporation
Law, in so far as they are not inconsistent with said Act (No. 2705). No provisions of
Act No. 2705 are found to be inconsistent with the provisions of the Corporation Law.
As a private corporation, it has no greater rights, powers or privileges than any other
corporation which might be organized for the same purpose under the Corporation
Law, and certainly it was not the intention of the Legislature to give it a preference
or right or privilege over other legitimate private corporations in the mining of coal.
While it is true that said proclamation No. 39 withdrew "from settlement, entry, sale,
or other disposition of coal-bearing public lands within the Province of
lOMoARcPSD|28917416
Zamboanga . . . and the Island of Polillo," it made no provision for the occupation and
operation by the plaintiff, to the exclusion of other persons or corporations who
might, under proper permission, enter upon the operate coal mines.
Davao Water District v. CSC: Employees of government-owned and controlled

corporations, whether created by special law or formed as subsidiaries under the
general corporation law are governed by the Civil Service Law and not by the Labor
Code, has been supplanted by the 1987 Constitution. The test in determining whether
a GOCC is subject to the Civil Service Law is the manner of its creation, such that
government corporations created by special charter are subject to its provisions while
those incorporated under the general corporation law are not within the coverage,
and therefore are governed by the Labor Code.
b. As to place of incorporation
 Domestic – one incorporated under the laws of the Philippines

 Foreign – note: principle of reciprocity (Sec. 123, Corporation Code)
- One formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or state.
- It shall have the right to transact business in the Philippines
after it shall have obtained a license to transact business in
this country in accordance with this Code and a certificate of
authority from the appropriate government agency.
c. As to nationality
Sec.140, Corporation Code. Stock Ownership in Certain Corporations. — Pursuant

to the duties specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of whether
the corporate vehicle has been used by any corporation or by business or industry to
frustrate the provisions thereof or of applicable laws, and shall submit to the
Batasang Pambansa, whenever deemed necessary, a report of its findings, including
recommendations for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in

corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals related to
lOMoARcPSD|28917416
each other by consanguinity or affinity or by close business interests, or whenever it

is necessary to achieve national objectives, prevent illegal monopolies or
combinations in restraint of trade, or to implement national
lOMoARcPSD|28917416
economic policies declared in laws, rules and regulations designed to promote the
general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or industries to

be declared vested with a public interest and in formulating proposals for limitations
on stock ownership, the National Economic and Development Authority shall consider
the type and nature of the industry, the size of the enterprise, the economies of
scale, the geographic location, the extent of Filipino ownership, the labor intensity of
the activity, the export potential, as well as other factors which are germane to the
realization and promotion of business and industry.
TEST:
 Place of Incorporation – a corporation is a national of the country under whose
laws it has been organized and registered
 Principal place of business – the corporation is a national or subject to the
jurisdiction of the place where its principal office or center of management is
located
 Investment Test - the nationality of a corporation is determined by the
nationality of the majority of the stockholders on whom control is vested
1. Exploitation of Natural Resources

Register of Deeds v. Ung Sui Si Temple: In disqualifying a non-incorporated religious
organization, whose trustees and whose members were Chinese nationals from
acquiring by donation a piece of land, the SC held that ―The purpose of the sixty per
centum requirement is obviously to ensure that corporations or associations allowed
to acquire agricultural land or to exploit natural resources shall be controlled by
Filipinos; and the spirit of the Constitution demands that in the absence of capital
stock, the controlling membership should be composed of Filipino citizens.‖
2. Public Utilities: (60%)

Sec. 11, Art. XII of the Constitution. 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; nor
shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens
of the Philippines.
Notes on Corporation Law |4
Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

lOMoARcPSD|28917416
People v. Quasha: The doctrine laid in this case is that the Constitution does not
prohibit the mere formation of a public utility corporation with the alien capital.
What it does prohibit is the granting of a franchise or other form of authorization for
the operation of a public utility to a corporation already in existence but without the
requisite proportion of Filipino capital. This case draws the distinction between the
primary franchise of a corporation entity by virtue of which it is constituted as a body
politic endowed with separate juridical personality, and the secondary franchise that
it may receive during its life for the exercise of a privilege granted by law, such as the
operation of a public utility. It is the secondary franchise by which the corporation
may be granted special privileges, licenses or benefits not enjoyed by other
corporations where the real abuse may be committed.
3. Mass Media: - (100%)
Sec. 11 (1), Art. XVI of the Constitution: The ownership and management of mass
media shall be limited to citizens of the Philippines, or to corporations, cooperatives
or associations,wholly-owned and managed by such citizens. The Congress shall
regulate or prohibit monopolies in commercial mass media when the public interest so
requires. No combinations in restraint of trade or unfair competition therein shall be
allowed.
4. Advertising Industry- (70%)

Sec. 11(2), Art. XVI of the Constitution: The advertising industry is impressed with
public interest, and shall be regulated by law for the protection of consumers and the
promotion of the general welfare. Only Filipino citizens or corporations or associations
at least seventy per centum of the capital of which is owned by such citizens shall be
allowed to engage in the advertising industry. The participation of foreign investors in
the governing body of entities in such industry shall be limited to their proportionate
share in the capital thereof, and all the executive and managing officers of such
entities must be citizens of the Philippines.
5. War Time Test

Filipinas Compania v. Christern: In times of war, the nationality of a private
corporation is determined by the character or citizenship of its controlling
stockholders. The Court considered the juridical entity an enemy based on the fact
that the ―majority of the stockholders of the respondent corporation were German
subjects.‖ It ruled that the control test was applicable only in war time. It refused the
sole application of the place of incorporation test during war-time to determine the
nationality of an enemy corporation.
6. Grandfather Rule – method by which the percentage of Filipino equity in a

corporation engaged in nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other nationalization laws, is computed in
cases where corporate shareholders are present in the situation, by attributing the
nationality of the second or even subsequent tier of ownership to determine the
nationality of the corporate shareholder.

lOMoARcPSD|28917416
Ex., In case of public utilities, the Constitution requires 60% capital Filipino
ownership, said corporation shall be considered as of Philippine nationality. If
it has less than 60%, only the number of shares corresponding to such
percentage shall be counted as
Philippine nationality.
d. As to purpose of incorporation
- Municipal –those formed and organized by the State (mini-state); possesses
power of eminent domain, police power, & power of taxation
- Religious
Sec. 109, Corporation Code. Classes of religious corporations. - Religious

corporations may be incorporated by one or more persons. Such corporations may be
classified into corporations sole and religious societies. Religious corporations shall be
governed by this Chapter and by the general provisions on non-stock corporations
insofar as they may be applicable.
Sec. 116, Corporation Code. Religious societies.

Guidelines:
1. The religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or
church;
2. At least two-thirds (2/3) of its membership have given their written consent or
have voted to incorporate, at a duly convened meeting of the body;
3. The incorporation of the religious society or religious order, or diocese, synod,
or district organization desiring to incorporate is not forbidden by competent
authority or by the constitution, rules, regulations or discipline of the religious
denomination, sect, or church of which it forms a part;
4. The religious society or religious order, or diocese, synod, or district
organization desires to incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the corporation is to be established and
located must be within the Philippines
6. The trustees elected by the religious society or religious order, or the diocese,
synod, or district organization to serve for the first year or such other period as
may be prescribed by the laws of the religious society or religious order, or of
the diocese, synod, or district organization, must not less than five (5) nor
more than fifteen
-
- Educational
Sec. 106, Corporation Code. Incorporation. - Educational corporations shall be

governed by special laws and by the general provisions of this Code.

lOMoARcPSD|28917416
Sec. 108, Corporation Code Board of trustees. - Trustees of educational institutions

organized as non-stock corporations shall not be less than five (5) nor more than
fifteen (15): Provided, however, That the number of trustees shall be in multiples of
five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the board of
trustees of incorporated schools, colleges, or other institutions of learning shall, as
soon as organized, so classify themselves that the term of office of one-fifth (1/5) of
their number shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers and authority of trustees shall be
defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.
Sec. 25, Batas Pambansa 232. Establishment of Schools - All schools shall be
established in accordance with law. The establishment of new national schools and
the conversion of existing schools from elementary to national secondary or tertiary
schools shall be by law: Provided, That any private school proposed to be established
must incorporate as an non-stock educational corporation in accordance with the
provisions of the Corporation Code of the Philippines. This requirement to incorporate
may be waived in the case of family-administered pre-school institutions.
Government assistance to such schools for educational programs shall be used

exclusively for that purpose.
- Charitable, Scientific or Vocational
- Business Corporation
e. As to number of members
- Aggregate Corporation- incorporated by an aggregate of persons
- Corporation Sole – special form of corporation formed by one person being the
chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church for purposes of administering and
managing, as trustee, the affairs, property and temporalities of any religious
denomination, sect or church (Sec. 110, Corporation Code)
Section 111. Articles of incorporation. - In order to become a corporation sole, the

chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious

lOMoARcPSD|28917416
denomination, sect or church must file with the Securities and Exchange Commission
articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elder of his religious denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect or
church are not inconsistent with his becoming a corporation sole and do not
forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder,
he is charged with the administration of the temporalities and the management
of the affairs, estate and properties of his religious denomination, sect or
church within his territorial jurisdiction, describing such territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief archbishop,
bishop, priest, minister, rabbi of presiding elder is required to be filled,
according to the rules, regulations or discipline of the religious denomination,
sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be established
and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to
law for the regulation of the affairs of the corporation. (n)
Section 112. Submission of the articles of incorporation. - The articles of

incorporation must be verified, before filing, by affidavit or affirmation of the chief
archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and
accompanied by a copy of the commission, certificate of election or letter of
appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding
elder, duly certified to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of the said
articles of incorporation, verified by affidavit or affirmation, and accompanied by the
documents mentioned in the preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become a corporation sole and all
temporalities, estate and properties of the religious denomination, sect or church
theretofore administered or managed by him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held in trust by him as a corporation sole,
for the use, purpose, behalf and sole benefit of his religious denomination, sect or
church, including hospitals, schools, colleges, orphan asylums, parsonages and
cemeteries thereof.
NOTE: Sec. 112 does not expressly require the approval of the SEC of the AOI unlike in
the case of educational corporations (Sec. 107)
Section 113. Acquisition and alienation of property. - Any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for such

lOMoARcPSD|28917416
purposes. Such corporation may sell or mortgage real property held by it by obtaining
an order for that purpose from the Court of First Instance of the province where the
property is situated upon proof made to the satisfaction of the court that notice of
the application for leave to sell or mortgage has been given by publication or
otherwise in such manner and for such time as said court may have directed, and that
it is to the interest of the corporation that leave to sell or mortgage should be
granted. The application for leave to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder
acting as corporation sole, and may be opposed by any member of the religious
denomination, sect or church represented by the corporation sole: Provided, That in
cases where the rules, regulations and discipline of the religious denomination, sect
or church, religious society or order concerned represented by such corporation sole
regulate the method of acquiring, holding, selling and mortgaging real estate and
personal property, such rules, regulations and discipline shall control, and the
intervention of the courts shall not be necessary. (159a)
Section 114. Filling of vacancies. - The successors in office of any chief archbishop,
bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become
the corporation sole on their accession to office and shall be permitted to transact
business as such on the filing with the Securities and Exchange Commission of a copy
of their commission, certificate of election, or letters of appointment, duly certified
by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church incorporated as a
corporation sole, the person or persons authorized and empowered by the rules,
regulations or discipline of the religious denomination, sect or church represented by
the corporation sole to administer the temporalities and manage the affairs, estate
and properties of the corporation sole during the vacancy shall exercise all the powers
and authority of the corporation sole during such vacancy. (158a)
Section 115. Dissolution. - A corporation sole may be dissolved and its affairs settled
voluntarily by submitting to the Securities and Exchange Commission a verified
declaration of dissolution.
The declaration of dissolution shall set forth:

1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding up of
the affairs of the corporation.

lOMoARcPSD|28917416
Upon approval of such declaration of dissolution by the Securities and Exchange

Commission, the corporation shall cease to carry on its operations except for the
purpose of winding up its affairs.
Roman Catholic Administrator v. LRC (1957): In that case, the Court held that a
corporation sole would have no nationality at all to disqualify it from owning land in
the Philippines even though its only corporator was Canadian citizen. The Court
classified a corporation sole as a special form of corporation usually associated with
the clergy designed to facilitate the exercise of the functions of ownership of the
church which was regarded as property owner; it is created not only to administer the
temporalities of the church or religious society where the corporator belongs, but also
to hold and transmit the same to his successor in said office. But the Court went on to
say that even if nationality is ascribed to a corporation sole, the nationality of its
constituents of the diocese, and not the nationality of the actual incumbent of the
parish must be taken into consideration, because the corporation sole ordinarily holds
the property in trust for the benefit of the Roman Catholic faithful of their respective
locality or diocese. It was therefore, held that a corporation sole was not disqualified
under the constitutional provision that only Filipino citizens or corporations of which
at least 60% of the capital stock are qualified to hold land in the Philippines.
Republic v. Villanueva (1982): corporation sole is disqualified to acquire or hold

alienable lands of the public domain, because of the constitutional prohibition
qualifying only individuals to acquire land of the public domain which applied only to
Filipino citizens or natural persons.
Note: In Director of Lands v. IAC (1986), the doctrine in Republic v. Villanueva was
abandoned.
f. As to existence of shares
- Stock - Corporations which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or allotments of
the surplus profits on the basis of the shares held (Sec. 3, Corporation Code)
 Corporators are those who compose a corporation, whether as
stockholders or as members.
 Incorporators are those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
 Corporators in a stock corporation are called stockholders or
shareholders.
- Non-stock - one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of this Code on
dissolution (Sec. 87, Corporation Code)
 However, any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used

lOMoARcPSD|28917416
for the furtherance of the purpose or purposes for which the

corporation was organized, subject to the provisions of this Title.
 The provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title.
 Corporators in a non-stock corporation are called members
Section 88. Purposes. - Non-stock corporations may be formed or organized for

charitable, religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the special
provisions of this Title governing particular classes of nonstock corporations.
CIR v. Club Filipino: Club Filipino was a civic organization created for recreational
purposes, and neither in the AOI nor in the by-laws was there a provision relative to
dividends and their distribution, although it was covenanted that upon its dissolution,
the club‘s remaining assets, after paying its debts, shall be donated to a charitable
institution. Whatever profits the club had were used to defray its overhead expenses
and to improve its golf course. The issue was WON the club is liable to pay business
taxes. The Court found that the plain and ordinary meaning of business is restricted to
activities or affairs where profit is the purpose. Having found that the club was
organized to help develop and cultivate sports, that whatever profits it derived were
actually used to defray its over head expenses, it stood to reason that the club was
not engaged in the business of an operation of a bar and restaurant. WHEN THERE IS
NO EXPRESS
AUTHORIZATION, NO EXPRESS PROHIBITION AND THE PRACTICE OF THE CORPORAITON
SHOWS THAT IT NEVER DECLARED DIVIDENDS IN THE PAST AND THE PURPOSE OF THE
CORPORATION IS ELEEMOSYNARY, IT WAS DEEMED A NON-STOCK CORPORATION.
g. As to relationship of management and control
- Holding company
 one that controls another as a subsidiary or affiliate by the power to
elects its management
 One which holds stocks in other companies for purposes of control rather
than mere investment
- Affiliate company
 Company which is subject to common control of a mother or holding
company and operated as part of a system
 SEC defines an affiliate as a person that directly or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with the person specified, through the ownership of
voting shares, by contract or otherwise

lOMoARcPSD|28917416
- Parent and subsidiary company

a. Parent company – corporation has a controlling financial interest in one
or more corporations
b. Subsidiary of a person is an affiliate controlled by such person, directly
or indirectly, through one or more intermediaries
h. Close Corporations
- Definition (Sec. 96, Corporation Code) - one whose articles of incorporation

provide that:
1) All the corporation's issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20);
2) All the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and
3) The corporation shall not list in any stock exchange or make any public
offering of any of its stock of any class.
Note: If a corporation which is not a close corporation, owns or control at least two-
thirds (2/3) of its voting stock or voting rights of another corporation, such shall not
be deemed a close corporation.
Any corporation may be incorporated as a close corporation, except mining or oil

companies, stock exchanges, banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with public interest in accordance
with the provisions of this Code.
- Articles of Incorporation Requirements (Sec. 97,Corporation Code)
The articles of incorporation of a close corporation may provide:

1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may be
voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the business of
the corporation shall be managed by the stockholders of the corporation rather than
by a board of directors. So long as this provision continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and

lOMoARcPSD|28917416
3. The stockholders of the corporation shall be subject to all liabilities of

directors.
The articles of incorporation may likewise provide that all officers or employees or
that specified officers or employees shall be elected or appointed by the stockholders,
instead of by the board of directors.
- Pre-emptive Rights (Sec. 102, Corporation Code) - The pre-emptive right of

stockholders in close corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for money, property or
personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.
Note: right of pre-emption is a matter of absolute right on the part of the

stockholders except only when limited or curtailed by the AOI
- Amendment (Sec. 103, Corporation Code)

Coverage of amendment: Any amendment to the articles of incorporation which seeks
to delete or remove any provision required by this Title to be contained in the articles
of incorporation or to reduce a quorum or voting requirement stated in said articles of
incorporation
Requirement: affirmative vote of at least two-thirds (2/3) of the outstanding capital
stock, whether with or without voting rights, or of such greater proportion of shares
as may be specifically provided in the articles of incorporation for amending, deleting
or removing any of the aforesaid provisions, at a meeting duly called for the purpose.
- Restriction on Transfer of Shares (Secs.98, Corporation Code)

1. Restrictions on the right to transfer shares must appear in the articles of
incorporation and in the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any purchaser thereof in good
faith.
2. Said restrictions shall not be more onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the
transferring stockholder with such reasonable terms, conditions or period
stated therein.
 If upon the expiration of said period, the existing stockholders or the
corporation fails to exercise the option to purchase, the transferring
stockholder may sell his shares to any third person.
Section 99. Effects of issuance or transfer of stock in breach of qualifying

conditions. -
1. If stock of a close corporation is issued or transferred to any person who is not
entitled under any provision of the articles of incorporation to be a holder of
record of its stock, and if the certificate for such stock conspicuously shows the
qualifications of the persons entitled to be holders of record thereof, such

lOMoARcPSD|28917416
person is conclusively presumed to have notice of the fact of his ineligibility to

be a stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of
its stock, and if the certificate for such stock conspicuously states such
number, and if the issuance or transfer of stock to any person would cause the
stock to be held by more than such number of persons, the person to whom
such stock is issued or transferred is conclusively presumed to have notice of
this fact.
3. If a stock certificate of any close corporation conspicuously shows a restriction
on transfer of stock of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he has acquired stock in
violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been issued or
transferred has, or is conclusively presumed under this section to have, notice
either (a) that he is a person not eligible to be a holder of stock of the
corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c) that the
transfer of stock is in violation of a restriction on transfer of stock, the
corporation may, at its option, refuse to register the transfer of stock in the
name of the transferee.
- Agreements by Stockholder (Sec. 100, Corporation Code)

1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent
that such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except
those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to
any phase of the corporate affairs, shall be invalidated as between the parties
on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or interfere
with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.

lOMoARcPSD|28917416
5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders
shall be held to strict fiduciary duties to each other and among themselves.
Said stockholders shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
- No Necessity of Board (Sec. 101, Corporation Code)

Unless the by-laws provide otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the
directors; or
2. All the stockholders have actual or implied knowledge of the action and make
no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
- Deadlocks (Sec. 104, Corporation Code)

Notwithstanding any contrary provision in the articles of incorporation or by-laws or
agreement of stockholders of a close corporation, if the directors or stockholders are
so divided respecting the management of the corporation's business and affairs that
the votes required for any corporate action cannot be obtained, with the consequence
that the business and affairs of the corporation can no longer be conducted to the
advantage of the stockholders generally, the Securities and Exchange Commission,
upon written petition by any stockholder, shall have the power to arbitrate the
dispute.
In the exercise of such power, the Commission shall have authority to make such order
as it deems appropriate, including an order:
1) cancelling or altering any provision contained in the articles of incorporation,
by-laws, or any stockholder's agreement;
2) cancelling, altering or enjoining any resolution or act of the corporation or its
board of directors, stockholders, or officers;
3) directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action;
4) requiring the purchase at their fair value of shares of any stockholder, either
by the corporation regardless of the availability of unrestricted retained
earnings in its books, or by the other stockholders;
5) appointing a provisional director;
6) dissolving the corporation; or
7) granting such other relief as the circumstances may warrant.
Provisional director:
 shall be an impartial person

lOMoARcPSD|28917416
 who is neither a stockholder nor a creditor of the corporation or of any

subsidiary or affiliate of the corporation,
 and whose further qualifications, if any, may be determined by the
Commission.
 not a receiver of the corporation
 and does not have the title and powers of a custodian or receiver.
 shall have all the rights and powers of a duly elected director of the
corporation, including the right to notice of and to vote at meetings of
directors, until such time as he shall be removed by order of the Commission or
by all the stockholders.
 His compensation shall be determined by agreement between him and the
corporation subject to approval of the Commission, which may fix his
compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
- Withdrawal and Dissolution (Sec. 105, Corporation Code)

WITHDRAWAL: In addition and without prejudice to other rights and remedies
available to a stockholder under this Title, any stockholder of a close corporation
may, for any reason, compel the said corporation to purchase his shares at their fair
value, which shall not be less than their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of capital stock
DISSOLUTION: Any stockholder of a close corporation may, by written petition to the

Securities and Exchange Commission, compel the dissolution of such corporation
whenever any of acts of the directors, officers or those in control of the corporation is
illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever corporate assets are being misapplied or
wasted.
2. FORMATION OF CORPORATIONS
1. Organizing the Corporation

a. Promoters (Sec. 29[r] of the Revised Securities Act {BP 178})
(Secs. 60-61)
 persons who bring about or cause to bring about the formation or organization of
a corporation by bringing together the incorporators or the persons interested
in the enterprise, procuring subscriptions or capital for the corporation and
setting in motion the machinery which leads to the incorporation of the
corporation itself.
Cagayan Fishing Development v. Sandiko: (ratification is the key element in

upholding the validity and enforceability of promoter’s contract) Here, four parcels of
land were sold to a corporation in the process of incorporation, under specific terms

lOMoARcPSD|28917416
whereby the outstanding mortgage loan on the properties would have to be fully paid
by the corporation. Later, the corporation was incorporated but the mortgage loan
was not paid. However, the corporation sold the parcels of land to Sandiko with the
condition that the latter would shoulder the mortgage debts. When Sandiko failed to
comply with his obligation, the corporation filed a recovery suit. In dismissing the
case, the TC held the contract to be void since it was entered into with a corporation
that had no corporate existence at the time the properties were transferred to it. The
Court upheld the dismissal of the case holding:
"That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would
seem to be self evident. . . . A corporation, until organized, has no being, franchises
or faculties. Nor do those engaged in bringing it into being have any power to bind it
by contract, unless so authorized by the charter. Until organized as authorized by the
charter there is not a corporation, nor does it possess franchises or faculties for it or
others to exercise, until it acquires a complete existence."
But more importantly, while the Court conceded that there are circumstances where
―the acts pf promoters of a corporation be ratified by the corporation if and when
subsequently organized. There are, of course, exceptions but under the peculiar facts
and circumstances of the present case we decline to extend the doctrine of
ratification which would result in the commission of injustice or fraud to the candid
and unwary.‖ The Court elaborated thus:
Boiled down to its naked reality, the contract here (Exhibit A) was entered into
not only between Manuel Tabora and a non-existent corporation but between
Manuel Tabora as owner of four parcels of land on the one hand and the same
Manuel Tabora, his wife and others, as mere promoters of a corporation on the
other hand. For reasons that are self-evident, these promoters could not have
acted as agents for a projected corporation since that which had no legal
existence could have no agent. A corporation, until organized, has no life and
therefore no faculties. It is, as it were, a child in ventre sa mere.
Rizal Light & Ice Co. v. Municipality: A franchise was awarded in favor of a
corporation was sought to be annulled on the ground that at the time the application
was filed, the corporation was then only in the process of incorporation. In dismissing
the action, the Court held that although a franchise may be treated as a contract, the
eventual incorporation of the applicant corporation after the grant of the franchise,
―and its acceptance of the franchise as shown by its action in prosecuting the
application filed with the Commission for the approval of said franchise, not only
perfected a contract between the respondent municipality and Morong Electric but
also cured the deficiency pointed out by the petitioner in the application of Morong
Electric.

lOMoARcPSD|28917416
The Court clarified also in this case that in deciding Cagayan Fishing, ―this Court did
not say in that case that the rule is absolute or that under no circumstances may the
acts of promoters of a corporation be ratified or accepted by the corporation if and
when subsequently organized. Of course, there are exceptions. It will be noted that
American courts generally hold that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified by the corporation
when organized.‖
IMPORTANT: CAGAYAN FISHING and RIZAL LIGHT cases: not incompatible
The conclusion herein reached regarding the validity of the franchise granted
to Morong Electric is not incompatible with the holding of this Court in Cagayan
Fishing Development Co., Inc. vs. Teodoro Sandiko upon which the petitioner
leans heavily in support of its position. In said case this Court held that a
corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business.
It should be pointed out, however, that this Court did not say in that case that
the rule is absolute or that under no circumstances may the acts of promoters
of a corporation be ratified or accepted by the corporation if and when
subsequently organized. Of course, there are exceptions. It will be noted that
American courts generally hold that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified by the
corporation when organized.
Caram, Jr. v. CA: The Court stated that it would not resolve the issue whether it is
the promoters or the corporation itself that shall be responsible for the expenses
incurred in connection with such organization. Nevertheless it ruled that investors
who were not the ‗moving spirit‘ behind the organization of the corporation, but who
were merely convinced to invest in the proposed corporate venture on the basis of the
feasibility study undertaken, are not liable personally with the corporation for the
cost of such feasibility study.
The above finding bolsters the conclusion that the petitioners were not involved in the
initial stages of the organization of the airline, which were being directed by Barretto
as the main promoter. It was he who was putting all the pieces together, so to speak.
The petitioners were merely among the financiers whose interest was to be invited
and who were in fact persuaded, on the strength of the project study, to invest in the
proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As a
bona fide corporation, the Filipinas Orient Airways should alone be liable for its
corporate acts as duly authorized by its officers and directors.

lOMoARcPSD|28917416
The most that can be said is that they benefited from such services, but that surely is
no justification to hold them personally liable therefor. Otherwise, all the other
stockholders of the corporation, including those who came in later, and regardless of
the amount of their share holdings, would be equally and personally liable also with
the petitioners for the claims of the private respondent.
b. Subscription Contracts (Secs. 60 and 72)
 any contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed
Rights of Unpaid Shares: Holders of subscribed shares which are not fully paid but
which are not delinquent shall have all the rights of a stockholder.
- Such rights commence from the time his subscription is accepted by the
corporation, from the time such offer is accepted by the subscriber.
Trillana v. Quezon Colleges
1. Purchase Agreements
Note: Under the former law, if the acquisition of unissued shares from a corporation is
made after its corporation, the contract is either a subscription or a purchase of
stock depending upon its terms and the intention of the parties.
Bayla v. Silang Traffic, Co.: Here the petitioner bought shares of stock from the
corporation on installment basis. The title of the contract was ―Agreement for
Installment Sale of Shares.‖ Since the corporation had become insolvent, there was a
call on the subscription, and the issue was whether the contract was a subscription
contract which rendered the obligation demandable upon insolvency the corporation,
or a purchase agreement which would grant the purchaser the legal authority to
rescind the contract by reason of insolvency of the seller-corporation.
It held that the nature of the contract covering unissued shares made after its
incorporation, the contract ws either a subscription contract or a purchase of stock,
depending upon the terms of the agreement and the intention of the parties. It held
that a subscription is a mutual agreement among the subscribers to take and pay for
the stock of a corporation and therefore it was not possible to withdraw from such
agreement without the consent of the other subscribers, and even if the corporation
should become insolvent because of the enforcement of the trust fund doctrine. In
contrast, the Court recognized that a ―purchase‖ of shares of stock is an independent
agreement between the individual and the corporation to buy shares of stock from it
at a stipulated price, and the insolvency of the corporation makes it incapable of
complying with its obligation, which grants to the purchaser the right to rescind the
agreement.

lOMoARcPSD|28917416
Purchase Agreement Subscription Contract

-the promise to issue the shares and the -the subscriber becomes a
promise to pay the price are considered to stockholder even if he has not
create dependent and concurrent duties, and paid his subscription
payment is a condition to the right to a
certificate for shares and the status of a
shareholder
- the purchaser is not a debtor, and - unpaid subscription

according to some courts, the is a debt of the
measure of liability of the purchaser subscriber
if he defaults, is in damages for the
difference between the contract
price and the market value of his
shares
- bankruptcy or insolvency of the

- insolvency of the
corporation will terminate its claim
corporation makes the
against the purchaser on the theory
unpaid subscription
that it can no longer perform its side
immediately due and
of the executory contract by delivery
demandable
of a valid certificate and that the
consideration has failed
- the rule that the corporation has no legal
capacity to release an original subscriber to its
capital stock from the obligation to pay for his
shares is inapplicable to contract of purchase
of shares
The Code under Sec. 60, abolished the distinction between subscription and
purchase of shares from an existing corporation by making all acquisitions a
subscription notwithstanding that the parties denominate it as a purchase or
sale or some other contract.
2. Pre-Incorporation Subscription (Sec. 61)
 applies only to corporations still to be formed
General Rule: Pre-incorporation subscription shall be irrevocable for a period of at

least 6 months from date of subscription
Exception:

lOMoARcPSD|28917416
a. All other subscribers consent to the revocation

b. The incorporation of said corporation fails to materialize within said period or
within a longer period as may be stipulated in the contract of subscription
Note that this rule applies only to corporations still to be formed. The irrevocability
except for 2 instances is for 6 months. However, if the articles of incorporation of said
corporations (still to be formed) is submitted to the SEC, the pre-incorporation
subscription may no longer be revoked even after the lapse of 6 months.
 irrevocable unless cancelled by the parties before acceptance of the corporation.
- Offer Theory
- Contract Theory
3. Release from Subscription obligation
Velasco v. Poizat: Poizat was a stockholder of the Philippine Chemical Product Co.
from the inception of the enterprise; 15 shares subscribed by Poizat and the other 15
shares subscribed by Infante, were not fully paid. The BOD adopted 2 resolutions, the
first to make good by new subscriptions in proportion to their respective holdings the
15 shares of Infante which have been surrendered by Infante; the other was to require
Poizat to pay the amount of his subscription upon the 15 shares and should Poizat
refuse to pay, the company would undertake judicial collection proceedings. When
the company went into voluntary insolvency, the assignee, Velasco, filed a complaint
against Poizat seeking to recover his deficiency. Poizat contended that the call of the
BOD was not made pursuant to the requirements of the Corporation Law and that the
action was instituted before the expiration of the 30 days specified in Sec. 38 of the
old Corporation Law.
The Court held that Poizat continued to be liable on his subscription. When insolvency
supervenes upon a corporation and the court assumes jurisdiction to wind it up,
unpaid stock subscriptions become payable on demand, and are at once recoverable
in an action instituted by the assignee in insolvency.
TRUST FUND DOCTRINE: "It is established doctrine that subscriptions to the capital of
a corporation constitute a fund to which creditors have a right to look for satisfaction
of their claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debts. . . A
corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release;
and as against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or the charter or the

lOMoARcPSD|28917416
articles of incorporation. Moreover, strict compliance with the statutory regulations is

necessary . . ."
PNB v. Bitulok Sawmill, Inc.: Pres. Roxas organized the Philippine Distributing Agency
(PDA) for the purpose of insuring the steady supply of lumber to enable the war
sufferers to rehabilitate their devastated homes. Roxas convinced the lumber
producers to form a lumber cooperative and to pool their resources together. The
President promised and agreed to finance the agency by making the government
invest P9.00 for every peso the members would invest. Relying on the assurance,
Bitulok and several others susbscribed to the stocks of PDA. The Legislature was not
able to appropriate the counterpart fund to be put up by the government, hence,
Pres. Roxas instructed PNB to grant the loan to the PDA. The loan was not paid, as a
consequence, PNB filed a suit on their subscriptions to the PDA. Issue is whether PNB
can collect the balance on the subscription in spite of the conditions attached thereto
which were not fulfilled.
The Court held that it is a well-settled principle that with all the vast powers lodged
in the Executive, he is still devoid of the prerogative of suspending the operations of
any statute or any of its terms. The power of suspending the laws is lodged with the
Legislature, which has indicated that the obligation for the payment of subscription
by the defendants shall be governed by the Corporation Law. The President could not
suspend the effectivity of the Corporation Law; therefore, the defendants remain
liable to the balance of their subscriptions.
2. Formalities in Organizing
Government of PI v. Manila Railroad Co.: AOI is the basic contract document in

Corporate Law, defining the charter of the corporation, and the contractual
relationships between the State and the corporation, the stockholders and the State
and between the corporation and its stockholders.
Rural Bank of Salinas v. CA: By laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction. Here, the Court held that
restrictions affecting the assignment or transfer of shares cannot validly be provided
for in the corporation‘s by-laws, and any such provisions in the by-laws are void.
A. Generally B. Articles of Incorporation

1. Procedure and Documentary Requirements
a. to be filed with the SEC
b. in any official language of the Philippines
c. duly signed and acknowledged by all of the incorporators (Sec. 14)
- As to contents and forms (Sec. 14 and 15)

lOMoARcPSD|28917416
 shall substantially contain the following matters EXCEPT as otherwise prescribed by

the
Corpo Code or by special law
A. Name of the
corporation
B. Specific purpose(s) for which it is being incorporated
 if there are more than one purpose, AOI must state which is the
primary and secondary purpose
 for non-stock corporation: may not include a purpose which would
change or contradict its nature as a non-stock corporation
C. Place of principal office – must be within the Philippines
D. Corporate term/existence
E. Number of directors or trustees – min of 5 but max of 15
F. Names, nationalities and residences of the persons who shall acts as
directors or trustees until the first regular directors or trustees are duly
qualified and elected under this Code
G. FOR STOCK CORPORATION
1. Amount of authorized capital stock (in legal tender in
Philippines) 2. Number of shares the authorized capital stock
was divided 3. As to Shares:
With Par Value Shares
 Par value of each
 Names, nationalities and residences of the
original subscribers
 Amount subscribed
 Amount paid by each subscriber
Without Par Value Shares: the fact that some or all of the
shares are without par value must be stated in the AOI
H. FOR NON-STOCK CORPORATION
1. Amount of capital
2. Names, nationalities and residences of contributors
3. Amount contributed by each contributors
I. SUCH OTHER MATTERS
1. NOT INCONSISTENT WITH LAW AND
2. WHICH THE INCOPORATORS MAY DEEM NECESSARY AND
CONVENIENT
SEC shall not accept the AOI of any stock corporation unless accompanied by a
Sworn statement of the Treasurer elected by the subscribers showing the following:
a. That at least 25% of the authorized capital stock of the corporation has been
subscribed and

lOMoARcPSD|28917416
b. at least 25% of the total subscription has been fully paid in actual cash or in
property (the fair valuation is equal to at least 25% of the said subscription) –
paid up capital must not be less than 5K
In case of BANKS, BANKING AND QUASI-BANKING INSTITUTIONS, BUILDING AND LOAN

ASSOCIATIONS, TRUST COMPANIES, AND OTHER FINANCIAL INTERMEDIARIES,
INSURANCE COMPANIES, PUBLIC UTILITIES, EDUCATIONAL INSTITUTIONS AND OTHER
CORPORATIONS GOVERNED BY SPECIAL LAWS – SEC shall accept AOI or amended AOI of
these corporations if accompanied by a favorable recommendation of the appropriate
government agency to the effect that such AOI or amendment is in accordance with
law (Sec. 17)
- As to corporate name (Sec. 18)
 Not identical or deceptively or confusingly similar to that of any existing

corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws
IN CASE OF CHANGE OF CORPORATE NAME: Note that a corporation may change its
name after complying with the formalities prescribed by law, to wit: amendment of
AOI and filing of amendment with the SEC.
As to the second requirement, under Sec. 18, once the SEC approves of the
amendment (as to name), it is required that it must issue an amended certificate of
incorporation under the amended name.
Red Line Transit v. Rural Transit: The incorporators "constitute a body politic and
corporate under the name stated in the certificate." (Section 11, Act No. 1459, as
amended.) A corporation has the power "of succession by its corporate name."
(Section 13, ibid.) The name of a corporation is therefore essential to its existence. It
cannot change its name except in the manner provided by the statute. By that name
alone is it authorized to transact business. The law gives a corporation no express or
implied authority to assume another name that is unappropriated; still less that of
another corporation, which is expressly set apart for it and protected by the law. If
any corporation could assume at pleasure as an unregistered trade name the name of
another corporation, this practice would result in confusion and open the door to
frauds and evasions and difficulties of administration and supervision. The policy of
the law as expressed in our corporation statute and the Code of Commerce is clearly
against such a practice.
Philippine First Insurance Co. v. Hartigan: The changing of the name of a

corporation is no more than the creation of a corporation than the changing of the
name of a natural person is the begetting of a natural person. The act, in both cases,
would seem to be what the language which we use to designate it imports- a change
of name and not a change of being.

lOMoARcPSD|28917416
Universal Mills v. Universal Textiles: The corporate names in question are not
identical, but they are indisputably so similar that even under the test of "reasonable
care and observation as the public generally are capable of using and may be
expected to exercise" invoked by appellant, We are apprehensive confusion will
usually arise, considering that under the second amendment of its articles of
incorporation on August 14, 1964, appellant included among its primary purposes the
"manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which
respondent had been engaged for more than a decade ahead of petitioner. Factually,
the Commission found existence of such confusion, and there is evidence to support
its conclusion.
Since respondent is not claiming damages in this proceeding, it is, of course,

immaterial whether or not appellant has acted in good faith, but We cannot perceive
why of all names, it had to choose a name already being used by another firm
engaged in practically the same business for more than a decade enjoying well earned
patronage and goodwill, when there are so many other appropriate names it could
possibly adopt without arousing any suspicion as to its motive and, more importantly,
any degree of confusion in the mind of the public which could mislead even its own
customers, existing or prospective.
2. As to Purpose [Sec. 14(2)]
 if there are more than one purpose, AOI must state which is the primary and
secondary purpose
 for non-stock corporation: may not include a purpose which would change or
contradict its nature as a non-stock corporation
NOTE: LAWFUL PURPOSE ONLY – Sec. 10; if there are more than one purpose, the
primary and secondary purpose must be capable of being legally combined.
PURPOSE for indicating purposes in AOI: to determine whether the acts performed by
the corporation are authorized or beyond its powers (ultra vires acts)
Uy Siulong v. Director: Statements of primary purpose is to protect shareholders so

they will know the main path of the business of the corporation and they may file
derivative suits if the corporation deviate from the primary purpose.
3. As to principal office [Sec. 14(3)]
 must be within the Philippines
MEANING OF PLACF OF PRINCIPAL OFFICE: does not necessarily mean the place
where the business of the corporation is transacted but the place where its books and

lOMoARcPSD|28917416
records are ordinarily kept and its officers usually meet for the purpose of managing
the affairs and transacting the business of the corporation.
IN CASE OF CHANGE OF CORPORATE ADDRESS: (Sec. 16)

a. if change involves a change of city or municipality : amended AOI must be filed
with the
SEC
b. if new address is located within the same city or municipality: no document to
be filed with SEC but a notice only regarding the change
Clavecilla Radio System v. Antillon: Residence of a corporation is the place where its
principal office is established; it can be sued in that place, not in the place where its
branch office is located.
4. As to Corporate Term (Sec. 11)
Limitations on Corporate Existence:

a. Not more than 50 years from date of incorporation UNLESS
- Sooner dissolved OR
- Period is extended
b. As to Extendible Period
- Not exceed 50 years IN ANY SINGLE INSTANCE
- EXTENSION CANNOT BE MADE EARLIER THAN 5 YEARS PRIOR TO THE
EXPIRATION DATE unless there are justifiable reasons as may be
determined by SEC
Note: As to extension, this means that corporation, by filing an amended AOI with SEC
may ask for extension of corporate term WITHIN THE 5-YEAR PERIOD BEFORE THE
EXPIRATION DATE OF THE EXISTING TERM
Note also that while corporate life can be extended by amendment of AOI, it may also
be reduced (Sec. 120)
Alhambra Cigar and Cigarette v. SEC: Corporation cannot extend its life by
amendment of its AOI to be effected during the 3 year statutory period for liquidation
when its original term had already expired. The 3 year statutory period for corporate
liquidation is not for the purpose of continuing the business for which it was
established, but strictly limited to liquidation. The extension of a corporation is
deemed to constitute new business and cannot be validly pursued during the
liquidation stage.
enguet Consolidated v. Pineda: This case discussed the importance of corporate term
as it is co-terminous with its possession of an independent legal personality, distinct
from that of its corporate members: The State and its officers also have an obvious
interest in the term of life of associations, since the conferment of juridical capacity

lOMoARcPSD|28917416
upon them during such period is a privilege that is derived from statute. It is obvious
that no agreement between associates can result in giving rise to a new and distinct
personality, possessing independent rights and obligations, unless the law itself shall
decree such result. And the State is naturally interested that this privilege be enjoyed
only under the conditions and not beyond the period that it sees fit to grant; and,
particularly, that it be not abused in fraud and to the detriment of other parties; and
for this reason it has been ruled that "the limitation (of corporate existence) to a
definite period is an exercise of control in the interest of the public"
5. As to number and residency of incorporators (Sec. 10)
 Min. of 5 but max of 15 (natural persons not juridical)

 Legal age
 Majority must be residents of the Philippines
 FOR STOCK CORPORATIONS: Incorporators must own or be a subscriber of AT
LEAST ONE SHARE of the capital stock of the corporation
6. As to minimum capitalization (Sec. 12)
 FOR STOCK CORPORATIONS: no required minimum authorized capital

stock except as otherwise provided by special law AS LONG AS THE
PAID UP CAPITAL, as required under Sec. 13 is not less than 5K.
Remember the 25%-25%-5K rule: At least 25% of the authorized capital stock of the
corporation has been subscribed and at least 25% of the total subscription has been
fully paid in actual cash or in property (the fair valuation is equal to at least 25% of
the said subscription) – paid up capital must not be less than 5K
7. As to subscription and paid-up requirements (Sec. 13)
25%-25%-5K rule:
a. At least 25% of the authorized capital stock of the corporation has been
subscribed
b. And at least 25% of the total subscription has been fully paid in actual cash or
in property (the fair valuation is equal to at least 25% of the said subscription) –
paid up capital must not be less than 5K
8. Grounds for disapproval (Sec. 17)

a. AOI or any amendment thereto is not substantially in accordance with the form
prescribed therein
b. Purpose(s) of the corporation are patently unconstitutional, illegal, moral or
contrary to government rules and regulations
c. Treasurer‘s Affidavit concerning the amount of capital stock subscribed and/or
paid is false

lOMoARcPSD|28917416
d. Required percentage of ownership of the capital stock owned by citizens of the

Philippines has not been complied with as required by existing laws or the
Constitution
 Note of Filipino ownership requirement regarding corporate capital:

- Corpos for exploration, development and utilization of nat res –60%40%
- Public Service corpos-60%-40%
- Educational corpos-60%-40%
- Banking Corpos- 60%-40%
- Corporations engaged in retail trade – 100%
- Rural Banks – 60%-40%
- Corpos engaged in pawnshop business-70%-30%
- Corpos engaged in mass media- 100%
- Corpos engaged in advertising industry – 75%-25%
Asuncion v. De Yriate: The Court held that when on the face of the AOI presented for
registration it is shown that it is organized for a purpose contrary to law or public
policy, the same may be denied outright registration.
The object of the proposed corporation, as appears from the articles offered
for registration, is to make of the barrio of Pulo or San Miguel a corporation
which will become the owner of and have the right to control and administer
any property belonging to the municipality of Pasig found within the limits of
that barrio. This clearly cannot be permitted. Otherwise municipalities as now
established by law could be derived of the property which they now own and
administer. Each barrio of the municipality would become, under the scheme
proposed, a separate corporation, would take over the ownership,
administration, and control of that portion of the municipal territory within its
limits. This would disrupt, in a sense, the municipalities of the Islands by
dividing them into a series of smaller municipalities entirely independent of
the original municipality.
What the law does not permit cannot be obtained by indirection. The object of the
proposed corporation is clearly repugnant to the provisions of the Municipal Code and
the governments of municipalities as they have been organized thereunder. (Act No.
82, Philippine Commission.)
This case also held that although the duties of the official concerned happened to be
ministerial, it does not necessarily follow that he may not, in the administration of his
office, determine questions of law. It is his duty to determine whether the objects of
the corporation as expressed in the AOI are lawful pursuant to the then Corporation
Law. And just because the AOI are perfect in form, it does not mean that the division
of archives must accept and register them and issue the corresponding certificate of
incorporation no matter, as what the corporation‘s purpose is. It is not only the right
but also the duty of the appropriate government agency to determine the lawfulness

lOMoARcPSD|28917416
of the objects and purpose of the corporation before it issues a certificate of

incorporation.
9. Commencement of Corporate Existence (Sec. 19)
- Corporation commences to have juridical personality and legal existence only

from the moment the SEC issues to the incorporators a CERTIFICATE OF
INCORPORATION under its official seal
- Such certificate is a final determination of the corporation‘s right to do
business or enter into contracts in its name
- Once issued, the certificate becomes the charter or corporate franchise from
which the authority of the corporation to operate as such flows
Note that the issuance of the certificate calls the corporation into being but it is not
ready to do business until it is organized. The corporation must formally organize and
commence the transaction of its business or the construction of its works within 2
years from the date of the incorporation, otherwise, its corporate powers shall cease
and it shall be deemed dissolved. (Sec. 22)
B. By-Laws
1. Adoption Procedure (Sec. 46)
TIME for ADOPTION OF BY-LAWS
A. By-laws must adopted within one month after receipt of official notice of the
issuance of its certificate of incorporation by the SEC
- By laws must not be inconsistent with the Corpo Code

- Signed by stockholders/members voting for the by-laws
- Shall be kept in the principal office of the corporation
- Subject to the inspection of the stockholders/.members during office hours
- A copy of the by-laws (certified by majority of the directors/trustees
countersigned by corporate secretary) shall be filed with the SEC (SEC will
attach said by-laws to the AOI)
VOTE NEEDED FOR ADOPTION OF BY-LAWS

- STOCK CORPOS: Affirmative vote of stockholders representing at least
majority of the OCS (outstanding capital stock)
- NON-STOCK CORPOS: at least majority of members
B. It may also be adopted and filed prior to incorporation: must be approved and
signed by all the incorporators and submitted to the SEC together with the AOI

lOMoARcPSD|28917416
EFFECTIVITY OF BY-LAWS: Only upon issuance of SEC of a certification that by-laws

are not inconsistent with the Corpo Code
In case of BANKS, BANKING AND QUASI-BANKING INSTITUTIONS, BUILDING AND LOAN

ASSOCIATIONS, TRUST COMPANIES, AND OTHER FINANCIAL INTERMEDIARIES,
INSURANCE COMPANIES, PUBLIC UTILITIES, EDUCATIONAL INSTITUTIONS AND OTHER
CORPORATIONS GOVERNED BY SPECIAL LAWS – SEC shall accept By-laws or amended
by-laws of these corporations if accompanied by a favorable recommendation of the
appropriate government agency to the effect that such AOI or amendment is in
accordance with law
2. Contents (Sec. 47)
a. Time, place, manner of calling and conducting regular/special meetings of

directors/trustees
b. Time, place, manner of calling and conducting regular/special meetings of
stockholders/members
c. Required QUOROM in meetings of stockholders/members and the manner of
voting them
d. Form of proxies of stockholders/members and the manner of voting them
e. Qualifications, duties and compensation of directors/trustees, officers and
employees
f. Time for holding the annual election of directors/trustees and the mode or
manner of giving notice thereof
g. Penalties for violation of by-laws
h. For stock corpos: manner of issuing certificates
i. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs
3. Amendments (Sec. 48)
 includes amend, repeal or adoption of new by-laws
Requirements (majority affirmative vote of stockholders/members)

a. STOCK CORPOS: Affirmative vote of stockholders representing at least majority
of the
OCS (outstanding capital stock);
NON-STOCK CORPOS: at least majority of members
b. Voted at a regular or special meeting duly called for the purpose
Power to amend MAY BE DELEGATED BY THE STOCKHOLDERS/MEMBERS TO THE

BOD/BOT: 2/3 of the OCS or members
VOTE REQUIRED TO REVOKE DELEGATION: majority affirmative vote of OCS

[stockholders]/members at a regular or special meeting

lOMoARcPSD|28917416
- The amendment or the new by-laws shall be attached to the original by-laws in
the office of the corporation
- Copy of the amendment or the new-by laws (certified by the corporate
secretary and majority of the directors/trustees) shall be filed with the SEC
(SEC will attach it to original AOI and original by-laws
EFFECTIVITY OF AMENDMENT OR NEW BY-LAWS: Only upon issuance of SEC of a

certification that by-laws are not inconsistent with the Corporation Code
Loyola Grand Villas v. CA: The Court held that Sec. 46 of the Corporation Code,
which provides that the corporation ―must‖ adopt a set of by-laws within one month
after receipt of notice of the issuance of the certificate of incorporation by the SEC,
reveals the legislative intent to attach a directory, and not mandatory, meaning for
the word ―must‖ in the first sentence thereof, since the second paragraph of the
section allows the filing of the by-laws even PRIOR to incorporation. It necessarily
follows that failure to file the by-laws within that period does not imply the "demise"
of the corporation, but merely constitutes a ground by which the SEC may seek
forfeiture of the franchise of the corporation as provided in PD 902-A.
PMI Colleges v. NLRC: In this case, the corporation sought to avoid liability under a
contract of service which was not signed by the Chairman of the Board as clearly
mandated under the corporation‘s by-laws. The Court held that such contract cannot
be held as invalid just because the signatory thereon was not the Chairman of the BOD
which allegedly violated the corporation‘s by-laws, ―since by-laws operates merely as
internal rules among the stockholders, they cannot affect or prejudice third persons
who deal with the corporation unless they have knowledge of the same.
Pena v. CA: By-laws of a corporation are its own private laws which substantially have
the same effect as the laws of the corporation. They are in effect, written into the
charter. In this sense, they become part of the fundamental law of the corporation
with which the corporation and its directors and officers must comply.
3. RECOGNITION OR DISREGARD OF CORPORATENESS
a. Separate Juridical Personality
Santos v. NLRC: A corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and, in general, from the people
comprising it. The rule is that obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities. Nevertheless, being a
mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit
done sparingly, the disregard of its independent being and the lifting of the corporate
veil. 25 As a rule, this situation might arise when a corporation is used to evade a just

lOMoARcPSD|28917416
and due obligation or to justify a wrong, 26 to shield or perpetrate fraud, to carry out
similar other unjustifable aims or intentions, or as a subterfuge to commit injustice
and so circumvent the law. 28 In Tramat Mercantile, Inc., vs. Court of Appeals, 29 the
Court has collated the settled instances when, without necessarily piercing the veil of
corporate fiction, personal civil liability can also be said to lawfully attach to a
corporate director, trustee or officer; to wit: When ?
1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith
or gross negligence in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or other persons;
2) He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto;
3) He agrees to hold himself personally and solidarily liable with the corporation;
or 4) He is made, by a specific provision of law, to personally answer for his
corporate action.
Stockholders of Guanzon v. Register of Deeds: The distribution of the corporate

properties to the stockholders were deemed not in the nature of a partition among
co-owners but rather a disposition by the corporation to the stockholders, as opposite
parties to a contract. It held that a
corporation is a juridical person distinct from the members composing it. Properties
registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. While shares of stock constitute personal property they do
not represent property of the corporation. The corporation has property of its own
which consists chiefly of real estate. A share of stock only typifies an aliquot part of
the corporation's property, or the right to share in its proceeds to that extent when
distributed according to law and equity but its holder is not the owner of any part of
the capital of the corporation. Nor is he entitled to the possession of any definite
portion of its property or assets. The stockholder is not a co-owner or tenant in
common of the corporate property.
Manila Gas v. CIR: It held that a corporation has a personality distinct from that of its
stockholders, enabling the taxing power to reach the latter when they receive
dividends from the corporation. It must be considered as settled in this jurisdiction
that dividends of a domestic corporation, which are paid and delivered in cash to
foreign corporations as stockholders, are subject to the payment of the income tax,
the exemption clause in the charter of the corporation notwithstanding.
Magsaysay-Labrador v. CA: This case held that a majority stockholder‘s interest in

corporate property, ―if it exists at all… is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of a corporation and to share in the
profits thereof and in the properties and assets thereof on dissolution, after payment
of corporate debts and obligations. It also held that while a share of stock represents
a proportionate or aliquot interest in the property of the corporation, ―it does not

lOMoARcPSD|28917416
vest the owner thereof with any legal right or title to any of the property, his interest
in the corporation property being equitable or beneficial in nature. Shareholders are
in no legal sense the owners of corporate property, which is owned by the corporation
as a distinct legal person.
Saw v. CA: Here, the Court refused the petition for intervention filed by the
stockholders in a collection case covering the loans of the corporation on the ground
that the interest of the shareholders in corporate property is purely inchoate interest
that will not entitle them to intervene involving corporate property.
Good Earth v. CA: The Court, in refusing to allow execution of corporate judgment
debt against the officer, held that being an officer or stockholder of a corporation
does not by itself make one‘s property also of the corporation, and vice-versa, for
they are separate entities, and the shareholders are in no legal sense the owners of
corporate property which is owned by the corporation as a distinct legal person.
b. Defective Corporation
1. De jure – if corporation has fully or substantially complied with the

requirements of an existing law permitting organization of such corporation as
by proper AOI duly executed and filed
 Generally, its juridical personality is not subject to attack in the courts
from any source
 If a corporation is a de jure corporation, its due incorporation cannot be
successfully attacked even in a quo warranto proceeding by the State
 Therefore if such proceeding is bought against the corporation and the
State has a prima facie case, the corporation must show that it is a de
jure corporation
2. De facto – if corporation has a bonafide attempt to incorporate and a colorable
compliance with the statute and user of corporate powers
Sec. 20, Corporation Code: 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.
i. Rationale for the doctrine
Tayko v. Capistrano: The case discussed the policy of the doctrine as applied to
public officers, and it held that ―The principle is one founded in policy and
convenience, for the right of no one claiming a title or interest under or through the
proceedings of an officer having an apparent authority to act would be safe, if it were
necessary in every case to examine the legality of the title of such officer up to its

lOMoARcPSD|28917416
original source, and the title or interest of such person were held to be invalidated by
some accidental defect or flaw in the appointment, election or qualification of such
officer, or in the rights of those from whom his appointment or election emanated;
nor could the supremacy of the laws be maintained, or their execution enforced, if
the acts of the judge having a colorable, but not a legal title, were to be deemed
invalid.‖
Gamboa v. CA: It is well-settled that the title to the office of a judge, whether de
jure or de facto, can only be determined in a proceeding in the nature of quo
warranto and cannot be tested by prohibition. But counsel for the petitioner
maintains that the respondent is neither a judge de jure or de facto and that,
therefore, prohibition will lie. In this, counsel is undoubtedly mistaken. ...
... (R)espondent Judge must be considered a judge de facto. His term of office
may have expired, but his successor has not been appointed, and as good faith
is presumed, he must be regarded as holding over in good faith. ...
As to the validity of the official acts of a judge de facto, this Court in the
aforementioned case Citing the Ruling Case Law 9 held:
... The rightful authority of the judge in the full exercise of his public judicial
functions, cannot be questioned by any merely private suitor, or by any other,
excepting in the form especially provided by law. A judge de facto assumes the
exercise of a part of the prerogative of sovereignty, and the legality of that
assumption is open to the attack of the sovereign power alone. Accordingly, it
is a well-established principle dating from the earliest period and repeatedly
confirmed by an unbroken current of decisions, that the official acts of a de
facto judge are just as valid for all purposes as those of a de jure judge, so far
as the public or third persons who are interested therein are concerned. The
rule is the same in civil and criminal cases. The principle is one founded on
public policy and convenience, for the right of no one claiming title or interest
under or through the proceedings of an officer having an apparent authority to
act would be safe, if it were necessary in every case to examine the legality of
the title of such officer up to its original source, and the title or interest of
such person were held to be invalidated by some accidental defect or flaw in
the appointment, election or qualification of such officer, or in the rights of
those from whom his appointment or election emanated: nor could the
supremacy of the law be maintained, or their execution enforced, if the acts of
the judge having a colorable but not legal title, were to be deemed invalid. As
in the case of the courts of record, the acts of a justice de facto cannot be
called in question in any suit to which he is not a party the official acts of a de
facto justice cannot be attacked collaterally ... The title of a de facto officer
cannot be indirectly questioned in a proceeding to obtain a writ of prohibition
to prevent him from doing an official act, nor in a suit to enjoin the collection
of a judgment rendered by him. Having at least colorable right to the office his
title can be determined only in a quo warranto proceeding or information in
the nature of a quo warranto at suit of the sovereign.

lOMoARcPSD|28917416
ii. Requisites
Hall v. Piccio: In this case, a corporation was organized from an unregistered

partnership among several individuals. Immediately after the execution of the AOI,
the corporation proceeded to do business with the adoption of the by-laws and the
election of its officers. The AOI were forwarded to the SEC for registration. But before
the issuance of the corresponding certificate of incorporation, some of the
incorporators filed an action in court to have the unregistered partnership dissolved,
and included as defendants some of the officers of the partnership. The defendants
filed a motion to dismiss on the ground that the court had no jurisdiction over the
dissolution of the company. Since it was a de facto corporation, they argued
dissolution thereof could only be ordered in a quo warranto proceeding; and since the
plaintiffs signed the AOI, they are now estopped from claiming that it is not a
corporation but only a partnership.
The Court held that since the certification of incorporation had not been issued by the
SEC, the then de facto corporation doctrine did not apply. None of the incorporation
directors could claim in GF to be a corporation, being fully aware of the non-issuance
of the certificate of incorporation. Likewise, since the suit was not one where the
corporation itself was made a party, but was merely a litigation between stockholders
of the alleged corporation for the purpose of obtaining its dissolution, ―Even the
existence of a de jure corporation may be terminated in a private suit for its
dissolution between stockholders, without the intervention of the state.‖
Fernandez v. Cuerva: Issue in this case is can there be a de facto corporation

organized under an enabling statute that is unconstitutional. Following the ―orthodox
view‖ that an ―unconstitutional act, whether legislative or executive, is not a law,
confers no right, imposes no dues, and affords no protection, the enabling statute
being unconstitutional would absolutely be void, and no corporation organized under
it can achieve the status of being a de-facto corporation. Therefore, the prevailing
view is than an unconstitutional enabling law has the same effect as though there is
no law under which to organize, and even if the associates organize in GF in reliance
upon it, the resulting association cannot claim to be a de facto corporation.
Benguet Consolidated v. Pineda: "Organize or 'organization,' as used in reference to

corporations, has a well-understood meaning, which is the election of officers,
providing for the subscription and payment of the capital stock, the adoption of by-
laws, and such other steps as are necessary to endow the legal entity with the
capacity to transact the legitimate business for which it was created. Under a statute
providing that, until articles of incorporation should be recorded, the corporation
should transact no business except its own organization, it is held that the term
"organization" means simply the process of forming and arranging into suitable
disposition the parties who are to act together in, and defining the objects of, the
compound body, and that this process, even when complete in all its parts, does not

lOMoARcPSD|28917416
confer a franchise either valid or defective, but, on the contrary, it is only the act of
the individuals, and something else must be done to secure the corporate franchise.
3. Corporation by estoppel
Sec. 21, Corporation Code. 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.
i. Rationale for the doctrine
Asia Banking v. Standard Products: In this case, a collection suit was brought by the
bank on a PN issued in behalf of the corporate borrower. At the trial, the bank failed
to prove affirmatively the corporate existence of the parties, and so the defendant
corporate borrower insisted on appeal that the judgment rendered against it was
wrong. In brushing aside the contention of the corporate borrower, the Court held
that the ―The general rule is that in the absence of fraud a person who has
contracted or otherwise dealt with an association in such a way as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped to deny its
corporate existence in any action leading out of or involving such contract or dealing,
unless its existence is attacked for cause which have arisen since making the contract
or other dealing relied on as an estoppel and this applies to foreign as well as to
domestic corporations.‖
Here, the defendant corporate borrower, having recognized the corporate existence
of the plaintiff by making a PN in its favor and making partial payments on the same,
was estopped to deny plaintiff’s corporate existence, and also from denying its own
corporate existence; evidence to establish such facts was unnecessary. (See par. 2 of
Sec. 21)
Vda. De Salvatierra v. Garlitos: Salvatierra, as owner of a piece of land, entered into

a contract of lease with corporation allegedly ―duly organized and existing under the
laws of the Philippines,‖ represented by its president. When the obligations imposed
under the contract of lease on corporate lessee were not complied with, Salvatierra
brought an action for accounting, rescission and damages. Judgment was rendered
against the corporation. When a writ of execution was sought to be enforced, no
properties in the name of the corporation could be located, and consequently,
properties registered in the name of its president were levied upon. The president
sought to have the levy against his properties lifted, since he was not even a party to
the case against the corporation. On the other hand, Salvatierra showed that the case
was brought against the corporation in the belief that it was duly incorporated and

lOMoARcPSD|28917416
that he found out only after judgment that it had not been duly registered with the
SEC.
Under those proven facts, the SC held that the president is personally liable on the
contract entered into on behalf of the corporation. In resolving the case, the Court
refused to apply the corporation by estoppel doctrine: While as a general rule a
person who has contracted or dealt with an association in such a way as to recognize
its existence as a corporate body is estopped from denying the same in an action
arising out of such transaction or dealing, yet this doctrine may not be held to be
applicable where fraud takes a part in the said transaction. In the instant case, on
plaintiff's charge that she was unaware of the fact that the Philippine Fibers
Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no
confirmation or denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de
Salvatierra was really made to believe that such corporation was duly organized in
accordance with law.
There can be no question that a corporation when registered has a juridical

personality separate and distinct from its component members or stockholders and
officers such that a corporation cannot be held liable for the personal indebtedness of
a stockholder even if he should be its president and conversely, a stockholder or
member cannot be held personally liable for any financial obligation by the
corporation in excess of his unpaid subscription. But this rule is understood to refer
merely to registered corporations and cannot be made applicable to the liability of
members of an unincorporated association. The reason behind this doctrine is obvious
— since an organization which before the law is non-existent has no personality and
would be incompetent to act and appropriate for itself the powers and attribute 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. And as it is an elementary
principle of law that a person who acts as an agent without authority or without a
principal is himself regarded as the principal, possessed of all the rights and subject
to all the liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts performed as
such agent. Considering that defendant Refuerzo, as president of the unregistered
corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the
consummation of the lease agreement by acting as its representative, his liability
cannot be limited or restricted to that imposed upon corporate shareholders. In acting
on behalf of a corporation which he knew to be unregistered, he assumed the risk of
reaping the consequential damages or resultant rights, if any, arising out of such
transaction.

lOMoARcPSD|28917416
Albert v. University Publishing: The instant case gave new input to the then version
of the estoppel doctrine. Albert sued University Publishing Co., for his share in the
publication of a book under a contract entered into by the parties, with the
corporation being represented in the contract by its president, Jose M. Aruego.
Judgment was rendered in favor of Albert against the corporation. When judgment
was sought to be enforced against the corporation, it was discovered that it had never
been registered with the SEC. The judgment was then sought to be enforced against
Aruego in his personal capacity. Aruego raised the point that the contract was not a
personal contract but one with a juridical entity. The Court ruled, ―Precisely,
however, on account of the non-registration it cannot be considered a corporation,
not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no
personality separate from Jose M. Aruego; it cannot be sued independently.‖
However, the Court also rejected application of the corporation by estoppel doctrine
to resolve the issue: The corporation-by-estoppel doctrine has not been invoked. At
any rate, the same is inapplicable here. Aruego represented a non-existent entity and
induced not only the plaintiff but even the court to believe in such representation. He
signed the contract as "President" of "University Publishing Co., Inc.," stating that this
was "a corporation duly organized and existing under the laws of the Philippines," and
obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a corporation was duly
organized and existing under the law, cannot thereafter set up against his victim the
principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
However, in Albert, the Court discussed how the then version of the estoppel doctrine
could be applied to hold actors behind the purported corporation, personally liable for
the contract, at the same time that corporate liability was upheld: Even with regard
to corporations duly organized and existing under the law, we have in many a case
pierced the veil of corporate fiction to administer the ends of justice. * And in
Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act
on behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent."
The implication of Albert is clear: even with the then version of the estoppel doctrine,
we could uphold the validity and enforceability of a contract by upholding the fiction
of the contracting corporation’s existence (although in fact, it does exist); but
nonetheless, we can pierce the veil of the recognized corporate party and make the
actors liable personally for the obligations arising from the contract.
c. Piercing the veil of corporate fiction
Umali v. CA: This case held that when the piercing doctrine is applied in a case, the
consequences would be that the members or stockholders of the corporation will be

lOMoARcPSD|28917416
considered as the corporation, that is, liability will attach directly to the officers and
stockholders.
Koppel (Phil.) v. Yatco: The application of the piercing doctrine is not a

contravention of the principle that the corporate personality of a corporation cannot
be collaterally attacked. In this case, it was held that when the piercing doctrine is
applied against a corporation in a particular case, the court does not deny legal
personality for any and all purposes. The application of the piercing doctrine is
therefore within the ambit of the principle of res judicata that binds only the parties
to the case and only to the matters actually resolved therein.
Tantongco v. Kaisahan: Even when a corporation‘s legal personality has been pierced
in one case, it was held in the instant case, that such corporation still possessed such
separate juridical personality in any other case, or with respect to the other issues.
Robledo v. NLRC: The doctrine of piercing the veil of corporate entity is used
whenever a court finds that the corporate fiction is being used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or to confuse legitimate
issues, or that a corporation is the 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. 5 It is apparent, therefore, that the doctrine has no application to this
case where the purpose is not to hold the individual stockholders liable for the
obligations of the corporation but, on the contrary, to hold the corporation liable for
the obligations of a stockholder or stockholders. Piercing the veil of corporate entity
means looking through the corporate form to the individual stockholders composing it.
Here there is no reason to pierce the veil of corporate entity because there is no
question that petitioners' claims, assuming them to be valid, are the personal liability
of the late Felipe Bacani. It is immaterial that he was also a stockholder of BASEC.
a. Fraud cases
Gregorio Araneta, Inc., v. Tuazon: This case held that the piercing doctrine is
employed to prevent the commission of fraud and cannot be employed to perpetuate
a fraud. In this case, Tuason sold lots to G. Araneta, Inc. Subsequently, the
corporation filed a case against Tuason to compel delivery of clean title to said lots.
Tuason claimed that the sale was made to her agent, Jose Araneta, president of the
buying corporation, and therefore the corporate fiction should be disregarded, the
sale being not valid as it was made to an agent of the seller.
The Court ruled that the corporate fiction will not be disregarded because the
corporate entity was not used to perpetuate fraud not circumvent the law, and the
disregard of the technicality would pave the way for the evasion of a legitimate and
binding commitment, especially since Tuason was fully aware of the position of Mr.
Araneta in the corporation at the time of sale.

lOMoARcPSD|28917416
Palacio v. Fely Transportation Co.: Here it was found that an incorporator‘s main
purpose in forming the corporation was to evade his subsidiary civil liability resulting
from the conviction of his driver, the corporation was made liable for such subsidiary
liability by denial of the plea that it had a separate juridical personality and could not
be held liable for the personal liabilities of its stockholder. The Court took into
consideration as part of the attempt to do fraud that the only property of the
corporation was the jeep owned by the main stockholder involved in the accident.
Villa Rey Transit v. Ferrer: The Court held here that when the fiction of legal entity
is ―urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime, 30 the veil
with which the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.‖ In this case, the Court pierced the veil of corporate
fiction to enforce a non-competition clause entered into by its controlling stockholder
in his personal capacity.
Palay, Inc. v. Clave: The general rule laid down in this case is unless sufficient proof
exists on record that an officer (here, a President and controlling stockholder) has
used the corporation to defraud private respondent, he cannot be made personally
liable just because he "appears to be the controlling stockholder". Mere ownership by
a single stockholder or by another corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
Pabalan v. NLRC: In the instant case, the Court ruled that The settled rule is that the
corporation is vested by law with a personality separate and distinct from the persons
composing it, including its officers as well as from that of any other legal entity to
which it may be related. Thus, a company manager acting in good faith within the
scope of his authority in terminating the services of certain employees cannot be held
personally liable for damages.
Pabalan refused to hold the officers of the corporation personally liable for corporate
obligations on employees‘ wages, since ―in this particular case complainants did not
allege or show that petitioners, as officers of the corporation deliberately and
maliciously designed to evade the financial obligation of the corporation to its
employees, or used the transfer of the employees as a means to perpetrate an illegal
act or as a vehicle for the evasion of existing obligations, the circumvention of
statutes, or to confuse the legitimate issues‖
Paradise Sauna v. Ng: It was held that an officer-stockholder who is a party signing in
behalf of the corporation to a fraudulent contract cannot claim the benefit of
separate juridical entity.

lOMoARcPSD|28917416
Del Rosario v. NLRC: The doctrine laid here is in order for a corporate officer to be
held liable for corporate debts, it must be clearly shown that he had participated in
the fraudulent or unlawful act.
b. Alter ego cases
Arnold v. Willets and Paterson, Ltd.: In this case the creditors‘ committee of the
corporation opposed the payment compensation due to the plaintiff,. Arnold, under a
contract-letter signed by Willits, the controlling stockholder, without board approval.
The signing president was the controlling stockholder of the corporation. The Court
held the validity of the contract and ―although the plaintiff was the president of the
local corporation, the testimony is conclusive that both of them were what is known
as a one man corporation, and Willits, the owner of all the stocks was the force and
dominant power which controlled them. The Court expressed that language of
piercing doctrine when applied to alter-ego cases, as follows: "Where the stock of a
corporation is owned by one person whereby the corporation functions only for the
benefit of such individual owner, the corporation and the individual should be deemed
to be the same."
La Campana Coffee v. Kaisahan: In the instant case, Tan Tong and his family owned
and controlled two corporations, one engaged in the sale of coffee and the other in
starch. Both corporations had one office, one management and one payroll; and the
laborers of both corporations were interchangeable. The 60-member labor association
in the coffee and starch factories demanded for higher wages addressed to ―La
Campana Starch and Coffee Factor.‖ The La Campana Coffee Factory sought dismissal
of the petition on the ground that the starch and coffee factory are two distinct
juridical persons. The Court disregarded the fiction of corporate existence and
treated the 2 companies as one.
Note: It should be remembered that cases like La Campana where the issue was the
jurisdiction of the CIR to hear the matter, show that unlike in fraud cases where there
must be a pecuniary claim, in alter ego cases, no such pecuniary claim need not be
involved to allow the courts to apply the piercing doctrine.
Yutivo Sons Hardware v. CTA: Yutivo Sons and Hardware Co., imported cars and
trucks, which it sold to Southern Motors Inc. Sales taxes were paid by Yutivo on his
first sale. Southern Motors sold the vehicles to the public. The Collector of Internal
Revenue sought to impose sales tax not on the basis of Yutivo‘s sales to Southern
Motors but on the latter‘s higher sales to the public. To this, the Court agreed.
Although it found that Southern Motors was indeed actually owned and controlled by
Yutivo as to make it a mere subsidiary or branch of the latter. Yutivo, through
common officers and directors exercised full control over Southern Motor‘s cash
funds, policies, expenditures, and obligations.

lOMoARcPSD|28917416
Liddell & Co., v. Collector: Lidell & Co., was engaged in importing and retailing cars
and trucks. Frank Lidell owned 98% of its stocks. Later, Lidell Motors Inc., was
organized to do the retailing for Lidell & Co. Frank‘s wife owned almost all of its
stocks. Since then, Lidell & Co. paid sales tax on the basis of its sales to Lidell Motors.
But the Collector of Internal Revenue considered the sales by Lidell Motors to the
public as basis for the original sales tax. The Court agreeing with the Collector, held
that Frank owned both corporations as his wife could not have had the money to pay
her subscriptions. Such fact alone though not sufficient to warrant piercing, but under
the proven facts of the case, Lidell Motors was the medium created by Lidell & Co. to
reduce its tax liability. A taxpayer has the legal right to decrease, by means which the
law permits, the amount of what otherwise would be his taxes or altogether avoid
them; but a dummy corporation serving no business purposes other than as a blind,
will be disregarded.
The legal right of a taxpayer to decrease the amount of what otherwise would be his
taxes, or altogether avoid them, by means which the law permits, cannot be
doubted." But, as held in another case,"where a corporation is a dummy, is unreal or a
sham and serves no business purpose and is intended only as a blind, the corporate
form may be ignored for the law cannot countenance a form that is bald and
mischievous fiction."
Consistently with this view, the United States Supreme Court held that "a taxpayer
may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in proper cases, may disregard the separate corporate entity where it
serves but as a shield for tax evasion and treat the person who actually may take the
benefits of the transactions as the person accordingly taxable."
Thus we repeat: to allow a taxpayer to deny tax liability on the ground that the sales
were made through another and distinct corporation when it is proved that the latter
is virtually owned by the former or that they are practically one and the same is to
sanction a circumvention of our tax laws.
Ramirez Telephone v. Bank of America: Ramirez had unpaid rents due to Herbosa.
The latter sought to garnish Ramirez‘s bank account no such personal account existed,
and only an account in the name of Ramirez could be found and was garnished. The
Court held that the corporate bank account could not be garnished despite the fact
that Ramirez himself leased Herbosa‘s premises because: although Ramirez was the
tenant, the company in truth occupied the premises. Ramirez paid the rents with the
checks of the telephone company; and 75% of the shares of the company belonged to
Ramirez and his wife.
Guatson International v. NLRC: In this case, the other affiliated corporations were
also made liable by the NLRC for the separation pay and backwages for which a
corporate-employer was held liable. In contesting the inclusion of the other
corporations to the liability, on the ground that they were separate and distinct legal

lOMoARcPSD|28917416
personalities, the Court took the following proven facts in consideration in piercing
the veil of corporate fiction: the three companies were owned by one family, such
that majority if the officers of the companies are the same; the companies are
located in one building and use the same messengerial services; the terminated
employee was not paid separation fee when he was absorbed by the other affiliate
company, nor was he made to resign from the first corporation.
Concept Builders, Inc., v. NLRC: It is a fundamental principle of corporation law that

a corporation is an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. 8 But, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to
promote justice. So, when the notion of separate juridical personality is used to
defeat public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the
corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.
The conditions under which the juridical entity may be disregarded vary according to
the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative factors of identity that
will justify the application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
The SEC en banc explained the "instrumentality rule" which the courts have applied in
disregarding the separate juridical personality of corporations as follows:
"Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the 'instrumentality' may be disregarded.
The control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately
cause the injury or unjust loss for which the complaint is made."
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect

lOMoARcPSD|28917416
to the transaction attacked so that the corporate entity as to this transaction

had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of:
The absence of any one of these elements prevents 'piercing the
corporate veil'. In applying the 'instrumentality' or 'alter ego' doctrine,
the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant's relationship to that
operation.
Thus, the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact.
c. Equity cases
TESCO v. WCC: The veil of corporate fiction was not allowed to be availed of, and
piercing was allowed when the corporation was made as a scheme to confuse the
legitimate issues, such when the defense of separate juridical personality is
interposed for the first time on appeal.
A.D. Santos v. Vasquez: This case is a suit for workmen‘s compensation filed by taxi
driver Vasquez against A. D. Santos, Inc. Vasquez testified that Amador Santos was his
employer. A.D. Santos, Inc. contended that Amador is the one liable. The Court held
that AD Santos, Inc., is liable. Indeed, Amador was at one time, the sole owner and
operator of the taxi business that employed Vasquez, which was later transferred to
A.D. Santos, Inc. But such testimony should not be allowed to confuse the facts
relating to ER-EE relationship, for when the veil of corporate fiction was made to
confuse legitimate issues, the same should be pierced.
d. Due Process
McConnnel v. CA: In this case, when the judgment debt could not be satisfied from
corporate assets, an entirely new case was filed by the judgment creditor against
both the corporation and the controlling stockholders, and pleaded therein the
application of the piercing doctrine to make the stockholders liable for the judgment
debt of the corporation.
Emilio Cano Enterprises v. CIR: This case involved a suit for reinstatement filed
against Emilio Cano and Rodolfo Cano in their capacities as officers of Emilio Cano
Enterprises, Inc., which did not include the corporation as defendant. The Court
rendered judgment against the two for reinstatement due to the fact that the
stockholders belong to a single family. A writ of execution of the judgment debt was

lOMoARcPSD|28917416
issued directed against the properties of the corporation, instead of those of the
properties of the respondents officers. The Court denied the action to quash the writ
of execution on the ground that judgment sought to be enforced was not rendered
against the corporation which is a juridical personality separate and distinct from its
officers. The Court held that a factor that should not be overlooked is that the
officers were sued, not in their private capacities, but as officers of the corporation,
and ―having been sued officially, their connection with the case must be deemed to
be impressed with the representation of the corporation. A corporation is a fiction, it
can only act through its officers, so there would be no denial of due process in this
case, even if the corporation was not made a party defendant.
NAMARCO v. Associated Finance Co. Inc.: In the instant case, where corporate
liability was sought to be enforced against the President who fraudulently entered
into a contract in the name of the corporation, the piercing of the veil of corporate
fiction was sought with the President being merely made a defendant at the onset
together with the corporation.
Jacinto v. CA: Here it was held that the piercing doctrine may be applied by the
courts even when the complaint does not seek its enforcement, so long as evidence is
adduced during trial as the basis for its application can be had. In other words, there
must be evidential basis for application of the piercing doctrine during the trial on the
merits.
Arcilla v. CA: In this case, a judgment rendered against a person ―in his capacity as
President‖ of the corporation was enforceable against the assets of such officer when
the decision itself found that he merely used the corporation as his alter ego or
business conduit.
AC Ransom Labor Union v. NLRC (1984): Here the corporate officers were sought to
be made personally liable for a judgment for backwages rendered against the
corporation. In allowing judgment to be executed against the officers who were not
parties to the case filed against the corporation, the Court relied upon the provisions
on the Labor Code that defined the liable ―employer‖ to ―include any person acting
in the interest of an employer, directly or indirectly.‖ The Court held: ―Since RANSOM
is an artificial person, it must have an officer who can be presumed to be the
employer, being the "person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer. The responsible officer of
an employer corporation can be held personally, not to say even criminally, liable for
nonpayment of back wages. That is the policy of the law.‖
Lim v. NLRC (1989): Here, the Court clarified that the A.C. Ransom doctrine applies
only when the corporation no longer exists. ―The case of Ransom v. NLRC is not in
point because there the debtor corporation actually ceased operations after the
decision of the Court of Industrial Relations was promulgated against it, making it

lOMoARcPSD|28917416
necessary to enforce it against its former president. Sweet Lines is still existing and
able to satisfy the judgment in favor of the private respondent.‖
De Guzman v. NLRC (1992): The Court further clarified in this case that the A.C.
Ransom doctrine is not applicable to all types of officers, such as the general
manager, even if he is the highest ranking officer, when such officer is neither a
stockholder or member of the BOD.
4. CORPORATE POWERS
a. Sources of Corporate Powers
a. Corporate Powers and Capacity

1. Express Powers
Sec. 36, Corporation Code. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in accordance with
this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code;
and to admit members to the corporation if it be a nonstock
corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations
as provided in this Code;
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic,
or similar purposes: Provided, That no corporation, domestic
or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;

lOMoARcPSD|28917416
10. To establish pension, retirement, and other plans for the

benefit of its directors, trustees, officers and employees; and
2. Implied Powers (Sec. 36 [11], Corporation Code): 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 – Sec.2, Corporation Code. - A corporation is an
artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.
 those that attach to a corporation at the moment of its creation
without regard to its express powers or particular primary
purpose, and maybe said to be inherent in it as a legal entity or
organization
b. Specified Powers
1. Power to extend or shorten corporate term
Requirements: (Sec. 37)

a) Approval vote of majority of the board of directors or trustees
b) Ratification vote of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-thirds (2/3)
of the members in case of non-stock corporations.
c) Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid,
or served personally
d) Note: Any dissenting stockholder may exercise his appraisal right
under the conditions provided in this code.
2. Power to increase of decrease capital stock
Requirements (Sec. 38)

a) Approval vote of the majority the board of directors and, at a
stockholder's meeting duly called for the purpose
b) Ratification vote of two-thirds (2/3) of the outstanding capital stock
c) Written notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting
at which the proposed increase or diminution of the capital stock or
the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to

lOMoARcPSD|28917416
the addressee in the post office with postage prepaid, or served

personally.
d) No appraisal right
e) A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman and
the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied
with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock
or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the
persons subscribing, the amount of capital stock or number of
no-par stock subscribed by each, and the amount paid by each
on his subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock allotted to
each stock-holder if such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.
e) Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval of
the Securities and Exchange Commission.
f). One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation.
g). From and after approval by the Securities and Exchange Commission
and the issuance by the Commission of its certificate of filing, the
capital stock shall stand increased or decreased and the incurring,
creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare.
Note:
i. Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate, showing
that at least twenty-five (25%) percent of such increased capital

lOMoARcPSD|28917416
stock has been subscribed and that at least twenty-five (25%)

percent of the amount subscribed has been paid either in actual
cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-
five
(25%) percent of the subscription. (25% rule) ii. No decrease of the
capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Madrigal &Co. v. Zamora: “What clearly emerges from the recorded facts is that the
petitioner, awash with profits from its business operations but confronted with the
demand of the union for wage increases, decided to evade its responsibility towards
the employees by a devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all indications, just a mask for
the purge of union members, who, by then, had agitated for wage increases. In the
face of the petitioner company's piling profits, the unionists had the right to demand
for such salary adjustments.‖ Power to sell, dispose, lease or encumber assets‖
3. Power to sell, dispose, lease or encumber assets
Requirements: (Sec. 40)

a) Majority vote of its board of directors or trustees
b) Authorization vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the members,
in a stockholder's or member's meeting duly called for the purpose. *****
c) Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to
the addressee in the post office with postage prepaid, or served
personally
d) Any dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
RULES: ******
1. Ratification vote of at least 2/3 stockholders/members not necessary when:
a. If it is necessary in the usual and regular course of the business of such
corporation
b. If the proceeds of the sale or other disposition of such property and
assets be appropriated for the conduct of the remaining business
In these 2 instances, the dispositions are deemed to be within the business

judgment of the BOD and would not require stockholders’ ratification.

lOMoARcPSD|28917416
2. Ratification vote is necessary when the disposition shall involve OF ALL

CORPORATE ASSETS OR PROPERTY
 This involves a QUANTITATIVE TEST
3. In case of disposition of SUBSTANTIALLY ALL CORPORATE ASSETS OF

PROPERTY, the necessity of ratificatory vote will depend on the quality of the
property or assets
 What is SUBSTANTIALLY ALL CORPORATE ASSETS? Disposition shall be

deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of:
a. Continuing the business or
b. Accomplishing the purpose for which it was incorporated
 This involves a QUALITATIVE TEST- this means that the sale of one piece
of machinery, if it is essential in the continuance of the business,
amounts to sale of substantially all assets and thus NEEDS THE
RATIFICATORY VOTE
 If however the sale of substantially all of the assets of the corporation
shall not disrupt the business affairs, then there is NO NEED FOR THE
RATIFICATORY VOTE (mere board resolution is sufficient)
Pena v. CA: The sale of the only asset of the corporation made by the board, without
the appropriate stockholder‘s approval would render the contract void.
Islamic Directorate v. CA: The SC confirmed that the sale by the BOT of the only
property of the corporation without compliance with the provisions of Sec. 40,
Corporation Code requiring the ratification of members representing at least 2/3 of
the membership, would make the sale null and void.
4. Power to deny pre-emptive rights (Sec. 39, Corporation Code)
i. Definition: It is the common law right granted to the stockholders of a

corporation to be granted the first option to subscribe to any opening of the
unissued capital stock or to any increase of the authorized capital stock of the
corporation.
ii. Coverage: Extends to all issues or dispositions of shares of any class unless
denied by the AOI or an amendment thereto
iii. Exceptions to the rule: Shares to which right not available

(1) Shares to be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public
(2) Shares to be issued in GF with the 2/3 approval of outstanding capital
stock in exchange for property needed for corporate purposes

lOMoARcPSD|28917416
(3) Shares to be issued in GF with the 2/3 approval of the outstanding

capital stock in payment for previously contracted debts
iv. Rule on remaining unsubscribed shares: If the shares corresponding to one

stockholder are not subscribed or purchased by him within the period fixed for
the exercise of his pre-emptive right, it does not follow that said shares should
be again offered on a prorata basis to stockholders who took advantage of their
right of pre-emption.
*This is because as long as they exercise their pre-emptive rights, their relative
and proportionate voting strength will not be affected adversely even if the
shares mentioned are purchased by only some of them
PRE-EMPTIVE RIGHT IS WAIVEABLE- Waived shares need not be offered again on

a pro-rata basis to stockholders who took advantage of their right of pre-
emption. Waived shares may be offered to non-stockholders on a first come-
first serve basis.
Datu v. SEC: It held that when a corporation at its inception offers its shares, it is
presumed to have offered all those which it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of the authorized shares. When the shares
left unsubscribed are later offered, he cannot therefore claim a dilution of interest.
5. Power to purchase own shares (Sec. 41, Corporation Code)
A stock corporation shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code.
Phil. Trust Co. v. Rivera: It is established doctrine that subscriptions to the capital of
a corporation constitute a fund to which creditors have a right to look for satisfaction
unpaid stock subscription in order to realized assets for the payment of its debts.
(Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a reduction of the

lOMoARcPSD|28917416
capital stock can take place only in the manner and under the conditions prescribed
by the statute or the charter or the articles of incorporation. Moreover, strict
compliance with the statutory regulations is necessary
Boman Environmental v. CA: The requirement of unrestricted retained earnings to

cover the shares is based on the trust fund doctrine which means that the capital
stock, property and other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors. The reason is that creditors of a corporation are
preferred over the stockholders in the distribution of corporate assets. There can be
no distribution of assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice of creditors is
null and void. "Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock . . ."(Steinberg vs. Velasco, 52
Phil. 953.)
6. Power to invest corporate funds in another corporation or business or for

any other purpose
Requirements: (Sec. 42, Corporation Code)

1. Approval vote of the majority of the board of directors or trustees
2. Ratification vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, or by at least two thirds (2/3) of the members in
the case of non-stock corporations, at a stockholder's or member's meeting
duly called for the purpose.
3. Written notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally
4. Any dissenting stockholder shall have appraisal right
RULES:
1. If the investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in its articles of incorporation, the approval of the
stockholders or members shall not be necessary.
2. If the investment by the corporation in a business or activity within the
secondary purposes of the corporation, ratificatory vote of the stockholders is
necessary.
Dela Rama v. Ma-ao Sugar Central: In the judgment, the lower court ordered the
management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments
in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not
connected with the sugar central business." This portion of the decision should was
reversed by the Court because Sec. 17-1/2 of the Corporation Law allows a
corporation to "invest its funds in any other corporation or business, or for any

lOMoARcPSD|28917416
purpose other than the main purpose for which it was organized," provided that its
board of directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power.
7. Power to enter into a management contract
Requirements: (Sec. 44, Corporation Code)

1. Approval vote of the board of directors and
2. Approval vote of the stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the case
of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose
3. No management contract shall be entered into for a period longer than five
years for any one term.
4. Ratification Requirements when there is Common Control in Involved
Corporations:
a. where a stockholder or stockholders representing the same interest of

both the managing and the managed corporations own or control more
than one-third (1/3) of the total outstanding capital stock entitled to
vote of the managing corporation; or
b. where a majority of the members of the board of directors of the
managing corporation also constitute a majority of the members of the
board of directors of the managed corporation
In these 2 cases, an approval vote of the stockholders of the managed

corporation owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the members in the
case of a non-stock corporation is necessary.
8. Power to make donations – Sec. 36(9), Corporation Code: To make

reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for purposes of partisan
political activity
9. Power to provide gratuities to employees: Sec. 36(10), Corporation

Code: To establish pension, retirement, and other plans for the benefit
of its directors, trustees, officers and employees
Lopez Realty v. Fontecha: The SC held that providing gratuity pay for its employees
is one of the express powers of a corporation under the Corporation Code and cannot
be considered to be ultra vires to avoid any liability arising from the issuance of
resolution granting such gratuity pay. Such resolution does not also require the

lOMoARcPSD|28917416
ratification of the stockholders under Sec. 40 of the Corporation Code because such
provision is applicable to the sale, lease, exchange or disposition of all or
substantially all of the corporation‘s assets, including its good will.
10. Power to enter into a joint venture – See Sec. 44, Power to enter into
management contracts
Tuason v. Bolanos: The theory that it is illegal for two corporations to enter into a
partnership is without merit, for the true rule is that "though a corporation has no
power to enter into a partnership, it may nevertheless enter into a joint venture with
another where the nature of that venture is in line with the business authorized by its
charter."
Rationale: Being for a particular project or undertaking, when the BOD of a

corporation evaluate the risks and responsibilities involved, they can more or less
exercise their own business judgment in determining the extent by which the
corporation would be involved in the project and the likely liabilities to be incurred.
Unlike in ordinary partnership arrangement which may expose the corporation to any
and various liabilities and risks which cannot be evaluated and anticipated by the
Board, the situation in a joint venture arrangement allows the Board to fully bind the
corporation to matters essentially within the Board‘s business appreciation and
anticipation.
b. Ultra Vires Acts
Ultra Vires Doctrine: (Sec. 45, Corporation Code) No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code or by
its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred.
a. Types of Ultra Vires Acts

i. Acts done beyond the powers of the corporation as provided for in
law and or its AOI
ii. Acts or contracts entered into in behalf of the corporation by persons
who have no corporate authority
iii. Acts or contracts which are per se illegal as being contrary to law
b. Tests to Determine Ultra Vires

Montelibano V. Bacolod Murcia Milling Co., Inc: This case clarified the extent of
the application of the ultra vires doctrine. At issue was the validity and binding
effect on the corporation of an amended milling contract that granted favorable
terms to planters. Although the amended milling contracts were approved by the
BOD, it was interposed for the corporation that the resolution was null and void ab
initio, being in effect a donation that was ultra vires, beyond the power of the
corporate directors to adopt. The SC upheld the authority of the board acting for

lOMoARcPSD|28917416
the corporation to modify the terms of the amended milling contract for the
purpose of making its terms more acceptable to the other contracting parties. It
gave the formula for determining the applicability of the ultra vires doctrine:
"It is a question, therefore, in each case, of the logical relation of the act to
the corporate purpose expressed in the charter. If that act is one which is
lawful in itself, and not otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of those ends, in a
substantial, and not in a remote and fanciful, sense, it may fairly be considered
within charter powers. The test to be applied is whether the act in question is
in direct and immediate furtherance of the corporation's business, fairly
incident to the express powers and reasonably necessary to their exercise. If
so, the corporation has the power to do it; otherwise, not."
c. Cases
Piovano v. Dela Rama Steamship: In this case, the SC held that illegal acts of a
corporation contemplate the doing of an act which is contrary to law, morals or public
order, or contravenes some rules of public policy or public duty, and are, like similar
transactions between individuals, void. Some acts or contracts cannot serve as basis
of a court action, nor acquire validity by performance, ratification, or estoppel. On
the other hand, ultra vires acts or those which are not illegal and void ab initio but
are within the scope of the AOI, are merely voidable and may become binding and
enforceable when ratified by stockholders.
In other words, the ratification by the stockholders of an ultra vires act which is not
illegal, cures the infirmity of the corporate act and makes it perfectly valid and
enforceable, specially so if it is not merely executory but executed and
consummated, and no creditors are prejudiced.
Luneta Motors v. AD Santos: When the purpose clause of a corporation‘s AOI has
unwittingly used limiting words, such as describing its business as ―transportation by
water,‖ the Court will hold the corporation to such limited business and will refuse to
construe the same to allow the corporation to engage in land transportation business.
Republic v. Acoje Mining: The term ultra vires should be distinguished from an illegal
act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated. It being
merely voidable, an ultra vires act can be enforced or validated if there are equitable
grounds for taking such action. Here it is fair that the resolution be upheld at least on
the ground of estoppel.
Crisologo-Jose v. CA: This case held that accommodation contracts on negotiable

instruments executed in behalf of the corporation would not bind the corporation
without previous board authorization. The issuance or indorsement of negotiable

lOMoARcPSD|28917416
instruments in the name of the corporation without consideration and for the
accommodation of another was deemed to be ultra vires, and the person who takes
the instrument without knowledge of the accommodation nature thereof, cannot
recover against a corporation which is only an accommodation party.
This case stands as one of the few contemporary cases where the Court has upheld
the defense of ultra vires as validly exempting liability on the part of the corporation
for a contract entered into its name by an unauthorized officer. In that case, the
payee of the check issued by the corporation as an accommodation party, was fully
aware that the corporation was not receiving any benefit form the transaction and
that the issuance of the check was not for the benefit of the corporation, and was
therefore fully aware that the corporate signatories to the check had not been duly
authorized by the BOD. Therefore, the principles of ratification by acceptance of
benefits or the doctrine of apparent authority, nor the principle of estoppel espoused
by the Court to undermine the defense of ultra vires were inapplicable to favor the
payee as against the corporation since in this case, estoppel could not apply being
fully aware of the lack of authority.
Harden v. Benguet Consolidated: Here, the mining company, Benguet Consolidated

Mining Company, in violation of the express prohibition of the then Corporation Law,
held shares of stock in another mining corporation, the Balatoc Mining Company. The
shareholders of the Balatoc Mining Company filed an action against Benguet Mining
Company to annul the certificates of stock issued in favor of the latter, and to recover
money collected by the latter from the arrangements.
In upholding the dismissal of the complaint by the TC, the Court noted that although
the contract between the 2 mining companies was illegal for contravening the
Corporation Law, the statutory provision in question was adopted by the legislature
with the intention that public policy should be controlling in the granting of mining
rights. The Court said that the violation of the prohibition is such a nature that it can
be proceeded upon only by way of a criminal prosecution, or by action quo warranto,
which can be maintained only by the State.
The Court observed that insofar are the parties were concerned, no civil wrong had
been committed between them, and if public wrong had been committed, then the
directors of Balatoc Mining Company and the plaintiff Harden himself, were the active
inducers of the commission of that wrong. But more importantly, the Court observed:
The contract, supposing it to have been unlawful in fact, has been performed
on both sides, by the building of the Balatoc plant by the Benguet Company and
the delivery to the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been done. Nobody
would suggest the demolition of the mill. The Balatoc Company is secure in the
possession of that improvement, and talk about putting the parties in statu quo
ante by restoring the consideration with interest, while the Balatoc Company

lOMoARcPSD|28917416
remains in possession of what it obtained by the use of that money, does not
quite meet the case. Also, to mulct the Benguet Company in many millions of
dollars in favor of individuals who have not the slightest equitable right to that
money is a proposition to which no court can give a ready assent.
The lesson from this case therefore is that even when the corporate contracts are
illegal per se, when only public or government policy is at stake and no private wrong
is committed, the courts will leave the parties as they are, in accordance with their
original contractual expectations.
d. Ratification of Ultra Vires
Carlos v. Mindoro Sugar: "When a contract is not on its face necessarily beyond the
scope of the power of the corporation by which it was made, it will, in the absence of
proof to the contrary, be presumed to be valid. Corporations are presumed to
contract within their powers. The doctrine of ultra vires, when invoked for or against
a corporation, should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong.
The defense of the ultra vires doctrine is by some courts regarded as an ungracious
and odious one, to be sustained only where the most persuasive considerations of
public policy are involved, and there are numerous decisions and dicta to the effect
that the plea should not as a general rule prevail whether interposes for or against the
corporation, where it will not advance justice but on the contrary will accomplish a
legal wrong.
The doctrine is that no performance upon either side can validate an ultra vires
transaction or authorize an action to be maintained directly upon it. However, the
great weight of authority in the state courts is to the effect that a transaction which
is merely ultra vires and not malum in se or malum prohibitum although it may be
made by the state a basis for the forfeiture of the corporate charter or the dissolution
of the corporation, is, if performed by one party, not void as between the parties to
all intents and purposes, and that an action may be brought directly upon the
transaction and relief had according to its terms."
3. Liability for Torts or Crimes

a. For Torts
PNB vs. CA, 83 SCRA 237 (1978)
In this case, it was shown that the PNB through the unreasonableness of its BOD in
refusing to timely approve the lease of sugar quota allocation mortgaged with the
bank, caused a borrower to lose the lease income it was to earn therefrom, which
lease proceeds were more than enough to fully pay the loan obligation of the
borrower with the bank. The LC found the bank, through unreasonable intransigence
of its directors, as being guilty of torts under Art. 19 of the NCC.

lOMoARcPSD|28917416
A corporation is civilly liable in the same manner as natural persons for torts, because
"generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent be a natural or
artificial person. All of the authorities agree that a principal or master is liable for
every tort which he expressly directs or authorizes, and this is just as true of a
corporation as of a natural person. A corporation is liable, therefore, whenever a
tortious act is committed by an officer or agent under express direction or authority
from the stockholders or members acting as a body, or, generally, from the directors
as the governing body."
Doctrinal pronouncement: A CORPORATION IS LIABLE THEREFORE, WHENEVER A

TORTUOUS ACT IS COMMITTED BY AN OFFICER OR AGENT UNDER EXPRESS DIRECTION
OR AUTHORITY FROM THE STOCKHOLDERS/MEMBERS ACTING AS A BODY, OR
GENERALLY, FROM THE DIRECTORS AS THE GOVERNING BODY.
NOTE: NOT EVERY TORTUOUS ACT COMMITTED BY AN OFFICER CAN BE ASCRIBED TO

THE CORPORATION AS ITS LIABILITY, for it is unreasonable to presume that in the
granting of authority by the corporation to its agent, such a grant did not include a
direction to commit tortuous act against 3 rd parties. ONLY WHEN THE CORPORATION
HAS EXPRESSLY DIRECTED THE COMMISSION OF SUCH TORTUOUS ACTS, WOULD THE
DAMAGES RESULTING THEREFROM COULD BE ASCRIBED.
b. Criminal Liability
People vs. Tan Boon Kong, 54 PHIL 607 (1930)
In this case, the TC dismissed an information filed against the general manager of a
corporation for violation of the requirement under the provisions of the then
Administrative Code, for corporations to make and file true returns of their receipts
and sales on the ground that the offense charged must be regarded as committed by
the corporation and not of its officials or agents. The TC recognized and applied the
separate juridical personality of the corporation in the application of the criminal
statute for acts done for and in behalf of the corporation. On appeal, the SC brushed
aside the defense of separate juridical personality of a corporation by an officer who
seeks to avoid criminal liability arising from a violation of the law for transactions
done in behalf of the corporation. The Court‘s reasoning was in the line of piercing
the doctrine that the veil of corporate fiction cannot be used to avoid penalty
imposable for committing a criminal offense.
Doctrinal pronouncement: THE VEIL OF CORPORATE FICTION CANNOT BE USED TO

SHIELD THE INDIVIDUAL ACTORS IN THE CRIMINAL ACT, EVEN THOUGH WHEN THEY DO
THE CRIMINAL ACT FOR OR IN BEHALF OF THE CORPORATION THEY REPRESENT.
Underlying reasons for doctrine:

lOMoARcPSD|28917416
- for SOCIAL ORDER: criminals can hide behind the cloak of corporate fiction
- IMPOSSIBILITY of imposing penalty
- Being mere ARTIFICIAL BEING without a mind, the criminal intent as an
essential element of a crime would be missing
Sia vs. People, 121 SCRA 655 (1983)

Here, the President of the corporation had, on behalf of the corporation, entered into
a trust receipt arrangement for the corporation with the bank. When the corporation
failed to turn over the merchandise covered by the receipt or the proceeds from the
sale thereof, a crime of estafa punishable under the RPC was filed against the
President. The SC held that although the President acted in behalf of the corporation,
under the circumstances it cannot be held liable for the crime.
Doctrinal pronouncement (vis Tan Boon Kong case): A CORPORATE OFFICER CAN ONLY
BE HELD LIABLE FOR THE CRIME COMMITTED BY OR IN BEHALF OF A CORPORATION
ONLY IN CASES WHEN THE CORPORATION WAS DIRECTLY REQUIRED BY LAW TO DO AN
ACT IN A GIVEN MANNER AND THE SAME LAW MAKES THE PERSON WHO FAILS TO
PERFORM THE ACT IN THE PRESCRIBED MANNER EXPRESSLY LIABLE CRIMINALLY.
c. Moral Damages
ABS-CBN vs. CA (G.R. No. 128690 [January 1999])

Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered. and not to impose a penalty on the wrongdoer. 62 The
award is not meant to enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or amusements that will serve to
obviate then moral suffering he has undergone. It is aimed at the restoration, within
the limits of the possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. The award of moral damages cannot be
granted in favor of a corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no emotions, no senses, It
cannot, therefore, experience physical suffering and mental anguish, which call be
experienced only by one having a nervous system. 65 The statement in People v.
Manero 66 and Mambulao Lumber Co. v. PNB 67 that a corporation may recover moral
damages if it "has a good reputation that is debased, resulting in social humiliation" is
an obiter dictum. The claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.
Filipinas Broadcasting vs. AMEC-BCCM (GR No. 141994 [2005])
II. FINANCIAL STRUCTURE

- Debt securities- investment where the investor places no stake in the
corporate operations and his right are based on contract
- Equity securities – investment where the investor clearly undertook to
place their investment to the risk (success or loss) of the operations of
the corporations

lOMoARcPSD|28917416
DEBT SECURITIES EQUITY SECURITIES

INVESTMENT WITH NO RISK INVESTMENT WITH RISK
Investor extends loan or debt to the Investor places his investment ready
corporation but only looks at the financial and willing to take a risk with
conditions and operation of the corporation management‘s style of operating the
as a means of gauging the ability of the affairs of the corporation (i.e., can
corporation to pay back the loan at the receive dividends, has voting rights,
specified period. etc.)
NO PARTICIPATION IN INCOME EARNED WITH PARTICIPATION IN ALL INCOME
Investor can only demand the stipulate fixed EARNED BY THE VENTURE
return of his investment even if by the use
of the loan he extended, the enterprise is
able to reap huge profits
PRIMARY LEGAL PREFERENCE IN PAYMENT SECONDARY PREFERENCE
OF CORPORATE PROPERTIES Since they took a risk, investors can
Investor‘s rights is based on contract, thus only receive a return of their
the corporate venture must in case of investment only from the remaining
insolvency, devote and prefer all corporate assets of the venture, if any, after the
assets towards the payment of its creditors payment of all liabilities to creditors.
Investor can demand corporation to pay back Investment in the corporation is
the loan at the specified period generally non-withdrawable for as
long as corporation remains a
goingconcern (not dissolved)
A. DEBT SECURITIES – Note differences of debt securities and equity securities
Generally - Lirag Textile Mills, Inc., vs. SSS (GR No. L-33205 [1987])
1. Authority to Issue Debt Securities

- Power to incur, create or increase bonded indebtedness
(Section 38 of the Corporation Code)
Section 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. –
Both express and implied: A business corporation in the absence of restriction may
borrow money whenever the necessity of its business so requires and issue security or
customary evidence of debt such as bonds, mortgages and or notes. corporations are
presumed to incur or create liabilities as part of their normal operations of the
business and in pursuit of the purpose of the corporation

lOMoARcPSD|28917416
REQUIREMENTS:
1. majority vote of the board of directors/trustees
2. at a stockholder's meeting duly called for the purpose
3. two-thirds (2/3) vote of the outstanding capital stock/members - -- the
requirement of 2/3 vote of the OCS/Members is to ensure that the BOD/BOT
cannot alone bind the corporation in this financial matter
4. Written notice:
- Proposal for the increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness
- the time and place of the stockholder's
- must be addressed to each stockholder/member at his place of residence as
shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally
2. Types of Debt Securities
- Unsecured Bonds
- Secured Bonds
- Income Bonds
- Convertible Bonds
- Callable Bonds
B. EQUITY SECURITIES
Generally - Garcia vs. Lim Chu Sing, 59 PHIL 562
Garcia v. Lim Chu Sing: A share of stock or certificate is not an indebtedness to the
owner or evidence of indebtedness and therefore is not a credit. Stockholders as such
are not creditors of the corporation.
1. Issuance of Shares
a. Certificate of Stock (Section 63 of the Corporation Code)
Section 63. Certificate of stock and transfer of shares. – capital stock of stock
corporations shall be divided into shares for which certificates shall be issued
REQUIREMENTS:
1. signed by the president or vice president
2. countersigned by the secretary or assistant secretary
3. sealed with the seal of the corporation
4. shall be issued in accordance with the by-laws.
Nature of the Shares of stock so issued: personal property thus may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer.
RULES AS TO VALIDITY OF TRANSFER:

lOMoARcPSD|28917416
1. Transfer valid only between parties if not recorded in the books of the
corporation
2. Transfer valid as against 3rd persons if recorded in the books of the corporation
Records must show:
- the names of the parties to the transaction
- the date of the transfer
- the number of the certificate or certificates - and the number of
shares transferred.
3. No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation
b. Pre-Emptive Rights (Section 39 of the Corporation Code)
Section 39. Power to deny pre-emptive right.

v. Definition: It is the common law right granted to the stockholders of a
corporation to be granted the first option to subscribe to any opening of
the unissued capital stock or to any increase of the authorized capital
stock of the corporation.
vi. Coverage: Extends to all issues or dispositions of shares of any class
unless denied by the AOI or an amendment thereto
vii. Exceptions to the rule: Shares to which right not available
(1) Shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public
(2) Shares to be issued in GF with the 2/3 approval of
outstanding capital stock in exchange for property needed
for corporate purposes
(3) Shares to be issued in GF with the 2/3 approval of the
outstanding capital stock in payment for previously
contracted debts
viii. Rule on remaining unsubscribed shares: If the shares corresponding to one
stockholder are not subscribed or purchased by him within the period
fixed for the exercise of his pre-emptive right, it does not follow that
said shares should be again offered on a pro-rata basis to stockholders
who took advantage of their right of pre-emption.
*This is because as long as they exercise their pre-emptive rights, their

relative and proportionate voting strength will not be affected adversely
even if the shares mentioned are purchased by only some of them
PRE-EMPTIVE RIGHT IS WAIVEABLE- Waived shares need not be offered

again on a pro-rata basis to stockholders who took advantage of their
right of pre-emption. Waived shares may be offered to non-stockholders
on a first comefirst serve basis.
c. Consideration (Section 62 of the Corporation Code)

lOMoARcPSD|28917416
Section 62. Consideration for stocks.

Rules:
1. Stocks shall not be issued for a consideration less than the par or issued price
thereof.
2. Shares of stock shall not be issued in exchange for promissory notes or future
service
Consideration for the issuance of stock may be any or a combination of any two or
more of the following:
1. Actual cash paid to the corporation; it is not required that there be actual
payment of the cash in order to make the agreement valid and binding;
subscription contract is a consensual contract valid and binding upon the
meeting of the minds
2. Property, tangible or intangible(patents of copyrights), actually received by the
corporation and necessary or convenient for its use and lawful purposes at a
fair
valuation equal to the par or issued value of the stock issued;
- the valuation thereof shall initially be determined by the incorporators or
the BOD, subject to approval by the SEC
- corporation cannot lawfully issue stock for property which its charter does
not authorize it to acquire or for property acquired for an unauthorized
purpose
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
National Exchange v. Dexter: No corporation shall issue stock or bonds except in

exchange for actual cash paid to the corporation or for property actually received by
it at a fair valuation equal to the par value of the stock or bonds so issued. All
subscribers- whether has subscribed before incorporation or after incorporation are all
bound to pay full par value in cash or its equivalent and any attempt to discriminate
in favor of one subscriber by relieving him of this liability wholly or in part is
forbidden.
If it is unlawful to issue stock otherwise than stated, then it is self-evident that a

stipulated as that now under consideration in a stock subscription is illegal for the
stipulation obligated the subscriber to pay nothing for the shares except as dividends
may accrue upon the stock. In the contingency that dividends are not paid, there is no
liability at all. This is a discrimination in favor of the particular subscriber and hence
the stipulation is unlawful.
1. Par Value
- one with a specific money value fixed in the AOI and appearing in the
certificate of stock for each share of stock of the same issue

lOMoARcPSD|28917416
Note: The purpose of par value is to fix the minimum issue price of
the shares thus assuring creditors that the corporations would receive
a minimum amount for its stock. It is not usually the price at which
investors buy or sell the stock
2. No Par Value
- one without any stated or par value appearing on the face of the
certificate of stock
Issued price of no par value shares may be fixed in the: (Section 62)
- articles of incorporation
- or by the board of directors pursuant to authority conferred upon it by
the articles of incorporation or the by-laws,
- or in the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for the
purpose
Note: A corporation may issue no par value only or together with par value shares. No
par value stockholders have the same rights as holders of par value stock.
d. Payment of the Balance of the Subscription

(Sections 66 and 67 of the Corporation Code)
Section 66. Interest on unpaid subscriptions

- Value of the balance + interest on all unpaid subscription from the date of
subscription
- Rate of interest is either the rate included in the by-laws or at the legal rate
(12% per annum)
- Interest will reckon from the date of subscription until full payment thereof
Section 67. Payment of balance of subscription

1) Date specified in the contract of subscription
2) In the absence of any specified date in the contract of subscription, on the
date stated in the CALL* made by the BOD
- The contract of subscription or call may require the payment of
the entire unpaid subscription or only a certain percentage
thereof.
- BUT! FAILURE TO PAY WITHIN SUCH DATE SHALL
(1) RENDER THE ENTIRE BALANCE DUE AND PAYABLE +
INTERESTS
(2) DELINQUENCY SALE IF WITHIN 30 DAYS FROM SUCH
DATE NO PAYMENT IS MADE
CALL- a declaration officially made by a corporation usually expressed in the

form of a resolution of the BOD requiring payment of all or a certain prescribed
portion of a subscriber‘s stock subscription.

lOMoARcPSD|28917416
- Must be uniform with respect to all holders of the class of shares on

which it is made - When call not necessary:
(1) When, under the terms of the subscription contract, subscription is

payable, not upon call, but immediately or on a specified day, or
when it is payable in installments at specified times
(2) If the corporation becomes insolvent, which makes the liability on
the unpaid subscription due and demandable regardless of any
stipulation to the contrary in the subscription agreement
Lingayen Gulf v. Baltazar: The law requires that notice of any call for the payment of
unpaid subscription should be made not only personally but also by publication.
Exception is if the corporation is insolvent in which case, the payment is immediately
demandable.
e. Liability for Unpaid Subscriptions
Keller v. COB Group: Stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription, even when the corporation itself,
which was the main creditor for the obligations, was not shown to be insolvent. This
presumes that the liability of the stockholders for unpaid subscription to corporate
obligations is direct and they can be sued in their personal capacity with the
corporation even when the latter is still very much solvent.
f. Delinquency Subscription (Sections 68 to 71 of the Corporation

Code)
Section 68. Delinquency Sale

 BOD thru a resolution may order the sale of delinquent stocks
 Date of sale: 30-60 days from the date the stocks became delinquent
 Notice of resolution sent to all delinquent stockholders personally or by
registered mail
 Publication of resolution for 2 consecutive weeks in a newspaper of general
circulation in the locality where the corporation‘s principal office is located
 Delinquency is achieved if stockholders do not pay within 30 days from the date
specified in the contract of subscription or on the date mentioned in the call
 In the absence of any bidders, the corporation may purchase for itself the
delinquent stock. In such case the delinquent subscriber shall also be released
from liability with regards to his subscription which is deemed fully paid. Of
course, the purchase must be made out of the net earnings in view of the TFD.
Section 69. When sale may be questioned (Grounds)

lOMoARcPSD|28917416
(1) Irregularity or defect in the notice of sale

(2) Irregularity or defect in the sale itself
Requisites:
1. Plaintiff pays to the party holding the stock the sum for which the same was
sold + interest from the date of sale at the legal rate
2. Complaint must be filed within 6 months from the date of sale
Section 70. Court action to recover unpaid subscription

- Law does not preclude corporations to institute actions before the court to
recover
 General rule is a corporation may not maintain a suit for the
enforcement of unpaid subscription without first making a call as
provided by law
 Note: Judicial remedy is limited to the amount of the unpaid
subscription with interest, costs and expenses. Therefore, the
corporation cannot recover any other claim against the subscriber.
Other remedies
1. Judicial action
2. Extrajudicial sale at public auction (Delinquency sale)
3. Collection from cash dividends and withholding of stock dividends
Section 71. Effect of Delinquency
(1) Disqualifies the stockholder to be voted for or be entitled to vote or to

representation at any stockholder‘s meeting
(2) Disqualifies the stockholder to exercise any rights of a stockholder except
the right to receive dividends until and unless he pays the amount due on
his subscription with accrued interest, cost and expenses of advertisement
if any
The only remaining right to a delinquent stockholder is the right to receive

dividends. But the cash dividend due shall first be applied to the unpaid balance,
while stock dividend shall be withheld until the unpaid balance is fully paid.
Phil. Trust v. Rivera: It is an established doctrine that subscriptions to the capital of

the corporation constitute fund to which creditors have a right to look for satisfaction
unpaid subscription in order to realize assets for the payment of its debt.
A corporation has no power to release an original stockholder from their obligation to

pay his shares. In the case before us, the resolution releasing the stockholder from
the obligation to pay 50% of their respective subscriptions was an attempted

lOMoARcPSD|28917416
withdrawal of so much capital from the fund from which the company‘s creditors
were entitled ultimately to rely and having been effected without statutory
requirements was wholly ineffectual.
Miranda v. Tarlac Rice Mill: A stock subscription is a contract between the

corporation and the subscriber and the courts will not enforce it for or against either.
A corporation has no legal capacity to release a subscriber to its capital stock from
the obligation to pay for his shares and any agreement to this effect is invalid.
De Silva v. Aboitiz: The BOD has discretionary power to adopt the provision of the by-
laws and or to avail itself, for the same purpose of collecting for payment of the
unpaid subscription, of either of 2 remedies under the Corporation Law:
(a) To put up and stock for sale and dispose of it for the account of the
delinquent subscriber
(b) Action in court
Fua Cun v. Summers: In the absence of special agreement to the contrary, a

subscriber for a certain number of shares of stocks does not, upon payment of the ½
of the subscription price become entitled to the issuance of certificates for ½ of the
number of shares subscribed for the subscriber‘s right consists only in equity entitling
him to a certificate for the total number of shares subscribed for by him upon
payment of the remaining portion of the subscription price.
Nava v. Peers Marketing: As a rule, the shares which may be alienated are those
which are covered by certificates of stock. As prescribed under the Corporation Law,
shares of stock may be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by delivery of the certificate
with a written assignment or indorsement thereof. There should be compliance with
the mode of transfer prescribed by law.
In this case no stock certificate was issued to Po. Without the certificate, which is the
evidence of the ownership of corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction.
The delivery of the stock certificate which represents the shares to be alienated, is
essential for the protection of both the corporation and its stockholders.
Garcia v. Suarez: If the subscription agreement did not mention when the payment of
the balance shall be demandable, it is not payable at the moment of the subscription
but on a subsequent date which may be fixed by the corporation. In other words,
prescriptive period begins to run only from the time the BOD declares that the
balance are due and demandable.
The BOD of the corporation not having declared due and payable the stock subscribed
by Suarez, the prescriptive period of the action for the collection thereof only

lOMoARcPSD|28917416
commenced to run from June 18, 1931 when Garcia, in his capacity as receiver and in
the exercise of the power conferred upon him by the corporation law demanded
payment from Suarez to pay the balance of his subscription. The present action was
filed on Oct. 10, 1935 therefore the defense of prescription does not lie.
Moreover, a corporation or its officers have no legal capacity to release a subscriber

to its capital stock from the obligation to pay for his shares, and any agreement to
this effect is invalid.
g. Trust Fund Doctrine (Sections 43 and 122 of the Corporation Code)
Section 43. Power to declare dividends

 Rule is that dividends shall be paid only out of the unrestricted
earnings of the corporation
 Unrestricted retained earnings is the difference between the total
present value of its assets after deducting losses and liabilities
and the amount of he capital stock
Rationale for the rule is that capital stock of the corporation is a trust fund
for the security of creditors and cannot be distributed to their prejudice to
the stockholders as dividends.
For purposes of the general rule, the capital or capital stock which cannot
be impaired or depleted by dividends is not the entire assets of the
corporation (assets may include consideration for stocks issued with par
value and no par value). Rather it is the capital referring to the net assets
directly or indirectly contributed by the stockholders as consideration for
stocks issued to them upon the basis of their par or issued value.
The Code makes it clear that with respect to no-par value shares, the entire
consideration received for the same shall be treated as capital and shall not
be available for distribution as dividends.
Section 122. Corporate Liquidation

Order of Distribution of Assets – Under the law, such distributive shares of
the assets of the corporation upon its dissolution are not available for
general distribution among the stockholders. The reason for this rule is that
upon the dissolution of a corporation, the assets become a trust fund with
the title of the stockholders becoming an equitable right to a distributive
share therein, and that the stockholders, in respect of the liquidating
dividend, are not mere creditors, but the money is set apart for them, and
is therefore not available for general distribution.
1. When the corporation is insolvent, the creditors of the

corporation are entitled to have all its assets distributed first

lOMoARcPSD|28917416
among them according to their rights and priorities. This is in

accordance with the TFD.
2. Stockholders/members, directors/trustees and officers of the
corporation who are also creditors of the corporation
3. Stockholders/members in proportion to their shareholdings in
absence of any provision to the contrary
4. Creditor or stockholder who is unknown or cannot be found shall
be escheated to city or municipality where such assets are
located.
2. Classes of Shares
a. Classification of Shares (Section 6 of the Corporation Code)

1. Preferred Shares –stock which entitles the holder thereof to certain
preferences over the holders of a common stock
-Participating and Non-participating

i. Participating preferred shares- entitles the holders to
participate with the holders of common shares in the
retained earnings after the amount of stipulated dividend
has been paid to the preferred shares
This is the share which gives the holder thereof not only the right
to receive the stipulated dividends at the preferred rate but also
to participate with the holders of common shares in the remaining
profits pro rate after the common shares have been paid the
amount of the stipulated dividend at the same preferred rate.
ii. Non participating preferred shares- entitle holders of

preferred shares only t o the stipulated preferred dividends
and no more
This is the share entitles the holder thereof to receive the
stipulated preferred dividend and no more. The balance, if any, is
given entirely to the common stocks.
-Cumulative and Non-Cumulative

i. Cumulative – entitle the holders thereof to payment not
only of current dividends but also of back dividends not
previously paid, when and if dividends are declared, to
the extent agreed upon, before the holders of the
common shares are paid In other words, if the
stipulated dividend is not paid in a given year, it shall
be added to the dividend which shall be due the
following year and the accumulated dividends must be
paid to the holder of said preferred share before any

lOMoARcPSD|28917416
dividend may be paid to the holders of the common

stock.
ii. Non Cumulative- entitle the holders merely to the
payment of current dividends that are paid to the
extend agreed upon before the holders of common
shares are paid
In other words, if dividends are not declared in a given year, the

right to the dividend for that particular year is extinguished.
2. Redeemable Shares (Section 8 of the Corporation Code)- shares, usually

preferred, which by its terms is redeemable at a fixed date or at the
option of either the issuing corporation or the stockholder or both at a
certain redemption price
(a) May only be issued when expressly so provided in the AOI;

In the absence of provisions on redemption of preferred shares in the
AOI or by laws, it is deemed irredeemable. (Common shares are never
redeemed)
(b) Upon the expiration of the redemption period fixed, said

shares may be taken up or purchased by the corporation, regardless
of the existence of unrestricted retained earnings in the books of the
corporation (different from the case under Sec.41) – but redemption
may not be made if the corporation is insolvent or if such redemption
would cause insolvency or inability of the corporation to meet its
debt as they mature.
(c) Terms and conditions affecting such shares must be

contained in the AOI and certificate of stock. Except as otherwise
provided therein, the redemption rests entirely with the corporation,
and the stockholder is without any right to either compel or refuse
the redemption of his stock
Republic Planters vs. Hon. Agana (GR No. 51765 [1997]): When the certificates of
stock recognizes redemption, but the option to do so is clearly vested in the
corporation, the redemption is clearly the type known as ―optional‖ and rest entirely
with the corporation and the stockholder is without right to either compel or refuse
the redemption of its stock.
3. Founder‘s Shares (Section 7 of the Corporation Code) – shares issued to

the organizers and promoters of a corporation in consideration of some
supposed right or property

lOMoARcPSD|28917416
(a) Owners have special rights and privileges, i.e., preference

in the payment of dividends
(b) Has exclusive right to vote and be voted for in the election
of directors but such right is limited only for 5 years and must be
approved by the SEC, the period to commence from the date of said
approval
4. Treasury Shares (Section 9 of the Corporation Code) – share which has

been lawfully issued by the corporation and fully paid for and later
reacquired by it thru purchase, redemption, donation, forfeiture or
other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the BOD.
They are regarded as property acquired by the corporation which may be

reissued and resold by it at a price to be fixed by the BOD.
Commissioner v. Manning: Treasury shares are issued shares but being in the
treasury, they do not have the status of outstanding shares.
b. Watered Stocks (Section 65 of the Corporation Code) – Stock issued for

no value at all or for a value less than its equivalent either in cash,
property, shares, stock dividends, or services
The liability of consenting director or officer for the water in the stock is
SOLIDARY with the stockholder concerned. This means either of them
can be held liable for the whole amount of the difference between the
fair value received at the time of the issuance of the stock and the par
or issued value of the same.
c. Quasi-Reorganization (Section 38 of the Corporation Code)

 Reduction for Capital Stock – where capital stock is impaired and a reduction is
made merely to meet that impairment, there will be no distribution of assets
among the shareholders.
 Stock Splits – each of the issued and outstanding shares is simply broken up into a
greater number of shares, each representing a proportionately smaller interest in
the corporation
The usual purpose of a stock split is to lower the price per share to a more
marketable price and thus increase the number of potential shareholders. They
encourage investment.
C. DIVIDENDS AND OTHER DISTRIBUTIONS

lOMoARcPSD|28917416
Right to Dividends (Sec. 43 of the Corporation Code)
BOD shall declare the dividends from the unrestricted retained earnings of the
corporation which shall be payable in
1. cash dividends
 Any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs
and expenses
 No ratification vote needed
2. property dividends
3. stock dividends
 Stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid
 Approval vote of stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose.
General rule: Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of their paid-in capital stock
Exceptions:
(1) when justified by definite corporate expansion projects or programs
approved by the board of directors; or
(2) when the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not
yet been secured; or
(3) when it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies.
1. Types of Dividends and Other Distributions
Nielson and Co. v. Lepanto Consolidated: Since the right to receive dividends is
peculiar only to stockholders, the dividends may be distributed only to stockholders of
the corporation. In this case, Lepanto contended that the payment to Nielson of stock
dividends as compensation for its services under their management contract is a
violation of the then Corporation Law and that it was no and it could not be, the
intention of the parties that the services of Nielson should be paid in shares of stock
taken out of stock dividends declared by Lepanto. The Court held that stock dividends
cannot be issued to a person who is not a stockholder in payment of services
rendered. The remedy was to have Lepanto pay for the value of the shares of stock.
2. Legal Restrictions on Dividends and Other Distributions

lOMoARcPSD|28917416
3. Declaration and Payment of Dividends
CIR v. Court of Appeals: Both common and preferred shares are part of the
corporation's capital stock. Both stockholders are no different from ordinary investors
who take on the same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and losses of the
enterprise. Moreover, under the doctrine of equality of shares-- all stocks issued by
the corporation are presumed equal with the same privileges and liabilities, provided
that the Articles of Incorporation is silent on such differences.
Reclassification of shares does not always bring any substantial alteration in the
subscriber's proportional interest. But the exchange is different-- there would be a
shifting of the balance of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor exchange per se, yields
realize income for tax purposes. A common stock represents the residual ownership
interest in the corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to a pro rata
division of profits. Preferred stocks are those which entitle the shareholder to some
priority on dividends and asset distribution.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the

stock in exchange for property, whether or not the acquired stock is cancelled,
retired or held in the treasury. Essentially, the corporation gets back some of its
stock, distributes cash or property to the shareholder in payment for the stock, and
continues in business as before.
When the corporation redeems shares coming out from those issued upon the original
capital subscriptions upon establishment of the corporation or from initial capital
investment in an existing enterprise, its redemption to the concurrent value of
acquisition would not be subject to tax as it is not income but a mere return of
capital. On the contrary, if the redeemed shares are from stock dividend declarations
other than as initial capital investment, the proceeds of the redemption is additional
wealth, for it is not merely a return of capital but a gain thereon, and therefore
taxable.
Under the Trust Fund Doctrine, the capital stock, property and other assets of the
corporation are regarded as equity in trust for the payment of the corporate
creditors.
4. Liability for Improper Dividends and Distributions
Steinberg v. Velasco: In determining the legality of declared dividends, the existence

of unrestricted retained earnings alone cannot be the test. In this case, the BOD
passed and implemented a resolution authorizing the purchase of a substantial portion

lOMoARcPSD|28917416
of shares of stockholders and the declaration of dividends of P3,000.00. At the time of

the adoption of the resolution, the corporation had a ―surplus profit‖ of P3, 314.72
and had assets (account receivables) that far exceeded its liabilities. It turned out
that the assets were practically worthless. The evidence indicated that the directors
in adopting the resolution were either acting in BF or with the use of ordinary care
would have determined the non-existence of surplus profit.
In holding the directors of the corporation solidarily liable to corporate creditors to

the extent of dividends paid out, the SC held that the existence of a ―surplus profit‖
does not suffice but that the corporation should have an ―actual bona fide surplus
from which the dividends could be paid, and that the payment of them in full at that
time would not affect the financial condition of the corporation.
The directors of the corporation were held personally liable for causing the
corporation to purchase their own shares of stock and declaring dividends, which
because of the failure to take into consideration of worthless receivables, worked to
the detriment of the creditors. The SC held that the directors did not act with
diligence in taking the word of their chairman and not making an informed decision
based on the facts then available to them and on not relying on the other documents
available to them.
Creditors of a corporation have the right to assume that so long as there are debts and
liabilities, the BOD of the corporation will not use its assets to purchase its own stock
or to declare dividends to its stockholders when the corporation is insolvent.
In other words, this case is a clear indication that only dividends declared from a
bonafide unrestricted retained earnings is legally permissible. Thus, although a
corporation’s balance sheet provides for an unrestricted earnings, if the figure
does not register the true value of the assets (such as when worthless assets have
not been written off), dividends declared on that basis would be illegal.
The remedy therefore available in case of illegal distribution of dividends: the

directors who are in BF or are grossly ignorant of their duties shall be held
solidarily liable for the reimbursement of the amount declared as dividend.
D. TRANSFER OF INVESTMENT SECURITIES
Ownership of Securities
Right to Issuance
Gen. Rule: (Section 64) full payment of subscription = certificate of stock *
Exception: Partial payment = certificate of stock covering only the number of stocks
which can be paid by the amount

lOMoARcPSD|28917416
 This is allowed despite Sec. 64 because the subscriber is still not

relieved of his obligation thereby causing no prejudice to the
corporation or the corporate creditors, which is the evil avoided
by Sec. 64.
 The contrast theory however is the indivisible nature of a
subscription
Exception to the Exception: Baltazar v. Lingayen Gulf: Exception cannot be adopted

by the corporation if it is prohibited in the by laws.
The SC in this case had the occasion to rule upon the old corporate practice that
covered procedure of a corporation in issuing certificates of stock to its individual
subscribers for unpaid shares of stock. In order to maintain their control of the
corporations, defendant, who constituted
*
For unpaid subscription= payment of the balance + interests + expenses (in case of
delinquent shares)
a majority of the holdover BOD passed a resolution prohibiting unpaid shares of stock
from voting.
This resolution was held invalid by the TC, which ruled that if the entire subscribed
shares of stock were not paid, the paid shares of stock may not be deprived of the
right to vote. The SC held that since it was practice and procedure of the corporation
to issue certificates of stock to its individual subscribers, it may not take away the
right to vote granted by such certificates. Also unless prohibited by its by-laws,
certificates of stocks may be issued less than the number of the shares subscribed for,
provided that the par value of each of the stocks represented by each of the
certificates has been paid.
B.
Stockholders of F. Guanzon v. Register: While shares of stock constitute personal
property to the stockholder, they do not represent property or claims on the assets of
the corporation. A share of stock only typifies an aliquot part of the corporation‘s
property, or the contingent right to share in its proceeds to that extent when
distributed according to law and equity, but its holder is not the owner of any part of
the capital of the corporation; nor he is entitled to any possession of any definite
portion of its property or assets, and the stockholder cannot be treated as a coowner
of tenant in common of the corporate property.
C.
Joint Ownership – stocks owned by 2 or more persons
 Right to vote- an incident of ownership, cannot be deprived of
without consent

lOMoARcPSD|28917416
General Rule: Consent of all co-owners necessary to vote
Exception:
1. Written proxy executed by the joint owners authorizing any or some
of them or any other person to vote on their behalf
2. Shares are owned in an ―and/or capacity‖ in which case any one of
the joint owners can vote or appoint a proxy
Pledgor, Mortgagor, and Administrators
Representative voting of Shareholders/Members

1. Executors, administrators, receivers and other legal
representatives duly appointed by the court may attend and vote
without the need of a written proxy
2. Pledgees or mortgages of stocks can attend meetings and vote
provided the true owner of the stocks expressly authorized such
right in writing and is recorded in the books
 The written authorization is necessary because the pledgor or

mortgagor remains the true owner of the shares thus his right
to vote still vests in him unless he expressly delegates it.
Pooling Agreements- agreement by which two or more stockholders

agree that their shares shall be voted as a unit (usually concerned
with election of directors to gain control in management)
 The parties thereto remain the owners of their stocks with a
right to vote them although they each bound themselves to
vote in accordance with the decision of the majority of the
pool.
 Enforcement of pooling agreement must be by imposition of
hefty liquidated damages for non-compliance since such
agreement covers personal obligations (to do) and action for
specific performance shall not lie due to the public policy
against involuntary servitude.
-Control and Board Discretion
Stock and Transfer Book * – best evidence to establish ownership of

stocks unless proven otherwise
Monserrat v. Ceron: In this case, the registered owner of shares endorsed and
delivered the stock certificated of shares under the terms of a Deed of Transfer
conveying to the transferee the usufruct over the shares with express prohibition
under the deed, ―the sellng, mortgaging, encumbering, alienating or otherwise

lOMoARcPSD|28917416
exercising any act implying absolute ownership of all or any of the shares in question,
the transferor having reserved for himself and his heirs the right to vote derived from
said shares of stock and to recover ownership thereof at the termination of the
usufruct.‖ A new certificate was issued in the name of the transferee and the deed
was noted in the stock and transfer book of the corporation.
Subsequently, the transferee, in violation of the prohibition in the deed, mortgaged

the shares of stock, without informing the mortgagee of the terms of the deed. When
the mortgaged thereupon sought to enforce the mortgage on the shares, the
transferor invoked the provisions of the deed as binding upon the mortgagee of the
shares, the transferor invoked the provisions of the deed as binding upon the
mortgagee of the shares.
The Court, in reaching its conclusion, relied upon the provision of the then
Corporation Law (now Sec. 63 of the Corporation Code), and noted that the provisions
―do not require any entry except of transfers of shares of stock in order that such
transfers may be valid as against 3rd persons.‖ In other words, the Court was of the
position that the provisions of Sec. 63 holding as valid transaction involving shares of
stock only as between the parties thereo and void as to the other can only refer to
―transfers‖ or dispositions and not to encumberances or security arrangements
involving shares of stock.
The Court therefore held that the ―chattel mortgage is not the transfer referred to in
Sec. 63 of the Corporation Code, which transfer should be entered and noted upon the
books of the
*
Stock and Transfer Book
1. Contents:
a. All stocks in the name of the stockholders alphabetically arranged
b. Installment paid + date of payment of installment and unpaid
subscription
c. Annotation on every alienation, sale, transfer or stock made
d. Other entries that the by-laws may provide
2. Where kept
a. Principal office OR
b. Office of its stock transfer agent (licensed by SEC)
3. Open for inspection to any director or stockholder at reasonable hours on
business days
4. Corporate secretary- authorized to make transfers if accompanied by a
certification from the BIR that the taxes (estate/donor‘s) have been paid
5. Books to be set-up and registered with SEC within 30 days after receipt of their
certificate of incorporation

lOMoARcPSD|28917416
corporation in order to be valid, and which, as has already been said, means the
absolute and unconditional conveyance of the title and ownership of a share of stock.
It held that when it comes to mortgages and other encumberances covering shares of
stock, ‖which are not a complete and absolute alienation of the dominion and
ownership thereof, its entry and notation upon the books of the corporation is not a
necessary requisite to its validity. It clearly therefore implies that a notation in the
stock and transfer book covering transfer of ownership or dominion over shares, binds
the world even when no actual notice thereof is obtained by 3 rd parties dealing with
the share, and that the notation of such disposition or transfer must be made in the
stock and transfer book, not only for notice, but also validity of the transition.
Whereas, when it comes to encumberances of shares of stock, not only is the notation
thereof in the stock and transfer book not necessary for its validity, but the notation
thereof in the stock and transfer book would not even bind the world or 3 rd parties
dealing with the shares without actual knowledge.
Rule: Transfers which should only be noted in the books are those which are
complete and absolute alienation of dominion or ownership (NOTATION IS
NECESSARY TO BE VALID TO 3RD PERSONS)
For incomplete transfers:

1. Their entry and notation is not a requisite to their validity
2. Notation would not bind the world or 3rd parties dealing with
the shares without actual knowledge
D. Chua Guan v. Samahang Magsasaka: The registered owner mortgaged the

shares and the mortgagee not only registered the mortgage with the registry
of deeds, but also in the books of the corporation. When the mortgagee
foreclosed on the mortgage, the officers of the corporation refused to issue
new certificates in the name of the mortgagee as the winner bidder thereof
on the auction shale, on the ground that before the mortgagee made his
demand upon the corporation, writs of attachment had been served upon
and registered in the books of the corporation against the mortgagor, which
the mortgagee refused to have annotated in the new certificated to be
issued upon him.
To resolve the issue where the mortgage took priority over the writs of attachment,
the Court had to determine whether the registration of the chattel mortgage in the
registry of chattel mortgages in the officer of the register of deeds was equivalent to
constructive notice to the attaching creditors.
The Court first settled the issue by affirming the Monserrat doctrine that the
registration of the said chattel mortgage in the office of the corporation was not
necessary and had no legal effect. Taking its cue from the Chattel Mortgage Law, the
Court held: The practical application of the Chattel Mortgage Law to shares of stock

lOMoARcPSD|28917416
of a corporation presents considerable difficulty and we have obtained little aid from
the decisions of other jurisdictions because that form of mortgage is ill suited to the
hypothecation of shares of stock and has been rarely used elsewhere. In fact, it has
been doubted whether shares of stock in a corporation are chattels in the sense in
which that word is used chattel mortgage statutes.
It is a common but not accurate generalization that the situs of shares of stock is at
the domicile of the owner. The term situs is not one of fixed of invariable meaning or
usage. Nor should we lose sight of the difference between the situs of the shares and
the situs of the certificates of shares. The situs of shares of stock for some purposes
may be at the domicile of the owner and for others at the domicile of the
corporation; and even elsewhere. It is a general rule that for purposes of execution,
attachment and garnishment, it is not the domicile of the owner of a certificate but
the domicile of the corporation which is decisive.
By analogy with the foregoing and considering the ownership of shares in a

corporation as property distinct from the certificates which are merely the evidence
of such ownership, it seems to us a reasonable construction of section 4 of Act No.
1508 to hold that the property in the shares may be deemed to be situated in the
province in which the corporation has its principal office or place of business. If this
province is also the province of the owner's domicile, a single registration sufficient. If
not, the chattel mortgage should be registered both at the owner's domicile and in
the province where the corporation has its principal office or place of business. In this
sense the property mortgaged is not the certificate but the participation and share of
the owner in the assets of the corporation.
General Rule: DOUBLE REGISTRATION to produce legal effect
1. Register of deeds in the province of the owner‘s domicile

2. Register of deeds in the province of the corporation‘s principal office
Exception: Single registration if the domicile and principal office is the same
In case of pledges, to affect third parties, it is enough that the date and
description of the shares pledged appear in a public instrument (Art. 2096, Civil
Code)
Lost and Destroyed Certificates
1. Corporation can still issue new certificates even with non-compliance of

requirements in Section 73?*
*
Procedural Requirements for Lost/Destroyed Certificates

lOMoARcPSD|28917416
1. Registered owner/legal rep file an affidavit with the corporation + all other
information or evidence that may be necessary Contents:
a. Circumstances how the certificates were lost/destroyed
b. No. of shares represented by each certificate
c. Serial nos. of the certificates
d. Name of the issuing corporation
2. Corporation shall publish notice
- Newspaper of general circulation
- Published in the principal office
- Once a week for 3 consecutive weeks
- At the expense of the registered owner
Contents:
b. Name of registered owner
c. Serial nos.
d. No. of shares represented by each certificate
3. Period to contest: One year from date of publication. Failure to do so means

the right to contest is barred and corporation shall cancel and issue new
certificates
4. Issuance of new certificate
a. If uncontested, after expiration of one year from date of publication
unless registered owner files bond or other security as determined by
the BOD
b. If contested or an action is pending in court regarding ownership of
the certificates, issuance shall be suspended until final decision of
the court
YES, provided that the corporation is certain as to the real owner
of the shares to whom the new certificates shall be issued.
It would be an internal matter for the corporation to find

measures in ascertaining who are the real owners of stock.
2. What can be the recourse against the corporation or its officers who
issued new certificates pursuant to Sec. 73?
No action can be brought against them except if it was attended

by FRAUD, BAD FAITH, NEGLIGENCE on the part of the corporation
or its officers.
Transfer of Securities
 Right to transfer shares of stock: Because they are personal property
thus owner has absolute and inherent right to sell/transfer them
Transfer of Shareholding

lOMoARcPSD|28917416
Uson v. Diosomito: This case laid down the rule in our jurisdiction that under the
language of Sec. 63 of the Corporation code (then Sec. 35), the failure to register a
sale or transfer in the book of the corporation would render the sale invalid and not
binding to all persons, including attaching creditors of the seller, thus:
"We think the true meaning of the language is, and the obvious intention of the
legislature in using it was, that all transfers of shares should be entered, as
here required, on the books of the corporation. And it is equally clear to us
that all transfers of shares not so entered are invalid as to attaching or
execution creditors of the assignors, as well as to the corporation and to
subsequent purchasers in good faith, and, indeed, as to all persons interested,
except the parties to such transfers. All transfers not so entered on the books
of the corporation are absolutely void; not because they are without notice or
fraudulent in law or fact, but because they are made so void by statute."
Here, the SC resolved the issue of whether a bona fide transfer of shares of a
corporation, not registered or noted on the books of the corporation, would be valid
as against a subsequent lawful attachment of said shares, regardless of whether the
attaching creditors had actual notice of said transfer or not. The Court held that
transfer would be void.
The Court, through Mr. Justice Bette, held that the language of the then Corporation
Law was plain to the effect that the right of the owner of the shares of stock of a
corporation to transfer the same by delivery of the certificate, whether it be regarded
as statutory or common right, was limited and restricted by the express provision that
"No transfer, however, shall be valid, except as between the parties, until the
transfer is entered and noted upon the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred."
Escano v. Filipinas Mining: Escano obtained judgment in his favor against Salvosa,
who was ordered to deliver to the former his escrow shares in the Filipinas Mining
Corporation. A writ of garnishment was issued. However, before such judgment was
rendered, Salvosa sold his escrow shares to Bengzon and then from Bengzon to
Standard Investment of the Philippines.
These transfers were not recorded. But Standard did manage to have it recorded in
the books of Filipinas Mining Corporation 3 years after the writ of garnishment was
issued. Later, Filipinas Mining issued the shares to Standard. The issue resolved by the
SC was whether the issuance of the new certificates was valid as against the attaching
creditor.
The Court held that the requirements of registration applies to shares in escrow, and
saw no valid reason for treating unissued shares held in escrow differently from issued
shares insofar as their sale and transfer is concerned. But in holding so, this case

lOMoARcPSD|28917416
seems to have authorized the recording in the stock and transfer book of transactions
pertaining to shares over which no certificate of stock has been issued by the
corporation, thus:
But we see no valid reason for treating unissued shares held in escrow
differently from issued shares insofar as their sale and transfer is concerned. In
both cases the corporation is entitled to know who the actual owners of the
shares are, and to object to the transfer upon any valid ground. Likewise, in
both cases the possibility of fictitious or fraudulent transfers exists. The only
reason advanced by the appellant for exempting the transfer of unissued shares
from recording is that in case of unissued shares there is no certificate number
to be recorded. But that is a mere detail which does not affect the reasons
behind the rule. The lack of such detail does not make it impossible to record
the transfer upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, and the number of shares
transferred, which are the most essential data.
The rationale for the Uson doctrine was explained here, where the Court enumerated
the following reasons for holding sale/transfer of shares of stock valid only when
registered in the book of the corporation:
3. To enable the corporation to know at all times who its actual stockholders
(because mutual rights and obligations exist between the 2)
4. To afford the corporation an opportunity to object or refuse its consent to
the transfer in case it has any claim against the stock sought to be
transferred or for any other valid reason
5. To avoid fictitious or fraudulent transfers
VALIDITY OF TRANSFERS
1) As between the parties- mere delivery and indorsement of owner

2) As against 3rd persons – transfer be registered in the books of the
corporation
Remedy if Transfer is Refused: MANDAMUS
Hager v. Bryan: In this case, the Brya-Landon Company was the registered owner of
shares of stock in the Visayan Electric Company. Later, it indorsed its certificates of
stock to Hager. Hager brought his certificates to the Visayan Electric Company to
transfer upon the company‘s books the stocks under his name. The company secretary
refused. Hagel files a case for mandamus to compel the registration. The SC held that
the remedy of mandamus is unavailable under the facts of the case.
Mere indorsement in blank of certificate does not clearly indicate the registered
owner‘s wish to have the certificate cancelled and a new one issued in the name of
the holder.

lOMoARcPSD|28917416
To compel transfer, indorsement in blank of the certificate must

be accompanied by either:
1. Express instructions of the registered owner to make such

transfer to the indorsee
2. Power of attorney authorizing the transfer
Batong Buhay v. CA: WHEN DAMAGES CANNOT BE RECOVERED
In case of refusal of the corporation to issue new certificates, the

claim for damages pertaining to the value of the shares could have sold
at the stock market is considered speculative damage and cannot be
recovered. (This only applies for publicly listed shares.)
It is easy to say now that had private respondent gained legal title to the shares, it
could have sold the same and reaped a profit of P5,624.95 but it could not do so
because of petitioner's refusal to transfer the stocks in the former's name at the time
demand was made, but then it is also true that human nature, being what it is,
private respondent's officials could also have refused to sell and instead wait for
expected further increases in value.
Won v. Wack Wack Golf Club: Prescription for Mandamus
There is no fixed period for registering an assignment so the

complaint cannot be barred by the Statute of Limitations.
A stipulation on the stock certificate that the assignment thereof would

not be binding on the corporation unless such assignment is registered in
the books of the club as required under the by-laws, which does not
provide when the registration should be made, this would mean that the
cause of action and determination of the prescription would begin only
upon demand for registration is made and not at the time of the
assignment of the certificate.
Validity of Restrictions*
1. Stipulations must not be illegal nor in restraint of trade and offends

public policy (Lambert v. Fox)
In 1911, the firm of John R. Edgar and Company found itself in such a financial
condition that its creditors, including the defendant and plaintiff, agreed to take over
the business, incorporate it and accept shares therein in payment of their respective
credits. The plaintiff and defendant,

lOMoARcPSD|28917416
*
Guidelines:
1. Corporation is given power to regulate the transfer of share but not the power
to restrict transfer (i.e., adoption of rules/regulations as to formalities and
procedures in effecting transfers)
2. Restriction must appear in the AOI, by-laws, and certificate of stock to be valid
Types of transfers
1. Right of first refusal: Stockholders who wish to sell/assign his shares must first
offer to the corporation or to other existing stockholders of the corporation
under reasonable terms and conditions. If corporation or stockholders fails or
do not exercise their option, shares can now be offered to 3rd parties.
2. Right of first option: Grants corporation the right to buy the shares at a fixed
price
3. Right of prior consent: Stockholder who wish to sell/dispose must obtain first
the consent of the BOD or the stockholders = VOID
4. Buy-back agreement: Shares assigned to officers or employees under the
condition that upon resignation or termination of their work, the corporation
shall buy back the shares
being the 2 largest stockholders of the corporation, entered into an agreement, that
neither of them would to sell, transfer or otherwise dispose of any part of their
shareholdings till after one year from the date thereof. They further agreed that the
party violating such agreement would pay p1,000 to the other party as liquidated
damages in breach of contract.
In upholding the agreement, the SC held that the stipulation was not illegal nor in
restraint of trade and offends no public policy. he suspension of the power to sell has
a beneficial purpose, results in the protection of the corporation as well as of the
individual parties to the contract, and is reasonable as to the length of time of the
suspension. But in holding so, this case made it clear that the doctrine did not mean
to cover suspension of the right of alienation of stock, limiting ourselves to the
statement that the suspension in this particular case is legal and valid.
2. Stipulations in the by-laws as to restrictions must not take away or

abridge substantial rights of stockholders (Fleischer v. Botica
Nolasco)
Manuel Gonzales was the original owner of the 5 shares of stock of the Botica Nolasco,
Inc., which he indorsed and delivered said shares to Henry Fleischer, in consideration
of a large sum of money owned by Gonzales to Fleischer. The secretary-treasurer of
said corporation, offered buy from Henry, on behalf of the corporation, said shares of
stock at their par value of P100 a share, for P500 by virtue of artice 12 of the by-laws
giving said corporation the preferential right to buy from Gonzales said shares.
The SC declared void the by-law provision which granted to the stockholders a right of
first refusal over shares sought to be disposed by other stockholders. It follows from

lOMoARcPSD|28917416
the foregoing that a corporation has no power to prevent or to restrain transfers of its
shares, unless such power is expressly conferred in its charter or governing statute.
This conclusion follows from the further consideration that by-laws or other
regulations restraining such transfers, unless derived from authority expressly granted
by the legislature, would be regarded as impositions in restraint of trade.
The foregoing authorities go farther than the stand we are taking on this question.
They hold that the power of a corporation to enact by-laws restraining the sale and
transfer of shares, should not only be in harmony with the law or charter of the
corporation, but such power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of shares is found in
section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be
valid, except as between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate, and the number of shares
transferred." This restriction is necessary in order that the officers of the corporation
may know who are the stockholders, which is essential in conducting elections of
officers, in calling meeting of stockholders, and for other purposes. but any
restriction of the nature of that imposed in the by-law now in question, is ultra vires,
violative of the property rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the appellee.
He had no knowledge of such by-law when the shares were assigned to him. He
obtained them in good faith and for a valuable consideration. He was not a privy to
the contract created by said by-law between the shareholder Manuel Gonzalez and
the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a
purchaser.
3. No absolute prohibition to transfer shares because it is violative of the

right of the stockholder to dispose his personal property as incident
of his ownership thereof. (Padgett v. Babcock and Templeton)
The indication on the face of the stock certificate that it is non-

transferable alone does not compel the corporation to buy back
the shares from the shareholder. In the absence of a contractual
obligation and of a legal provision applicable thereto, it would be
unjust to compel the corporation to comply with a non-existent or
imaginary obligation.
d. Forged Transfers
General Rule: (De los Santos v. Republic)

Certificates of stock are only QUASI-NEGOTIABLE (not negotiable) thus:

lOMoARcPSD|28917416
1. They do not afford the same protection to a holder in GF or for

value who receives them in the course of being negotiated 2.
Ownership of the true owner is preferred
Exception: If the true owner is negligent in causing the loss (Sta. Maria
v. Hongkong & Shanghai)
In this case, Mrs. Josefa Santamaria brought 10,000 shares of stock of a mining
corporation. The certificates were made out in the name of a brokerage firm, duly
indorsed in blank and delivered to Mrs. Santamaria for valuable consideration. She
delivered it to R.J. Campos and Co., another brokerage firm, to comply with the
latter‘s requirement that she deposit something on account if she wanted to buy
shares of another mining corporation. Campos thereafter delivered to a bank the said
certificate duly indorsed to said bank pursuant to a letter of hypothecation executed
by Campos in favor of said bank. The said certificate was delivered to the bank in the
ordinary course of business together with many other securities and the time it was
delivered, the bank had no knowledge that the shares represented by the certificate
belonged to Mrs. Santamaria for it was in the form of a street certificate transferable
by mere delivery.
The Court held that she could not recover the certificates since she could have asked
the corporation that issued it to cancel it and issue another in lieu thereof in her
name. Her negligence was the immediate cause of the damage, since the certificate
was endorsed by her to constitute as a street certificate. Upon its face, the holder
was entitled to demand its transfer to his name from the issuing corporation. The
bank is not obligated to look beyond the certificate to ascertain the ownership of the
stock at the time he received it from Campos, it having been given pursuant to a
letter of hypothecation.
A bona fide pledge or transferee of a stock from the apparent owner is not chargeable
with knowledge of the limitations placed on said certificates by the real owner or of
any secret agreement relating to the use which might be made of the stock by the
holder.
It further held that when a stock certificate is endorsed in blank by the owner
thereof, it constitutes what is termed as ―street certificate,‖ so that upon its face,
the holder is entitled to demand its transfer into his name from the issuing
corporation. Such certification is deemed quasi-negotiable, and as such the transferee
thereof is justified in believing that it belongs to the holder and transferor.
e. Non-transferability of Membership in Non-Stock Corporations: Membership and

all rights arising therefrom are personal and non-transferable UNLESS otherwise
provided in the AOI or by-laws (Why a different rule on non-stock corporations?)

lOMoARcPSD|28917416
III. MANAGEMENT STRUCTURE
BPI Family v. First Metro: If a corporation knowingly permits its officers, or any other
agent to perform acts within the scope of an apparent authority, holding him out to
the public as possessing power to do those acts, the corporation will, as against any
person who has dealt in GF through such agent, be estopped from denying such
authority.
Rationale: Corporate transactions would speedily come to a standstill were every

person dealing with a corporation held duty bound to disbelieve every act of its
responsible officers, no matter how regular they should appear on their face.
A. CORPORATE GOVERNANCE
1. Powers of the Board of Directors or Trustees: * Centralized management of
the corporation unless otherwise provided in the Code
Gamboa v. Victoriano: (Extent of judicial review): As long as the

directors act honestly and the contract does not violate the rights of
the minority opposed to it, the courts will not interfere. The well-
known rule is that the courts cannot undertake to control the
discretion of the BOD about administrative matters as to which they
have legitimate power of action.
Courts cannot supplant the discretion of the board on

administrative matters as to which they have legitimate power of
action, and contracts which are intra vires entered into by the
board are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of rights of the
minority.
THE GENERAL RULE OR STANDARD IS THAT THE DISCRETION OF THE BOARD IS NOT
REVIEWABLE BY THE COURTS
EXCEPTION IS WHEN THERE IS GRAVE ABUSE OF DISCRETION BECAUSE THE

RELATIONSHIP IS FIDUCIARY.
*
Directors and Trustees : Centralized management more efficient in large
organizations
a. Term of office: One year until their successors are elected and qualified

lOMoARcPSD|28917416
b. Must own at least one share of the capital stock- no share means no
directorship. Rationale: A man with a financial interest at stake will
devote more attention to the business.
c. Majority of the directors/trustees must be residents of the Philippines
d. Sources of power: Law and Delegated authority of the stockholders
e. Peculiar agent: In corporate setting, although the board is an agent of
the corporation, since the corporation is a mere judicial concept, it
cannot countermand the determination of the principal corporation
itself.
Gokongwei v. SEC: Every corporation has the inherent power to adopt by-laws for its
internal government and to regulate the conduct and prescribe the rights and duties
of its members towards itself and among themselves in reference to the management
of its affairs.
A corporation may prescribe in its by-laws, the qualifications, duties and

compensation of directors, officers and employees.
Stockholders have no vested right to be elected as directors. Any person who buys
stock in a corporation does so with the knowledge that its affairs are dominated by a
majority of the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act o the incorporation
and lawfully enacted by-laws and not forbidden by law.
To this extent, therefore, the stockholder may be considered to have parted with his
personal right or privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it to the will of the
majority of his fellow incorporators.
In summary, the 2 cases explain the BUSINESS JUDGMENT RULE: The BOD hold such
office charged with duty to act for the corporation according to their best judgment
and in doing so, they cannot be controlled in the reasonable exercise and
performance of such duty.
Coverage of the Rule:
1) Resolutions and transactions entered into by the BOD within the powers
of the corporation cannot be reversed by the courts not even on the
behest of the stockholders of the corporation
2) Directors and officers acting within such business judgment cannot be

held personally liable for the consequences of such act except if they
violated their duties
a. Must act as a body*

lOMoARcPSD|28917416
General Rule: Grant of power is to the board as a body and not to the
individual members thereof, and that the corporation can be bound
only by the collective act of the board.
Islamic Directorate v. CA: For the sale of the sole property to be

valid, the majority vote of the legitimate Board of Trustees, concurred
in by the vote of at least 2/3 of the bonafide members of the
corporation should have been obtained. They must act as a body.
Exceptions:
Ramirez v. Orientalist: RATIFICATION. Not all corporate actions need

formal board approval. The board need not come together and act as
body to perform a corporate act. The corporation is also bound by a
particular transaction ratified in a subsequent board meeting.
*
Rationale: Public policy; It makes better management practice for the board to sit
down, to discuss corporate affairs and decide on the basis of their consensus.
In this case, the director-treasurer of the corporation entered into transactions for
the leases of films without the prior board authorization. Although the AOI of the
company authorized it to manufacture, buy or otherwise obtain all accessories
necessary for conducting the business of maintaining and conducting theaters, the
Court nevertheless held that a treasurer has no independent authority to bind the
corporation by signing its name to the documents; and that under then Sec. 28 of the
Corporation Law (now Sec. 23 of the Corporation Code) all corporate powers shall be
exercised and all corporate business conducted by the BOD. The by-laws of the
corporation even provided that the power to make contracts shall be vested in the
BOD. Although the by-laws provided that the president shall have the power, and it
shall be his duty, to sign contracts, the Court nevertheless construed the provision to
refer to the formality of reducing to proper form the contracts which are authorized
by the Board and is not intended to confer an independent power to make contracts
binding on the corporation.
It is declared under the Corporation Law that corporate powers shall be exercised and
all corporate business conducted by the BOD. And this principle is recognized in the
by-laws of the corporation in question which contain a provision declaring that the
power to make contracts shall be vested in the BOD. However, the fact that the
power to make corporate contracts is thus vested in the BOD, does not signify that a
formal vote of the board must always be taken before contractual liability can be
fixed upon a corporation for the board can create liability like an individual by other
means than a formal expression of its will.

lOMoARcPSD|28917416
The authority of the subordinate agent of a corporation often depends upon the
course of dealings which the company or its directors have sanctioned. It may be
established sometimes without reference to official record of the proceedings of the
board, by proof of the usage which the company had permitted to grow up in
business, and of the acquiescence of the board charged with the duty of supervising
and controlling the company's business.
In dealing with corporations the public at large is bound to rely to a large extent upon
outward appearances. If a man is found acting for a corporation with the external
indicia of authority, any person, not having notice of want of authority, may usually
rely upon those appearances; and if it be found that the directors had permitted the
agent to exercise that authority and thereby held him out as a person competent to
bind the corporation, or had acquiesced in a contract and retained the benefit
supposed to have been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have been granted. The public is not
supposed nor required to know the transactions which happen around the table where
the corporate board of directors or the stockholders are from time to time convoked.
Whether a particular officer actually possesses the authority which he assumes to
exercise is frequently known to very few, and the proof of it usually is not readily
accessible to the stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers. It is therefore
reasonable, in a case where an officer of a corporation has made a contract in its
name, that the corporation should be required, if it denies his authority, to state such
defense in its answer. By this means the plaintiff is apprised of the fact that the
agent's authority is contested; and he is given an opportunity to adduce evidence
showing either that the authority existed or that the contract was ratified and
approved.
The integrity of commercial transactions can only be maintained by holding the

corporation strictly to the liability fixed upon it by its agents in accordance with law,
and we would be sorry to announce a doctrine which would permit the property of a
man in the city of Paris to be whisked out of his hands and carried into a remote
quarter of the earth without recourse against the corporations whose name and
authority had been used in the manner disclosed in this case. As already observed, it
is familiar doctrine that if a corporation knowingly permits one of its officer, or any
other agent, to do acts within the scope of an apparent authority, and thus hold him
out to the public as possessing power to do those acts, the corporation will as against
any one who has in good faith dealt with the corporation through such agent, be
estopped from denying his authority; and where it is said "if the corporation permits"
this means the same as "if the thing is permitted by the directing power of the
corporation."
Board of Liquidators v. Kalaw: EXPRESS OR IMPLIED CORPORATE

AUTHORITY: This case held that it is possible for an express provision of
the bylaws to be violated and the Board may, in certain corporate

lOMoARcPSD|28917416
actions, bind the corporation in spite of the fact that it is contrary to

the by-law provision. It held that there are 2 ways by which corporate
actions may come about through the corporation‘s BOD, either the Board
may empower or authorize the act or contract, or it can be ratificatory
act on the part of the Board.
As long as there is corporate approval through the BOD, whether implied

or express, it is valid to bind the corporation.
RATIFICATION: Relates back to the time of the contract and is equivalent

to original authority.
Acuna v. Batac Producers: EXPRESS OR IMPLIED RATIFICATION: Diverse forms of

implied ratification:
i. Silence or acquiescence
ii. Acts showing approval or adoption of the
contract iii. Acceptance and retention of
benefits therefrom
In this case, the Court held that between the act of the Board as a body in beforehand
affirming, although informally, to the other party the perfection of a contract, on one
hand, and a subsequent express resolution formally taken at the board meeting which
resolution then proceeds to ―disapprove and/or rescind‖ the said contract, the former
must prevail. The Court held that ―there is abundant authority in support of the
proposition that the ratification may be express or implied, and that implied
ratification may take diverse forms, such as by silence or acquiescence; by acts
showing approval or adoption of the contract or by acceptance and retention of
benefits flowing therefrom.
RECAPITULATION: SEC. 23 IS MORE APPLICABLE IN INTERNAL RULES, SEC. 25 ON THE

OTHER HAND RELATES HOW A BOARD MAY ACT AS A BODY (i.e., MEETING, QUORUM,
BOARD RESOLUTION BY A DISCUSSION OF THE MAJORITY)
REMEMBER THE 5 RELATIONS IN CORPORATION LAW, ONE OF WHICH IS THE CONTRACT

OF CORPORATIONS WITH 3RD PARTIES, THE CASES OF RAMIREZ, BOARD OF LIQUIDATORS
AND ACUNA WERE HELD VALID BECAUSE THEY WERE AGAINST 3RD PERSONS.
b. Executive Committee:
- Composed of not less than 3 members of the board to be
appointed by the board.

lOMoARcPSD|28917416
General Rule: MATTERS WHICH EXECUTIVE COMMITTEE CAN ACT

UPON: Can only act on specific matters within the competence of
the board, as may be delegated to it by the board or in the by-laws,
upon majority vote of all its members
Exception: MATTERS WHICH ONLY THE BOARD DULY CALLED AND

ASSEMBLED AS SUCH CAN ACT UPON
1) Approval of any action for which shareholders‘ approval
is also required
2) Filing of vacancies in the board
3) Amendment or repeal of by-laws or the adoption of new
laws
4) Amendment or repeal of any resolution of the board
which by its express terms is not so amenable or
repealable 5) Distribution of cash dividends to the
shareholders
2 THEORIES AS TO THE CREATION OF AN EXECUTIVE COMMITTEE- with

enabling clause in the by-laws or without?
1) Under the Code, the by-laws may create an executive
committee but nothing therein prevents the creation of
such by board resolution even in the absence of an
enabling clause in the by-laws.
2) SEC however says that an executive committee can only
be created by virtue of a provision in the by-law and the
BOD cannot simply create or appoint an executive
committee to perform such functions
WHAT IS THE RELEVANCE/IMPORTANCE OF HAVING AN EXECUTIVE COMMITTEE: TO

EXPEDITE ACTION ON IMPORTANT MATTERS WITHOUT THE NEED FOR A
BOARDMEETING ESPECIALLY WHEN SUCH MEETING CANNOT BE READILY HELD. (NEED
NOT COMPLY WITH SECS. 23 OR 25)
NOTE: HAVING AN EXECUTIVE COMMITTEE IS BOARD DISCRETION. HOWEVER, ONCE

CREATED UNDER SEC. 23, SUCH CAN ONLY BE ABOLISHED UNDER SEC. 23
B. ROLE OF SHAREHOLDERS
Right to Vote and Attend Meetings (For non-stock corporations only)
Rule: Right to vote of any member may be limited, broadened, or denied by the
AOI. Unless the AOI or the by laws limits, broadens or denies it, member is
entitled to the following:
1. To one vote

lOMoARcPSD|28917416
2. Vote by proxy- in stock corporation, right to vote by proxy cannot be

taken away
3. May cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate
4. Voting by mail or other similar means
5. Cumulative voting – in the absence of provision, straight voting
system
Price v. Martin : STOCKHOLDER ON RECORD IS THE PARTY ENTITLED TO VOTE
Until challenged in a proper proceeding, a stockholder of record has a

right to participate and vote in any meeting of the stockholders of the
corporation and in the absence of fraud, the action of the stockholders at that
meeting cannot be collaterally attacked on account of such participation. A
person who has purchased stock and who desires to be recognized as a
stockholder, for the purpose of voting, must secure such a standing by having
the transfer recorded upon the books of the corporation and if the transfer is
not duly made upon request he has, as his remedy, to compel it to be made.
a. Instances
- Election of Directors and Trustees
1. At any meeting of stockholders/members called for the election,
there must be present in person or by representative authorized
to act by written proxy, OWNERS of the majority of the capital
stock or majority of the members entitled to vote in case of non-
stock corporations
2. Election must be by ballot if requested but voting by viva voces or
roll call is valid except when there is a request that the election
be held by ballot
3. if quorum is present, candidates receiving highest votes shall be
declared the winner.
4. In case of failure to hold an election for any reasonable meeting
may be adjourned from day to day or from time to time but it
cannot be adjourned sine die or indefinitely
In stock corporations:
1. Stockholders have right to vote in person or by proxy the number
of shares standing in his own name at the time fixed by the by-laws
or if the by-laws are silent, at the time of the election 2. No
delinquent stock shall be voted
Non-stock corporations: Right to vote of any member may be limited,

broadened, or denied by the AOI.

lOMoARcPSD|28917416
- Amendment in the Articles of Incorporation *: 2/3 ratification vote of

the outstanding capital stock or members
- Investment in other business

1. 2/3 vote NECESSARY: Dela Rama v. Maao-Sugar: IF INVESTMENT
IS MADE FOR ANY PURPOSE OTHER THAN THE PRIMARY
PURPOSE FOR WHICH IT WAS ORGANIZED
*
Limitations on the Power to Amend AOI
1. Amendment not allowed if contrary to any provision or requirement prescribed
under the Code or any special law
2. For a legitimate purpose
3. Approval vote of the board, stockholders and members
4. The original and amended AOI shall contain all provisions required by law to be
set out in the AOI
5. Amendments shall be underscored; must be certified by the corporate
secretary and majority of the directors and trustees
6. Amended AOI and original be submitted to SEC
7. Amendments take effect only upon SEC approval
8. If SEC did not act upon the submission within 6 months, it is deemed approved.
2. 2/3 vote NOT NECESSARY: Gokongwei v. SEC: IF INVESTMENT IS
REASONABLY NECESSARY OR INCIDENTAL TO ACCOMPLISH ITS
PRIMARY PURPOSE
THE INSTANCES WHERE THE STOCKHOLDER IS ALLOWED TO VOTE IS WHEN THERE ARE
FUNDAMENTAL CHANGES IN THE ORIGINAL RELATIONSHIP INSIDE THE CORPORATION.
Dela Rama v. Ma-ao Sugar Central: In the judgment, the lower court ordered the
management of the Ma-ao Sugar Central Co., Inc. "to refrain from making investments
in Acoje Mining, Mabuhay Printing, and any other company whose purpose is not
connected with the sugar central business." This portion of the decision should was
reversed by the Court because Sec. 17-1/2 of the Corporation Law allows a
corporation to "invest its funds in any other corporation or business, or for any
purpose other than the main purpose for which it was organized," provided that its
board of directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power.
- Merger and Consolidation: 2/3 ratification vote of outstanding capital

stock or members of each constituent corporations for plan to be
approved
a. Plan shall be approved by the majority vote of each of the
BOD or trustees of the constituent corporations

lOMoARcPSD|28917416
b. Plan submitted for approval by the stockholders and

members of each of such corporations at separate
corporate meetings duly called for the purpose with proper
notice
c. Personal or registered notice: 2 weeks before the meeting
d. Appraisal right may be exercised by a dissenting
stockholder but if after approval of plan, the BOD decides
to abandon the plant, the appraisal right is extinguished
e. AMENDMENT: Majority vote of BOD/trustees and ratification
vote of outstanding capital stock or members of each
constituent corporations
- Increase and Decrease in Capital Stock: Majority vote of BOD/Trustee

and ratification vote of outstanding capital stock or members -
Adoption, Amendment and Repeal of By-Laws
General rule; Power to amend, repeal and adopt new by-laws lies
on the stockholders and members. Majority vote of BOD/Trustee
and majority vote of the outstanding capital stock or members
Exception: Stockholders and members delegate the power to the

BOD thru 2/3 vote of outstanding capital stock or members
The delegated power is can be revoked by the majority vote of

the outstanding capital stock or members.
- Declaration of Stock Dividends: 2/3 vote of the outstanding capital

stock
- Management Contract:
General Rule: Approval of BOD and ratification of the majority of

the outstanding capital stock or members of both managing and
the managed corporation
Exception: 2/3 Ratification vote if

1. Majority of the members of BOD in the managed
and managing corporation is the same
2. Stockholders owning 1/3 of the capital stock and
members in the managed and managing
corporation are the same
- Fixing of Consideration for Par Value Shares

1. May be fixed in the AOI or by-laws

lOMoARcPSD|28917416
2. In the absence thereof, vote of majority of the shareholders at

a meeting duly called for the purpose
b. Treasury Shares: NO voting rights as long as

they remain in the treasury *
In case of resale or re-issue, they regain whatever voting rights and

dividends to which they were originally entitled in the hands of the 3 rd
party buyer.
c. Conduct of Stockholders or Members‘

Meetings - Kinds and Requirements
*
1. REGULAR
a. Held annually at a fixed date in the AOI or in the
absence thereof, on any date in April of every year as
determined by the BOD or trustees
b. Notice sent to all stockholders/members at least 2
weeks prior to the meeting unless a different period is
required by the bylaws
2. SPECIAL
a. Held anytime deemed necessary or as provided in the
by-laws
b. 1 week written notice unless a different period is
required in the by-laws
c. Specific purpose
NOTE: NON-SERVICE OF NOTICE TO ANY STOCKHOLDER WITH RESPECT TO A MEETING

IS VERY FATAL.
- Place and Time of Meeting*
General rule: City or municipality where the principal office of

the corporation is located and if practicable, in the principal
office of the corporation in order to be valid
*
Rationale: To give voting rights to treasury shares could enable the directors to
prolong their stay in the office against the wishes of the holders of the majority
stock.
*
Notice of meeting may be waived expressly or impliedly by any stockholder or
member

lOMoARcPSD|28917416
*
Postponement of annual stockholders’ meeting may be allowed for justifiable and
meritorious reasons provided however that the same be held within a reasonable time
from the date it has been postponed
Exception:
1. (SEC opinion) When all the stockholders and members are
present or duly represented at the meeting
2. In case of non-stock corporations, provided that notice as to
time, place and date of meeting is sent to all
- Quorum
General rule: Majority of the stockholders or members
Exceptions:
1. Otherwise provided in the by-laws
2. Law determines the necessary concurring votes of
stockholders and members to transact business
INSTANCES WHEN QUORUM IS MATERIAL IS THOSE CASES IN WHICH THE LAW

DETERMINES THE NUMBER OF SHAREHOLDERS OR MEMBERS WHOSE CONCURRING
VOTES ARE NECESSARY TO MAKE THEIR ACTIONS BINDING ON THE CORPORATION
(i.e., power to extend of shorten term, power to increase or decrease capital, etc.)
d. Contracts and Agreements Affecting Stockholders

a. Proxy: A special form of agency to vote
1. Requisites for a valid proxy
a. Proxy shall be in writing
b. Signed by the stockholder/member
c. Filed before the scheduled meeting with the
corporate secretary
2. Revocation: Revocable any time unless made irrevocable by
the giver (i.e., irrevocable when coupled with interest)
3. Period of Effectivity of Proxy: Valid only for the meeting for
which it is intended until otherwise provided in the proxy. No
proxy shall be valid for a period longer than 5 years at any
one time
4. Who may be appointed proxy? Code does not impose
limitation
5. Right to appoint proxy- absolute in stock corporations but not
in nonstock corporations
b. VTA: Stockholder parts with the voting power only but retains
the beneficial ownership of the shares*

lOMoARcPSD|28917416
*
Procedure:
1. Shareholder transfers shares to trustee
2. New certificates issued in name of trustee
3. Voting trustee executes and delivers to stockholder(s) voting trust
certificates to show the true ownership of the shares
4. Upon expiration of the period agreed upon, VTC shall be cancelled, new
certificates in the name of the owners shall be issued
Powers/Rights of Voting Trustees
1. Right to vote and other rights pertaining to the shares so transferred and
registered in their names subject to the VTA
2. Vote in person or by proxy unless agreement otherwise provides
3. Right to Inspect Corporate books
4. Trustee is the legal title holder or owner of the shares under the agreement
(qualified to be a director therefore)
- It is an agreement whereby a stockholder or more transfer his

shares to any person(s) or to a corporation having
authority to act as trustee for the purpose of vesting in
the latter as trustee voting or other rights for a period
not exceeding which is prescribed in the Code and upon
the terms stated in the agreement
Limitations on VTA:
1) No VTA shall be entered into:
General rule: Not exceed 5 years for any one time

Exception: VTA as part of a loan agreement but it shall
automatically expire upon full payment of the loan.
2) Not be used for purposes of fraud or circumventing the law

against monopolies and illegal combinations in restraint of
trade
3) Must be in writing and notarized and specify the terms and
conditions thereof
4) Certified copy must be filed with the SEC and the corporation
to be effective and enforceable
5) Subject to the examination of any stockholder
6) Unless expressly renewed, all rights granted in it shall
automatically expire at the end of the agreed period
IN CONTRAST,PROXY IS A SIMPLE CASE OF AGENCY WHILE IN VTA, IT MAY INVOLVE
OTHER RIGHTS (EQUITABLE RIGHTS SUCH AS INTERESTS, MANAGEMENT AND RESIDUAL
RIGHTS) , NOT ONLY THE RIGHT TO VOTE.

lOMoARcPSD|28917416
Lee v. CA: POWER OF TRUSTEES: Right to vote and other rights pertaining to the
shares so transferred and registered as long as not used for purposes of fraud or
circumventing the law against monopolies and illegal combinations in restraint of
trade
By its very nature, a VTA results I the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends, the right to inspect the
books of the corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled until the
liquidation of the corporation.
Criteria to distinguish VTA from proxy and pooling agreements:

a) The voting of rights of the stock are separated from the
other attributes of ownership
b) The voting rights granted are intended to be irrevocable for a
definite period of time
c) The principal purpose of the grant of voting rights is to
acquire voting control of the corporation
The transactional concept of a VTA primarily intended to single out a stockholder‘s

right to vote from his other rights as such and made irrevocable for a limited duration
may in practice become a legal device whereby a transfer of the stockholder‘s share
is effected subject to the specific provision of the VTA. The execution of the VTA,
therefore, may create a dichotomy between the equitable or beneficial ownership of
the corporate shares of a stockholder on the one hand, and the legal title thereto on
the other hand.
NIDC v. Aquino: Exception to the rule that Trustee must return certificates to
shareholder after expiration of the VTA: The acquisition in the present case by PNB-
NIDC of the properties in question was not made or effected under the capacity of a
trustee but as a foreclosing creditor for the purpose of receiving on a just and valid
obligation of the bank.
In that case, a part of the conditions mandated in the Financial Agreement entered
into by the borrowing corporation with the PNB and the NIDC, a VTA was executed
over 60% of the outstanding and paid up capital stock of the borrowing corporation.
The execution of the VTA also facilitated implementation of the condition in the
Financing Agreement that allowed PNBNIDC to appoint members in the 7-man board of
the corporation, and the appointment of a comptroller by PNB-NIDC to supervise the
financial management of the corporation.
During the term of the VTA, the corporation defaulted in the loan which resulted in
the foreclosure and sale of the oil mills with PNB-NIDC, ending s the highest bidders
thereof. Upon termination of the VTA, the corporation sought to have PNB-NIDC
account for all the assets and oil mills of the corporation under the theory that PNB-
NIDC acquired them as trustees for the corporation.

lOMoARcPSD|28917416
The Court held that it is clear that what was assigned to NIDC was the power to vote
the shares of stock of the stockholders of Batjak, representing 60% of Batjak‘s
outstanding shares, and who are signatories to the agreement. The power entrusted
to NIDC also included the authority to execute any agreement or document that may
be necessary to express the consent or assent to any matter, by the stockholders.
Nowhere in the said provisions or in any other part of the VTA is mention made of any
transfer or assignment to NIDC of Batjak‘s assets, operations and management. NIDC
was constituted as trustee only of the voting rights of the 60% of the paidup and
outstanding shares of stock in Batjak…The acquisition by PNB-NIDC of the properties in
question was not made or effected under the capacity of a trustee but as a
foreclosing creditor for the purpose of recovering on a just and valid obligation of
Batjak.
c. Pooling agreements- agreement by which two or more stockholders

agree that their shares shall be voted as a unit (usually concerned
with election of directors to gain control in management)
 The parties thereto remain the owners of their
stocks with a right to vote them although they
each bound themselves to vote in accordance
with the decision of the majority of the pool.
Enforcement of pooling agreement must be by imposition of hefty

liquidated damages for non-compliance since such agreement
covers personal obligations (to do) and action for specific
performance shall not lie due to the public policy against
involuntary servitude.
C. ENFORCEMENT OF RIGHTS OF SHAREHOLDERS
a. Right to Inspect – right to information founded on the

stockholders’ beneficial interest through ownership or shares
and membership and granted by common law for the purpose
of protecting his interests
Philpotts v. Phil. Manufacturing: LIMITATIONS ON RIGHT: There are some things

which a corporation may undoubtedly keep secret, notwithstanding the right of
inspection given to stockholders, as where a corporation, engaged in the business of
manufacture, has acquired a formula or process not generally known, which has
proved of utility in the manufacture of its products. The corporation or its BOD may
properly adopt measures for the protection of such process from publicity.
The right does not apply where the corporation is not organized under the Philippine
law. The right of the stockholder is governed by the inspection requirements in the
jurisdiction where the corporation was organized.

lOMoARcPSD|28917416
PARTY ENTITLED TO EXERCISE RIGHT: Stockholder has the right to exercise his right
of inspection of records either in person or by some authorized agent or attorney in
conformity with the general rule that what a man may do in person he may do through
another.
E. Pardo v. Hercules: TIME TO AVAIL RIGHT; At reasonable hours on business

day. This means that the right of inspection may be exercised at reasonable
hours on business day throughout the year and not merely during an
arbitrary period of a few days chosen by the directors.
The corporate secretary refused to permit petitioner or his agent to inspect the
records and business transactions of the company at times desired by the petitioner.
The basis for the refusal was the provision in the company‘s by-laws which declared
that every stockholder may examine the books of the company and other documents
pertaining to the same upon the days which the BOD shall annually fix.
The Court held that the resolution of the BOD of a corporation limiting the rights of
stockholders to inspect its records to a period of 10 days shortly prior to the annual
stockholders meeting is an unreasonable restriction given by Sec. 51 of the
Corporation Law, which declares that the right to inspection can be exercised ―at
reasonable hours‖.
Veraguth v. Isabela Sugar: UNQUALIFIED RIGHT OF STOCKHOLDERS: It cannot be

denied on the grounds that the director or stockholders is on unfriendly terms with
the officers of the corporation.
The court held that directors of a corporation have the unqualified right to inspect
the books and records of the corporation at all reasonable times. Pretexts may not be
put forward by the officers of the corporation to keep a director or stockholder from
inspecting books and minutes of the corporation, and the right of inspection cannot be
denied on the grounds that the director or stockholder is on unfriendly terms with the
officers of the corporation whose records are sought to be so inspected. Nevertheless,
the Court also held that a director or stockholder has no absolute right to secure
certified copies of the minutes of a corporation until these minutes have been written
up and approved by the directors.
Gonzales v. PNB: LIMITATIONS ON THE RIGHT: Stockholder must not have been guilty
of using improperly any information secured thru a prior examination and that the
person asking for such examination must be acting in GF and for a legitimate purpose
in making his demand. He must also setforth the reasons and purposes for which he
desires such inspection.
In contrasting the present language of Sec. 74 of the Corporation Code to that of Sec.
51 of the old Corporation Law, As may be noted from the above-quoted provisions,

lOMoARcPSD|28917416
among the changes introduced in the new Code with respect to the right of inspection
granted to a stockholder are the following the records must be kept at the principal
office of the corporation; the inspection must be made on business days; the
stockholder may demand a copy of the excerpts of the records or minutes; and the
refusal to allow such inspection shall subject the erring officer or agent of the
corporation to civil and criminal liabilities. However, while seemingly enlarging the
right of inspection, the new Code has prescribed limitations to the same. It is now
expressly required as a condition for such examination that the one requesting it must
not have been guilty of using improperly any information through a prior examination,
and that the person asking for such examination must be "acting in good faith and for
a legitimate purpose in making his demand." The court held that the ―unqualified
provision on the right of inspection previously contained in Sec. 51 of the Corporation
Law no longer holds true under the present law.‖
Gonzales held that it is the stockholder seeking to exercise the right of inspection to
set forth the reasons and the purposes for which he desires such inspection. In this
case, the purpose of the stockholder in seeking inspection of corporate records of the
bank to arm himself with materials he can use against the respondent Bank for acts
done by the latter when the petitioner was a total stranger to the same, were not
deemed proper motives.
Summary: 3 LIMITATIONS ON THE RIGHT TO INSPECT
1. Must be exercised at reasonable hours on business days

2. Person demanding the right has not improperly used any information
secured through any previous examination of the records of such
corporation 3. Demand is made in GF and for a legitimate purpose
1. Specified Records
i. Record of all business transactions ii.
Minutes of all meetings of
stockholders/members iii. Minutes of all
meetings of directors/trustees iv. Stock and
transfer book
v. Financial Statements – 10 days from receipt of written request of
stockholder/member Contents:
 1 balance sheet as of the end of the last taxable year
 Profit and loss statement of said year showing in details its
assets and liabilities as a result of its operations
vi. Annual Financial Reports- at every annual regular meeting of

stockholders/members when directors/trustees are elected
 General Rule: Must include financial statements signed and

certificed by an independent CPA

lOMoARcPSD|28917416
 Exception: If paid up capital is less than 50K, only the

certification under oath of treasurer or any responsible
officer is necessary
2. Remedies
a. MANDAMUS- if corporation has not established the impropriety of
the shareholders‘ request to inspect the books
b. DAMAGES (civil)-Against the stockholder/member or
directors/trustees
c. CRIMINAL SUIT – under Section 144 of the Corporation Code
(violation of the code)
 Fine or imprisonment or both upon discretion of the court
1
 If refusal is pursuant to a resolution or order of the BOD or

trustees, liability shall be imposed upon the
directors/trustee who voted for such refusal
3. Confidential Nature of SEC Examinations

Exceptions
a) Law requires the same to be public
b) Such interrogatories, answers, results are necessary to be
presented as evidence before any court
b. Appraisal Right- right to demand payment of the fair value of his

shares after dissenting from a proposed corporate action
INSTANCES WHEN APPRAISAL RIGHT AVAILABLE (Sec. 81)

1. Amendment of AOI which has the effect of changing/restricting the rights of
any stockholders or class of shares or of authorizing preferences in any respect
superior to those of outstanding shares of any class
2. Extension/shortening of corporate term
3. Sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially of all the corporate property and assets
4. Investment in another corporation outside of its primary purpose
5. Merger or consolidation
HOW RIGHT IS EXERCISED (Sec. 82)- Failure to make demand within such period
constitutes waiver of right
a. Dissenting stockholder who voted against the proposed action must make a
written demand within 30 days after said vote
b. If proposed action implemented, corporation shall pay dissenting
stockholder within 10 days after demanding payment for his shares upon
surrender of the corresponding certificates
1 Section 144 of the Corporation Code

lOMoARcPSD|28917416
EFFECTOF DEMAND AND TERMINATION OF RIGHT

A. All rights accruing to such shares including voting and dividend rights shall
be suspended B. Entitled to receive payment at the agreed FMV or as
determined by the appraisers chosen by them
C. If stockholder not paid within 30 days after the award his voting and
dividend rights shall be restored until payment of his shares. Upon such
payment, all his rights are terminated
D. If proposed corporate action is abandoned, his rights and status as a
stockholder shall thereupon be permanently restored.
WHEN RIGHT TO PAYMENT CEASES- RIGHT NOT EXERCISABLE

(Section 84)
1. Stockholder withdraws his demand and corporation consents thereto

2. Proposed action is abandoned
3. Proposed action is disapproved by SEC where its approval is necessary
a. Fine – 1k –
10k
b. Imprisonm
ent – 30
days – 5yrs
4. SEC found stockholder not entitled to appraisal right
BEARER OF COST OF APPRAISAL (Sec. 85)

a. By corporation
i. Price that corporation offered to the dissenting stockholder is lower
than the FMV as determined by the appraisers named by them
ii. Action is filed by the dissenting stockholder to recover such fair value
and the refusal of the stockholder to receive such payment is found by
the court to be justified
b. By dissenting stockholder
i. Price offered by the corporation is the approximately the same as the
FMV ascertained by the appraisers
ii. Action is filed by the dissenting stockholder to recover such fair value
and the refusal of the stockholder to receive such payment is found by
the court to be unjustified
NOTATION OF CERTIFICATES (Sec. 86): Dissenting stockholder must submit his

certificates within 10 days after demanding his payment
But the shares can be transferred still by the dissenting stockholder, in such case:
a. Transferee shall become a regular stockholder with the right to receive all
dividend distributions which would have accrued to such shares

lOMoARcPSD|28917416
b. The right of the transferor as a dissenting stockholder to be paid the fair

value of the shares shall cease. By transferring his shares, he ceases to be a
stock.
c. Derivative Suits
Richardson v. Arizona: A derivative action must necessarily based on a claim for

relief which is owned by the stockholders‘ corporation. Indeed, a prerequisite for
filing a derivative action is the failure of the corporation to initiate the action in its
own name. The stockholder, as a nominal party, has no right, title or interest
whatsoever in the claim itself- whether the action is brought by the corporation or by
the stockholder in behalf of the corporation.
A class action on the other hand is a predicated ownership of the claim for relief sued
upon in the representative of the class and all other class members in their capacity
as individuals. Shareholders of the corporation may of course have claims for relief
directly against their corporation because the corporation itself has violated rights
possessed by the shareholders, and a class action would be an appropriate means for
enforcing their claims. A recovery in a class action is a recovery which belongs
directly to the shareholders. However, in a derivative action, the plaintiff shareholder
recovers nothing and the judgment runs in favor of the corporation.
Pascual v. Orosco: A minority stockholder of a corporation brought a suit for and in

behalf of the corporation against the BOD. The AOI provided that the compensation of
the directors comprises a certain percentage of the net income of the corporation.
But the director, instead of determining the compensation from the net incomes, used
as basis the gross income which resulted in losses to the corporation. But petitioner‘s
cause of action covered the period when he was not yet a stockholder of the
corporation.
The SC held that a stockholder of a corporation who was not such at the time when
alleged objectionable transaction took place, or whose shares of stock have not since
devolved upon him by operation of law, cannot maintain suits of this character, unless
such transactions continue and are injurious to such stockholder or affect him
especially or specifically in some other way.
A close reading of this case would show that the rationale for the rule was that there
is in the US jurisdiction, two sets of court system- the federal judicial system and the
state judicial system. In order to prevent forum shopping, the rule in the US is such
that when a derivative suit is brought, it is essential that the relator should have been
a stockholder both at the time the act complained of occurred and at the time the
derivative suit is filed. The prevailing rule then was that a shareholder who was one
at the time of the institution of the action may bring a derivative suit. It was then
quite easy and in possible to bring a suit out of state court and bring it to federal
court by just making sure that you transfer a share to someone outside of the state, If

lOMoARcPSD|28917416
the suit is filed in California, what can be done is transfer one share to a resident of
Florida, to grant federal courts jurisdiction. In order to correct this collusion, the
requisite was imposed that the relator must be a shareholder at the time the cause of
action accrued.
However, in this case, it was held that a stockholder in a corporation who was not
such at the time when alleged objectionable transactions took place or whose shares
of stock have not since devolved upon him, by operation law, cannot maintain suits of
this character, unless such transaction continue and are injurious to such stockholder
or affect him especially or specifically in some other way.
Evangelista v. Santos: The plaintiffs were minority stockholders who brought a

derivative suit against the principal officer for damages resulting from the
mismanagement of corporate affairs and misuse of corporate assets. The complaint
prayed for judgment requiring defendant, among others, to pay plaintiffs the value of
their respective participation in said assets on the basis of the value of the stocks held
by each of them.
The Court held that the suit would not prosper. The stockholders brought the action
not for the benefit of the corporation but for their own benefit since they asked that
the defendant make good the losses occasioned by his mismanagement and pay them
the value of their respective participation in the corporate assets on the basis of their
respective holdings. The Court held that the relief sought could not be done until all
corporate debts, if there be ay, are paid and the existence the corporation
terminated by the limitation of its character or by lawful dissolution.
Since it is the corporation which is the real party in interest, then the reliefs prayed
for must be for the benefit or interest of the corporation. When the reliefs prayed for
do not pertain to the corporation, then it is an improper derivative suit.
Republic v. Cuaderno: The petitioner brought a derivative suit in behalf of the

corporation against the officers and the BOD. The complaint alleged that the directors
approved a resolution granting excessive compensation to officers of the corporation.
The suit was filed in order to prevent dissipation of the corporate funds for the
payment of the salary of said officers. The BOD claimed that the action cannot
prosper for failure to compel the BOD to file a suit for and in behalf of the
corporation.
The Court held that such a suit need not be authorized by the corporation where its
objective is to nullify the action taken by its manager and the BOD, in which case any
demand for intracorporate remedy would be futile.
A stockholder in a banking corporation has a right to maintain a suit for and on behalf
of the corporation, but the extent of such right depends upon when and for what
purpose he acquired the shares of stock of which he is the owner.

lOMoARcPSD|28917416
The complaint expressly pleads that the appointment of Cuaderno as technical

consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic
Bank, were made only to shield Pablo Roman from criminal prosecution and not to
further the interests of the Bank, and avers that both men are Roman's alter egos.
There is no denying that the facts thus pleaded in the complaint constitute a cause of
action for the bank: if the questioned appointments were made solely to protect
Roman from criminal prosecution, by a Board composed by Roman's creatures and
nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an
unlawful wastage or diversion of corporate funds, since the Republic Bank would have
no interest in shielding Roman, and the directors in approving the appointments would
be committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid
out for the purpose, as prayed for in the complaint in this case
Reyes v. Tan: This case gave a valid basis the violation of laws allowed by the board
as basis for a derivative suit. The Court held that where the director of the
corporation permitted the fraudulent transaction to go unpunished by allowing
importation of finished textile instead of raw cotton for the textile mill, and nothing
appears to have been done to remove the erring purchasing managers, the
appointment of receiver may have been thought of by the court so that the dollar
allocation for raw material may be reviewed and the textile mill placed on an
operating basis, because it is possible that a receiver in which the Central Bank may
have confidence is appointed, the dollar allocation for raw material may be restored.
San Miguel Corp. v. Khan:
Requisites for a proper derivative suit, viz:

1. the party bringing suit should be a shareholder as of the time of the act or
transaction complained of,
2. he has exhausted intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; and
3. the cause of action actually devolves on the corporation, the ,wrongdoing or
harm having been caused to the corporation and not to .the particular
stockholder bringing the suit;
In discussing the first requisite, the Court held, ―the bona fide ownership by a
stockholder of stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication
of his own particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation. ― GAMBOA v.
VICTORIANO

lOMoARcPSD|28917416
Lopue group were the owners of 1,328 shares of stocks of Inocentes de la Rama, Inc.
Such corporation have an authorized capital stocks of 3k, 2,177 of which were
subscribed and issued thus leaving 823 shares unissued. Said 823 shares is the root of
this controversy.
In order to forestall their takeover of the corporation, the Gamboa group, most of
which are members of the BOD bought the shares of stock held by the corporation‘s
president and VP. Then they surreptitiously met and elected Ricardo Gamboa and
Honorio de la Rama as president and VP and thereafter passed a resolution authorizing
the sale of the 823 unissued shares of the corporation to themselves. Other members
of the Gamboa group were later elected as members of the BOD. So the Lopue group
filed a case before the CFI to nullify the issuance of the 823 shares of stock of the
corporation in favor of the Gamboa group. Lopue group alleges that the sale of the
unissured shares of the stocks of the corporation was in violation of their rights and
their pre-emptive rights and such was made without the approval of the BOD
representing 2/3 of the outstanding capital stock and that the members of the
Gamboa group elected to the BOD were not legally elected.
After the writ of preliminary injunction restraining the Gamboa group from
committing any act tending to prejudice or injure the rights of the Lopue group was
granted by the LC, the 2 groups entered into a compromise agreement whereby the
contracting parties withdrew their respective claims against each other and the
Gamboa group has waived and transferred all their rights and interests over the
questioned 823 shares of stocks in favor of the Lopue group.
As a result, Gamboa group a MD upon the ground that the Lopue group‘s cause of
action has been waived or abandoned and that they were estopped from prosecuting
the case since they have in effect acknowledged the validity of the issuance of the
disputed 823 shares. CFI denied the MD finding that the Lopue group have not waived
their cause of action by entering into the CA because of an express provision in the
said CA that it shall not in anyway constitute or maybe considered a waiver or
abandonment of any claim or cause of action against the Gamboa group.
Gamboa group filed an MR for the order denying the MD but was likewise denied. An
addendum to the MR showed Gamboa group‘s questioning of the CFI‘s jurisdiction
over the case at bar. As claimed by them, the CFI has no jurisdiction to interfere with
the management of the corporation by the BOD and the enactment of a resolution by
them, as members of the BOD of the corporation allowing the sale of the 823 shares
of stocks unto themselves for this was purely a management concern which the courts
could not interfere with. As mentioned, CFI denied the motion so the Gamboa group
filed a petition for certiorari for the review of said orders.
Issue: WON the CFI has jurisdiction over the present case
Held: Has jurisdiction.

lOMoARcPSD|28917416
SC mentioned that firstly, the questioned order denying Gamboa group‘s MD is merely
interlocutory and cannot be the subject of a petition for certiorari. The proper
procedure is to proceed with the trial in the LC and from there make the necessary
appeals. Secondly, it agreed with the CFI that the Lopue group has not waived their
cause of action against the Gamboa group. In fact, the express provision in the CA and
the fact that no consideration was mentioned in the agreement for the transfer of
rights of said shares of stock to the Lopue group are sufficient to show that the
agreement was merely an admission by the Gamboa group of the validity of the claim
of the Lopue group.
Thirdly, the well-known rule is that courts cannot undertake to control the discretion
of the BOD about administrative matters as to which they have legitimate power of
action and contracts intra vires entered into by the BOD are binding upon the
corporation and courts will not interfere unless such contracts are so unconscionable
and oppressive as to amount to a wanton destruction of the rights of the minority. In
the instant case, Lopue group aver that the Gamboa group have concluded a
transaction among themselves as will result serious injury to the interests of the
Lopue group so that the TC has jurisdiction over the case.
GOKONGWEI v. SEC
Gokongwei, a stockholder of SMC filed a petition with the SEC against the majority of
the members of the BOD of SMC seeking for the nullity of the by laws which the said
majority members of BOD of SMC has amended. Said resolution contained that
stockholders who are as well directors in another corporation engaging in the same
business with SMC are disqualified to be elected as director of SMC. Gokongwei argues
that prior to the questioned amendment, he had all the qualifications to be a director
of SMC. That as a stockholder, he had acquired inherent rights in stock ownership,
such as the rights to vote and to be voted upon in the election of directors and that in
amending the by-laws, the majority members of the BOD purposely provided for his
disqualification and deprived him of his vested right hence the said amended by-laws
are null and void. At that time, Gokongwei is a stockholder of SMC and president and
controlling shareholder of CFC-Robina, a corporation engaged in business competitive
to that of SMC. He also alleged that corporations have no inherent power to disqualify
a stockholder from being elected as a director and therefore, the questioned act is
ultra vires and void.
Issue: WON the corporations have no inherent power to disqualify a stockholder from
being elected as a director; WON stockholders have vested right to be elected as
directors
Held:
1) It is recognized by all authorities that every corporation has the inherent power
to adopt by-laws for its internal government and to regulate the conduct and

lOMoARcPSD|28917416
prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs.
At common law, the rule was ―that the power to make and adopt by laws was
inherent in every corporation as one of its necessary and inseparable legal incidents.
And it is settled throughout the US that in absence of positive legislative provisions
limiting it, every private corporation has the inherent power as one of its necessary
and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation.‖
In this jurisdiction, a corporation may prescribe in its by-laws, the qualifications,

duties and compensation of directors, officers and employees. This must necessarily
refer to a qualification in addition to that specified under the Corporation Law, that
every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director.
2) Stockholders have no vested right to be elected as directors. Any person who

buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly contracts
that the will of the majority shall govern in all matters within the limits of the
act o the incorporation and lawfully enacted by-laws and not forbidden by law.
To this extent, therefore, the stockholder may be considered to have parted with his
personal right or privilege to regulate the disposition of his property which he has
invested in the capital stock of the corporation, and surrendered it to the will of the
majority of his fellow incorporators. It cannot therefore be justly said that the
contract, express or implied, between the corporation and the stockholders is
infringed by any act of the former which is authorized by the majority. Pursuant to
the Corporation Law, any corporation may amend its articles of incorporation by a
vote or written assent of the stockholders representing at least 2/3 of the subscribed
capital stock of the corporation. If the amendment changes, diminishes or restricts
the rights of the existing shareholders then the dissenting minority has only one right,
to object thereto in writing and demand payment for his share. Under also the
Corporation Law, the owners of the majority of the subscribed capital may amend or
repeal any elected director, in the face of the fact that the law at the time such right
as stockholder was acquired contained the prescription that the corporate charter and
the by-law shall be subject to amendment, alteration and modification.
3) An amendment to the corporate by-law which renders a stockholder ineligible

to be director, if he be also director in a corporation whose business is in
competition with that of the other corporation is valid.
Corporations have the power to make by-laws declaring a person employed in the
service of a rival company to be ineligible for the corporation‘s BOD. An amendment

lOMoARcPSD|28917416
which renders ineligible or if elected, subjects to removal, a director if he be also a

director in a corporation whose business is in competition with or is antagonistic to
the other corporation is valid. This is based upon the principle that where the director
is so employed in the service of a rival company, he cannot serve both, but must
betray one or the other.
ISLAMIC DIRECTORATE v. CA
Islamic Directorate of the Philippines was created. Libyan government donated money
for IDP to buy land. Martial law was declared so the original members flew to Middle
East to escape political persecution. 2 Muslim groups- Abba and Carpizo group, sprung
alleging to be members of IDP. Election for BOT were held but SEC held the election
to be null and void. In effect, no members of the BOT were elected. Later, the
Carpizo group via a board resolution authorized the sale of their land to INC, the only
property of IDP. The original board of trustees of IDP now questioned the said sale
before the SEC. SEC: Declared the sale null and void. CA: Set aside the decision of the
SEC.
Held: The Deed of Absolute Sale executed by the fake Carpizo Board and INC was
intrinsically void ab initio.
The Tandang Sora property, it appears from the records, constitutes the only property
of IDP. Hence, its sale to a 3 rd party is a sale or disposition of all the corporate
property and assets of IDP falling squarely within the contemplation of the foregoing
section. For the sale to be valid, the majority vote of the legitimate Board of
Trustees, concurred in by the vote of at least 2/3 of the bonafide members of the
corporation should have been obtained. These twin requirements were not met as the
Carpizo group which voted to sell the Tandang Sora property was a fake BOT, and
those whose names and signatures were affixed by Carpizo group together with the
sham BR authorizing the negotiation for the sale were, from all indications, not bona
fide members of IDP as they were made to appear to be.
RAMIREZ v. ORIENTALIST
Orientalists Co. was engaged in the business of manufacturing and conducting a

theatre in Manila for the exhibition of films. On the other hand, J.F. Ramirez who is
based in Paris, was engaged in the production or distribution of cinematographic
material. In this enterprise, J.F. Ramirez, was represented in Manila by his son, Jose
Ramirez. Sometime in July 1913, negotiations begun between the 2 parties for the
purpose of placing the exclusive agency of Éclair Films and Milano Films in the hands
of Orientalist. Ramon J. Fernandez, one of the directors of Orientalist and its
treasurer, was chiefly active in this matter. Before the end of the July, Jose Ramirez
placed in the hands of Fernandez an offer stating in detail the terms upon which his
father would undertake to supply from Paris the aforesaid films. Accordingly,
Fernandez had an informal conference with all the members of the company‘s BOD
except one, with the approval of those with whom he had communicated. Then he

lOMoARcPSD|28917416
addressed 2 subsequent letters accepting the offer for the exclusive agency of Éclair
and Milano films.
In due time the films began to arrive in Manila, a draft for the cost and expenses
incident to each shipment being attached to the proper bill of lading. It appears that
Orientalist Company was without funds to meet these obligations and the first few
drafts were dealt with in the following manner: The drafts, upon presentment thru
the bank, were accepted in the name of Orientalist Company by its president B.
Hernandez and were taken by the latter with his own funds. As the drafts has thus
been paid by B. Hernandez, the films which had been procured by payment of said
drafts were treated by him as his own property and they in fact never came into the
actual possession of Orientalist, as owner at all, though it is true that Hernandez
rented the films to Orientalist and they were exhibited by in the Oriental theatre
under an arrangement which was made between him and the theatre‘s manager.
Later, several other remittances of films from Paris came. Like the same, all of the
drafts were drawn on Orientalist but was accepted by Hernandez except the last
which the latter accepted individually. The drafts when they fell due were not paid.
Ramirez instituted an action against Orientalist and Fernandez. TC: Declared
Orientalist as principal debtor and Fernandez is subsidiarily liable as guarantor. From
this judgment, both of the Orientalist and Fernandez appealed.
No sworn answer denying the genuineness and due execution of the contracts in
question or questioning the authority of Fernandez to bind Orientalist was filed in this
case, but evidence was admitted without objection from Ramirez tending to show
that Fernandez has no such authority. The evidence consisted of extracts from the
minutes of the proceedings of the company‘s stockholders, showing that the making
of this contract had been under consideration in both bodies and that the authority to
make the same had been withheld by the stockholders.
Issue:
1) Whether the admission resulting from the failure of Orientalist to deny the due
execution of the contracts under oath is binding upon it for all purposes of this
lawsuit or such failure should be considered a mere irregularity of procedure
which was waived when the evidence referred to was admitted without
objection from Ramirez.
2) Liability of Orientalist and Fernandez upon the letters of acceptance
Held: TC ruling affirmed.

lOMoARcPSD|28917416
I. Failure of Orientalist to make any issue in its answer with regard to the
authority of Fernandez to bind it, and particularly its failure to deny
specifically under oath the genuineness and due execution of the
contracts sued upon, have the effect of eliminating the question of his
authority from the case, considered as a matter of mere pleading.
II. SC considered the liability of Orientalist on the merits just as if that

liability had been properly put in issue by a specific answer under oath
denying the authority of Fernandez to bind it. It must be at the outset
premised that Fernandez, as treasurer, had no independent authority to
bind the company by signing its name to the letters in question. It is
declared under the Corporation Law that corporate powers shall be
exercised and all corporate business conducted by the BOD. And this
principle is recognized in the by-laws of the corporation in question
which contain a provision declaring that the power to make contracts
shall be vested in the BOD. However, the fact that the power to make
corporate contracts is thus vested in the BOD, does not signify that a
formal vote of the board must always be taken before contractual
liability can be fixed upon a corporation for the board can create
liability like an individual by other means than a formal expression of its
will.
In the case at bar, it appears on evidence that on the date upon which the letter
accepting the offer of Éclair films was dispatched, the BOD of the Orientalist
convened in a special session in the office of Fernandez at the request of the latter.
Present there were 4 members, including the president, who under the by-laws is
authorized to enter into contracts. All signified their consent to the making of the
contracts. It thus appears that the BOD, before the financial inability of the
corporation to proceed with the project was revealed, had already recognized the
contracts as being in existence and had proceeded to take the necessary steps to
utilize the films.
BOARD OF LIQUIDATORS v. KALAW
NACOCO is a non-profit governmental organization which is engaged in the buying,

selling or bartering of coconut, copra, dessicated coconut, as well as their by-
products or to act as agent or broker of producers, dealers or merchants thereof.
After the passage of RA5, NACOCO embarked on copra trading activities. Several
contracts were entered into by the General Manager and Board Chairman Maximo
Kalaw. However, an unhappy chain of events conspired to deter NACOCO from
fulfilling these contracts. 4 devastating typhoons visited the Philippines so coconut
tree throughout the country suffered extensive damage thus copra production
decreased thereby increasing the prices of copra. Warehouses were also destroyed
and others (domino effect).

lOMoARcPSD|28917416
When it became clear that the contracts would be unprofitable, Kalaw submitted
them to the board for approval. Kalaw made a full disclosure of the situation,
apprised the Board of the impending heavy losses. However, no action was taken on
the contracts. Neither did the board vote thereon. Not long after, the board met
again. They unanimously approved the contracts entered into by Kalaw. But as
expected, NACOCO partially performed the contracts so the buyers threatened
damage suits against NACOCO. All were subjected to settlements. After the
settlements were made, NACOCO filed a case before the LC against Kalaw and the
other directors for the recovery of the total sum of settlements it paid to the buyers.
It charges Kalaw with negligence with breach of trust for having approved the new set
of contracts without approval of the BOD. LC dismissed the complaint.
Since an Executive Order was passed by President Roxas abolishing the BOD of the
various corporations. The powers, functions, and duties under existing laws of the
BOD of the various corporations were assumed and exercised by the Board of
Liquidators. Thus it was them who filed the present appeal to the SC.
The Board of Liquidators in imputing negligence to Kalaw rely on the by-laws of the
NACOCO which recites the duties of the general manager which is: To perform or
execute on behalf of the Corporation upon prior approval of the Board, all contracts
necessary and essential to the proper accomplishment for which the Corporation was
organized.
Issue: WON Kalaw was negligent for having entered into the questioned contracts
without prior approval of the BOD
Held: Kalaw not negligent.
A rule that has gained acceptance through the years is that a corporate officer
entrusted with the general management and control of its business has implied
authority to make any contract or do any other act which is necessary and appropriate
to the conduct of the ordinary business of the corporation. As such officer, he may
without special authority from the BOD perform all acts of an ordinary nature, which
by usage or necessity are incident to his office and may bind the corporation by
contracts in matters arising in the usual course of the business.
More so, long before the disputed contracts came into being, Kalaw contracted by
himself alone as general manager. In fact, because the BOD of NACOCO were so
pleased with him, he was given a special bonus in ―recognition of the signal
achievement rendered by him in putting the corporation‘s business on a self-sufficient
basis within a few months after assuming office despite numerous handicaps and
difficulties. These previous contracts, it should be stressed, were signed by Kalaw
without prior authority from the Board. Said contracts were known all along to the
board members. Nothing was said by them. The aforesaid contracts stand to prove

lOMoARcPSD|28917416
one thing: Obviously NACOCO board left the conclusion of the contracts to the sound
discretion of Kalaw.
In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts for and in NACOCO‘s behalf without prior
board approval. If the by-laws were to be literally followed, the board should give its
stamp of prior approval on all corporate contracts. But that board itself, by its acts
and through acquiescence practically laid aside the by-law requirement of prior
approval.
Lastly, the board undoubtedly ratified the contracts in dispute. They ratified the
contracts despite confirmation from Kalaw that said contracts would cause heavy
losses.
Indeed, if not for the typhoons, NACOCO could have, with ease, met its contractual
obligations.
ACUNA v. BATAC PRODUCERS
Emiliano Acuna and Batac Producers Cooperative Marketing Association, Inc. thru its
manager, Leon Verano entered into a tentative agreement whereby the Acuna would
give 20k to Batac Producers to be utilized by the latter as additional funds for its
Virginia tobacco buying

lOMoARcPSD|28917416
operations during the current redrying season. It also included that for Acuna shall be
constituted as Batac‘s representative in Manila, in charged for the handling and
facilitating of tobacco and for these services, Acuna shall receive a remuneration of
50 cents per kilo of tobacco. Said tentative agreement was favorably received by the
BOD of Batac Producers. Later, said BOD unanimously authorized Verano to execute
any contract on behalf of the corporation for the purpose of securing additional funds
for the corporation and secure the services of any person or entity to collect the
payments due to the corporation. Acuna alleges that he was made to believe that the
original agreement between him and Verano except for his remuneration is
acceptable to the corporation. Subsequently, the formal agreement was executed,
duly authorized by the corporation‘s BOD. According to Acuna, he was assured by the
BOD, upon his inquiry, that a formal approval of said agreement by the board was no
longer necessary, as it was a mere formality appended to its authorizing resolution
and all the members of the board had already agreed to the same. Acuna complied
with his obligations under the contract. But after doing so, the agreement was
disapproved by the BOD. Hence, Acuna filed a case against the corporation but CFI
dismissed the complaint on the ground that it states no cause of action.
Held:
A perusal of the complaint reveals that it contains sufficient allegations indicating

such approval or at least subsequent ratification. It must be noted that Acuna met
with each and all of the individual BOD members (who constituted the entire BOD)
and discussed with them extensively the tentative agreement and he was made to
understand that it was acceptable to them, except as to Acuna‘s remuneration. But
that matter was subsequently settled. More so, after the agreement was formally
executed, he was assured by said directors that there would be no need of formal
approval by the board. It should be noted that although the contract required such
approval it did not specify just in what manner the same should be given.
There is abundant authority in support of the proposition that ratification may be

express or implied and that implied may take diverse forms, such as by silence or
acquiescence, by acts showing approval or adoption of the contract, or by acceptance
and retention of benefits flowing therefrom.
PRICE v. MARTIN
Sulu Development Company held its stockholders meeting on Nov. 1925 where they
elected new officers of the corporation and at which the proposed mortgage of the
corporation in favor of another corporation was approved. One of the stockholders of
the corporation was Mr. Dean Worcester, in whose name the 97 shares of stocks at
that time stood upon the books of the corporation. But since he was already deceased
at that time, her 97 shares of stock were voted by his proxy, Mrs. Worcester. Here
now comes Martin with all the pertinent documents, claiming to be the owner of the
said shares. According to him, he delivered in trust the shares of stocks to the late

lOMoARcPSD|28917416
Dean Worcester to be held and used for his (Martin‘s) benefit. Copies of the
documents relied upon by Martin were made a part of the record but apparently no
action was taken by the stockholders or by the directors and at the meantime, Mrs.
Worcester‘s proxy apparently voted the stock without protest on the part of Martin or
any other stockholder. Martin filed a case before the CFI to question the voting made
by the proxy. TC: Held the voting of Mrs. Worcester legal.
Held: TC decision affirmed.
Martin contends that the transference of the books of the company of the 95 shares
of stocks in the name of Mrs. Worcester was fraudulent and illegal. The evidence of
record, however, under all the circumstances of the case, fails to demonstrate the
allegation of fraud. Mrs. Worcester acted in GF and in the honest belief that she had
not only a legal right but a duty to participate in the stockholders meeting.
Until challenged in a proper proceeding, a stockholder according to the books of the

company has a right to participate in that meeting and in the absence of fraud the
action of the stockholders‘ meeting cannot be collaterally attacked on account of
such participation. A person who has purchased stock and who desires to be
recognized as a stockholder, for the purpose of voting, must secure a standing by
having the transfer recorded upon the books. If the transfer is not duly made upon
request, he has, as remedy, to compel it to be made.
DELA RAMA v. MA-AO SUGAR CENTRAL CO. INC.
In 1950, Ma-ao Sugar Central Co. Inc thru its president, subscribed for 300k worth of
capital stock of Philippine Fiber Processing Co. 4 majority stockholders commenced a
representative suit against the corporation and 3 other directors saying that the
investments made by Ma-ao are unauthorized not having been approved by a board
resolution and no ratification from the stockholders. LC: enjoined Ma-ao from
investing with any other corporation whose purpose is not connected with the sugar
central business. But as to the investments made to Philippine Fiber Processing, the
LC ruled that since Philippine Fiber was engaged in the manufacture of sugar bags it
was perfectly legitimate for Ma-ao Sugar, a company engaged in the manufacturing of
sugar, to invest in it.
Held: Affirmed the ruling of the LC
If the investment is made in the corporation whose business is important to the

investing corporation and would aid in its purpose, to require authority of the
stockholders would be to unduly curtail the power of the BOD.
Under the law, if the investment by the corporation is necessary to accomplish its
primary purpose as stated in the AOI, ratification is not necessary. However,

lOMoARcPSD|28917416
ratification is necessary is investment is to accomplish or in pursuance to a secondary

purpose
GOKONGWEI v. CA
In another petition filed by Gokongwei before the SEC, it raised that SMC invested
corporate funds in Hongkong Brewery & Distellery, Ltd., a foreign corporation,
without prior authority of the stockholders thus violating the Corporation Law. SEC
however allowed the said investment made to Hongkong Brewery since the
stockholders ratified the same.
Held:
The Corporation Law allows a corporation to ‗invest its funds in any other corporation
or business or for any purpose other than the main purpose for which it was
organized‘ provided that its BOD has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least 2/3 of the voting
power. If the investment is made in pursuance of the corporate purpose, it does not
need the approval of the stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its incorporation that the
vote of approval of the stockholders holding shares entitling them to exercise at least
2/3 of the voting power is necessary.
As stated by SMC, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its AOI, which is to
manufacture and market beer. It appears that the original investment was made by
SMC when they purchased a beer brewery in Hongkong for the manufacture and
marketing of San Miguel beer thereat.
And assuming that the BOD of SMC had no authority to make the assailed investment,
there is no question that a corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its officers or other agents.
This is true because the questioned investment is neither contrary to law, morals,
public order nor public policy. It is a corporate transaction or contract which is within
the corporate powers, but which is defective from a purported failure to observe in
its execution the requirement of the law that the investment and its ratification by
said stockholders obliterates any defect which it may have had at the outset. Mere
ultra vires acts of those which are not illegal and void ab initio but are not merely
within the scope of the AOI, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
SMC submitted the assailed investment to the stockholders for ratification cannot be
construed as an admission that SMC had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for ratification of their
stockholders the acts of their directors, officers and managers.

lOMoARcPSD|28917416
LEE v. CA
A complaint for a sum of money was filed by International Corporate Bank against Lee
and the other directors of Alfa Integrated Textile Mills. Lee and the other directors in
turn filed a 3rd party complaint against ALFA. In the case, the TC issued an order
requiring the issuance of an alias summon to ALFA thru DBP after Lee informed the
court that the summons for ALFA have been erroneously served considering that the
management of ALFA has been transferred to DBP. In a manifestation, DBP informed
the court that it was not authorized to receive the summons for ALFA since DBP has
not taken over the said company which has a separate and distinct personality. In
view of this manifestation, the TC ordered DBP to serve summon to ALFA. DBP again
in a manifestation suggested that service of summons can be had to Lee and his
group, being directors of ALFA. Lee and his group filed for MR on the ground that they
were no longer officers of ALFA based on the VTA executed between all the
stockholders of ALFA and DBP hence it could no longer receive summons or any court
processes for or on behalf of ALFA. But TC upheld the validity of the service of
summons on ALFA thru Lee and the other directors. Lee and his group filed another
MR. TC reversed itself and held that Lee and his group were no longer corporate
officers of ALFA thus the service of summons on them for ALFA is not proper. CA
reversed the decision so Lee and his group appealed to the SC.
Lee and his group maintain that with the execution of the VTA between them and the
other stockholders of ALFA, as one party and the DBP as the other party, where they
assigned and transferred all their shares in ALFA to DBP as trustee, they can no longer
be considered directors of ALFA since under the corporation law, a director must in
his own right hold at least one share.
Issue: WON Lee and the other directors are no longer directors of ALFA due to the
execution of the VTA
Held: No longer directors.
Considering that the VTA between ALFA and the DBP transferred legal ownership of
the stock covered by the agreement to the DBP as trustee, the latter became the
stockholder of record with respect to the said shares of stocks. In the absence of a
showing that DBP had caused to be transferred in their names one share of stock for
the purpose of qualifying as directors of ALFA, Lee and his group can no longer be
deemed to have retained their status as officers of ALFA which was the case before
the execution of the VTA.
Not being directors of ALFA, service of summons upon them is not proper. It would
have been proper if made upon DBP since there appears to be no dispute from the
records that DBP has indeed taken over the full management and control of ALFA.

lOMoARcPSD|28917416
Notes:
VTA is an agreement in writing whereby one or more shareholders of a corporation

consent to transfer his or her shares to a trustee in order to vest in the latter voting
or other rights pertaining to said shares for a period of 5 years upon the fulfillment of
statutory conditions and such other terms and conditions specified in the agreement.
The 5 year-period may be extended in cases where the voting trust is executed
pursuant to a loan agreement whereby the period is made contingent upon full
payment of the loan.
Criteria to distinguish VTA from proxy and pooling agreements:

d) The voting of rights of the stock are separated from the other attributes of
ownership
e) The voting rights granted are intended to be irrevocable for a definite period
of time
f) The principal purpose of the grant of voting rights is to acquire voting control
of the corporation
NIDC v. AQUINO
Batjak Inc. is a corporation primarily engaged in the manufacture of coconut oil and
copra cake for export. Batjak‘s financial condition deteriorated to the point of
bankruptcy. As of that year, Batjaks‘s indebtedness to private banks and the PNB
amounted to 11.9 M. As security for payment of its obligations and advances against
shipments, Batjak mortgaged its 3 cocoprocessing oil mills to 3 banks. In need for
additional operating capital to place the 3 coco processing mills at their optimum
capacity and maximum efficiency and to settle, pay or otherwise liquidate pending
financial obligations with the different private banks, Batjak applied to PNB for
additional financial assistance. A financial agreement was concluded. Under said
agreement, NIDC (wholly-owned subsidiary of PNB) would invest in Batjak (in the
form of preferred shares of stocks convertible within 5 years to common stock) to
liquidate the latter‘s obligation with the 3 private banks and the balance of the
investment would be applied to Batjak‘s due account of 5M with PNB. The terms of
the FA were complied with by both parties. One of the terms of the FA mentioned of
an execution of a VTA in favor of NIDC by the stockholders representing 60% of its
outstanding paid-up and subscribed shares of Batjak. The VTA was for a period of 5
years and upon its expiration, was to be the subject of negotiation between Batjak
and PNB-NIDC.
Later however, forced by the insolvency of Batjak, PNB instituted a extrajudicial

foreclosure proceedings against the 2 oil mills of Batjak. The properties were sold to
PNB as highest bidder. Final certificates of sales were issued in favor of PNB after
Batjak failed to exercise its right to redeem the foreclosed properties within the
allowable 1year period of redemption.

lOMoARcPSD|28917416
Subsequently, PNB transferred the ownership of the 2 oil mills to NIDC. Thereafter,
NIDC similarly foreclosed extrajudicially the last oil mill of Batjak. It was sold to NIDC
as the highest bidder. After Batjak failed to redeem the property, NIDC consolidated
its ownership of the oil mill.
3 years thereafter, Batjak thru their counsel wrote NIDC inquiring if the same is still
interested in negotiating with the renewal of the VTA. No reply was received by
Batjak so counsel again wrote to NIDC that they are now assuming that NIDC was no
longer interested with the renewal of said VTA and in view thereof, requested for the
turnover and transfer of all Batjak‘s assets, properties, management and operations.
NIDC replied confirming the fact that it had no intention whatsoever to comply with
the demands of Batjak. Batjak then filed before the CFI a special civil action for
mandamus with PI against NIDC to enjoin the latter from disposing other equipment
in Batjak‘s factory. Before the court could act on the motion to grant PI, a petition
for receivership as alternative for the writ of PI was filed by Batjak. NIDC filed a MD
which the CFI denied. CFI also appointed 3 receivers. NIDC appealed.
Batjak claims its right of possession of the 3 oil mills from the VTA. According to
Batjak, under the agreement, NIDC was constituted as trustee for the assets,
management and operations of Batjak. And that due to the expiration of the VTA,
NIDC should now turn over the assets of the 3 oil mills.
Held: Reversed decision of the CFI; MD granted and petition for receivership denied.
It is true that under the VTA, NIDC was constituted as trustee only of the voting rights
of 60% of the paid-up and outstanding shares of stock in Batjak. It is provided in the
VTA that upon the termination of the agreement, NIDC was to return the certificates
of stocks belonging to Batjak‘s stockholders which were delivered in the first place to
NIDC under the terms of the VTA. HOWEVER, the acquisition in the present case by
PNB-NIDC of the properties in question was not made or effected under the capacity
of a trustee but as a foreclosing creditor for the purpose of receiving on a just and
valid obligation of the bank.
More so, the prevention of imminent danger is the guiding principle that governs
courts in the matter of appointing receivers. In the case at bar, Batjak in its petition
for receivership failed to present any evidence to establish the requisite condition
that the property is in danger of being lost, removed, or materially injured unless a
receiver is appointed to guard and preserve it.
PHILPOTTS v. PHIL MANUFACTURING
W.G. Philpotts, a stockholder in the Phil. Manufacturing Co. filed a case before the
CFI which seeks to obtain a writ of mandamus to compel the corporation and its
officers to permit him in person or by some authorized agent or attorney to inspect
and examine the records of the business transacted by the company within a certain

lOMoARcPSD|28917416
period of time. The defendants interposed a demurrer which the court granted. W.G.
Philpotts desires to exercise the right to inspect the books of the corporation through
an agent or an attorney. However, the corporation maintains that the right of
examination in the stockholder granted under the Corporation Law must be exercised
in person.
Held: Demurrer is overruled. Writ of mandamus issued
The right of inspection given to a stockholder under the Corporation Law can be
exercised either by himself or by any proper representative or attorney in fact and
either or without the attendance of the stockholder. This is in conformity with the
general rule that what a man may do in person he may do through another. There is
nothing in the stature that would justify the qualification of the right in the manner
suggested by the defendants. The right may be regarded as person, in the sense that
only the stockholder may enjoy it, but the inspection and examination may be made
by another. Otherwise, it would be unavailing in many instances.
PARDO v. HERCULES
Antonio Pardo, a stockholder of Hercules Lumber Company Inc. seeks by this original
proceeding in the SC to obtain a writ of mandamus to compel the officers of the
corporation (corporate secretary) to permit him and his duly authorized agent and
representative to examine the records and business transactions of said company.
The corporate secretary has refused to permit Pardo or his agent to inspect the
records of the company at times desired by Pardo because under a board resolution,
the right of examination can be exercised from the 15 th to the 25th of March on that
year. The officers of the corporation maintained that this resolution of the board
constitutes a lawful restriction on the right conferred by the statute and it is insisted
that as Pardo has not availed himself of the permission to inspect the books and
transactions of the company within the 10 days thus defined, his right to inspection
and examination is lost, at least for that year.
Held: Mandamus will lie
The general right given by the statute may not be lawfully abridged to the extent
attempted in the resolution. It may be admitted that the officials in charge of a
corporation may deny inspection when sought at unusual hours or under improper
conditions. But neither the executive officers nor the BOD have the power to deprive
a stockholder the right of inspection altogether. A by-law unduly restricting the right
of inspection is undoubtedly invalid. It will be noted that our statute declares that
the right of inspection can be exercised at a reasonable hour. This means at
reasonable hours on business days throughout the year and not merely during some
arbitrary period of a few days chosen by the directors.

lOMoARcPSD|28917416
VERAGUTH v. ISABELA SUGAR
An extraordinary meeting of the directors of Isabela Sugar was held. A notice of

meeting was sent to Eugenio Veraguth thru registered mail but the notice was not
received by Veraguth because the letter was sent to his address in Isabela when his
post-office address is at Negros Occidental, and this fact was known by the officers of
the corporation because previous notices of meetings were sent to Negros Occidental.
As a result, Veraguth received the notice several days after the meeting was had. For
this reason, Veraguth telegraphed the corporate secretary asking the latter to
forward in shortest possible time a certified copy of the resolution of the BOD passed
on said meeting. To this the secretary made answer by letter stating that since the
minutes of the meeting in question had not been signed by the directors present, a
certified copy could not be furnished and that as to other proceedings of the
stockholders, a request should be made to the president. It further appears that the
BOD on that meeting adopted a resolution providing for inspection of books and the
taking of copies by authority of the president previously obtained in each case.
Veraguth filed for special action for mandamus to compel the officers of the
corporation to give him a copy or record of the said board resolution as this right to
inspect is well vested upon him as director of the corporation.
Held: Mandamus will not lie
As a general rule, directors of a corporation have the unqualified right to inspect the
books and records of the corporation at all reasonable times. (Incident thereto, a
director or stockholder can of course make copies of the books of the corporation but
cannot without an order of a court, be permitted to take the books from the office of
the corporation.) However, the SC held that there was nothing improper occurred
when the corporate secretary declined to furnish certified copies of minutes which
had not been approved by the BOD. And that while so much of the last resolution of
the BOD as provides fro the prior approval of the president of the corporation before
the books of the corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution so far as we are aware, had not been
enforced to the detriment of anyone.
Dissenting: In any event the directors had adopted the resolution and whether it was
signed or not, Veraguth as a director of the corporation had a right to see.
GONZALES v. PNB
Ramon A. Gonzales, purchaser and owner of one share of stock of PNB filed a special
civil action for mandamus before the CFI against PNB praying that the latter be
ordered to allow him to look into the books and records of the banking corporation. It
was found that Gonzales‘ motive in filing the mandamus action is to be able to satisfy
himself as to the truth of the published reports regarding certain transactions
entered into by the bank and to inquire the validity of the certain transactions

lOMoARcPSD|28917416
entered into by PNB. The CFI denied his prayer on the grounds that the right to
inspection granted under the Corporation Law is not absolute, but is limited to
purposes reasonably related to the interest of the stockholder, must be asked for in
GF for a specific and honest purpose and not gratify curiosity or for speculative or
vicious purposes. And that such examination would violate the confidentiality of the
records of the bank as provided in its charter.
Held:
Although Gonzales has claimed that he has justifiable motives in seeking the
inspection of the books of the bank, he has not set forth the reasons and purposes for
which he desires such inspection, except to satisfy himself as to the truth of the
published reports regarding certain transactions entered into by the bank and to
inquire in their validity. The circumstances under which he acquired one share of
stock in the bank purposely to exercise the right of inspection do not argue in favor of
his GF and proper motivation. Admittedly, he sought to be a stockholder in order to
pry into the transactions entered into by the bank even before he became a
stockholder. His obvious purpose was to arm himself with materials he can use
against the bank for acts done by the latter when he was a total stranger to the
same. He could have been impelled by a laudable sense of civic consciousness, but it
could not be said that his purpose is germane to his interest as a stockholder.
More so, PNB is not an ordinary corporation. Having a charter of its own, it is not
governed as a rule by the Corporation Code. To allow Gonzales to look into the
records of PNB, that inspection sought to be exercised by him would be violative of
PNB‘s charter especially as to the provisions which relates to the confidentiality of
information regarding PNB‘s affairs.
RICHARDSON v. ARIZONA FUELS
Plaintiffs Richardson and his group are stockholders of Major Oil Corporation.
Defendants are
Arizona Fuels, Eugene Dalton and Deanna Dalton. Eugene Dalton is alleged to be a
controlling stockholder and director of Arizona and Major. Arizona Fuels alleges to be
the legal or beneficial owner of 47% of the issued and outstanding shares of stocks of
Major. The amended complaint filed with the district court of Salt Lake City by the
plaintiffs described the action filed therein as one brought as a class action. Plaintiffs
in the district court moved for an order certifying the said suit as a class action and
for the appointment of a receiver for Major. Both motions were granted by the
district court. Arizona Fuels attack the said orders.
The amended complaint states 12 causes of action, the first 8 of which allege some
fraudulent appropriation of or scheme to appropriate Major‘s assets by defendants.
These causes of action seek to require the defendants to disgorge and return to Major
the assets wrongfully obtained. Of the remaining 4 causes, 3 seek compensatory or

lOMoARcPSD|28917416
punitive damages for injury attributable to alleged breaches of fiduciary duty implicit
in the fraudulent acts enumerated in the first 8 causes. The final cause of action
seeks appointment of a receiver.
There is no that the first of the 8 causes of action allege injury to the corporation
only. The injury alleged can be asserted by plaintiffs only derivatively as stockholders
on behalf of the corporation. This leaves the 9th, 10th, and 11th causes of action to be
analyzed to determine if they state claims which may be pursued by the stockholders
as a class to redress injuries to the stockholders as individuals.
Issue: WON the district court erred in certifying the suit as a class action
Held: Reversed the decision of the district court
The 9th cause of action alleges initially that the defendants breached their fiduciary
duties to Major Oil and its stockholders. As a general rule, directors and other officers
of a corporation stand in a fiduciary to the corporation. But while the statement is
made that directors and officers stand in like relation to stockholders of the
corporation, it is clear that the relation is to stockholders collectively. The
distinction between a fiduciary duty owed to the corporation as a whole as opposed
to the stockholders collectively does not appear to be one in substance in this case.
Although plaintiffs frames this claim, as one belonging to the shareholders, the claim
for relief belongs to the corporation.
The 10th cause of action alleges that the defendants defrauded the stockholders of
Major. The fraud is premised on defendants‘ fiduciary duty owed to the shareholders
of the corporation. However, in nor regard can the 10 th cause of action be interpreted
as stating a claim belonging to the stockholders individually and therefore that claim
for relief will not support a class action.
The 11th cause of action alleges the possibility of other conversion of Major‘s assets
and alleges that defendants should be required to account to the stockholders for all
the assets of Major and disgorge themselves of any assets so converted. This claim
also clearly belongs to the corporation.
The class action device, if used inappropriately and in lieu of derivative action is
likely to result in grave injustices, not the least of which is the diversion of assets
recovered in a lawsuit from creditors of a corporation to stockholders, thereby
reversing long established substantive rules of law as to the relative priorities of the
claims of creditors and stockholders to the assets of an insolvent corporation.
Notes:

lOMoARcPSD|28917416
A derivative action must necessarily based on a claim for relief which is owned by the
stockholders‘ corporation. Indeed, a prerequisite for filing a derivative action is the
failure of the corporation to initiate the action in its own name. The stockholder, as a
nominal party, has no right, title or interest whatsoever in the claim itself- whether
the action is brought by the corporation or by the stockholder in behalf of the
corporation.
A class action on the other hand is a predicated ownership of the claim for relief sued
upon in the representative of the class and all other class members in their capacity
as individuals. Shareholders of the corporation may of course have claims for relief
directly against their corporation because the corporation itself has violated rights
possessed by the shareholders, and a class action would be an appropriate means for
enforcing their claims. A recovery in a class action is a recovery which belongs
directly to the shareholders. However, in a derivative action, the plaintiff
shareholder recovers nothing and the judgment runs in favor of the corporation.
PASCUAL v. DEL SAZ OROSCO
This is an appeal by Pascual, a stockholder of Banco Espanol-Filipino, from a

judgment of the LC sustaining a demurrer to the first and second causes of action in
its amended complaint against said banking corporation. It is alleged in such
complaint that during the years 1903, 1904, 1905, and 1907, defendants (constitute
the majority of the present BOD of the bank) without the knowledge, consent or
acquiescence of the stockholders, deducted their respective compensation from the
gross income instead of getting it from the net profits of the bank thereby defrauding
the bank and the stockholders. Despite demands defendants refused to refund to the
bank the sums so misappropriated or any part thereof. Noteworthy to remember is
that Pascual only become a stockholder on Nov. 13, 1903.
The action was brought by Pascual, in his own right as a stockholder of the bank, for
the benefit of the bank, and all the other stockholders.
Held: Pascual sues on behalf of the corporation which even though nominally a
defendant is to all intents and purposes the real plaintiff in this case. It affirmatively
appears from the complaint that Pascual was not a stockholder during any of the time
in question in this second cause of action. It is self-evident that Pascual in the case at
bar was not, before he acquired in September 1903, the shares which he owns now,
injured or affected in any manner by the transactions set forth in the second cause of
action. His vendor could have complained of these transactions, but he did not
choose to do so. The discretion whether to sue to set them aside, or to acquiesce in
and agree to them, is incapable of transfer. If the Pascual himself had been injured
by the acts of defendant‘s predecessors that is another matter. He ought to take
things as he found them when he voluntarily acquired his ten shares. If he was
defrauded in the purchase of these shares he should sue his vendor.

lOMoARcPSD|28917416
It is a settled rule that if the party himself, who is the victim of the fraud or usury,
chooses to waive his remedy and release the party, it does not belong to a
subsequent purchaser under him to recall and assume the remedy for him.
A stockholder in a corporation who was not such at the time of the transactions
complained of, of whose shares, had not devolved upon him since by operation of
law, cannot maintain suits of this character, unless such transactions continue and
are injuries to the stockholder, or affect him especially and specifically in some other
way.
Note: In derivative suits, the corporation itself and not shareholder is the RPI.
EVANGELISTA v. SANTOS
This is an action by the minority stockholders of a corporation against its principal

officer for damages resulting from him mismanagement of its affairs and misuse of its
assets.
The complaint alleges that are minority stockholders of Vitali Lumber Company Inc.,
a corporation organized for the exploitation of a lumber concession. Defendant is the
president, manager and treasurer of the corporation. It is alleged that said defendant
in such triple capacity, through fault, neglect and abandonment allowed its lumber
concession to lapse and its properties and assets to disappear, thus causing the
complete ruin of the corporation and total depreciation of its stocks. The complaint
prays that the defendant make good the losses occasioned by his mismanagement and
pay to them the value of their respective participation in the corporate assets on the
basis of their respective holdings.
After hearing, the LC rendered its order granting the motion for dismissal upon the 2
grounds alleged by defendant to wit, (a) improper venue and (b) questionable right of
the plaintiffs to bring this action for their benefit. Reconsideration of this order
having denied, plaintiffs appealed to the SC.
Held:
The complaint shows that the action is for damages resulting from mismanagement of
the affairs and assets of the corporation by its principal officer, it being alleged that
defendant‘s maladministration has brought about the ruin of the corporation and the
consequent loss of its stocks. The injury complained of is thus primarily to the
corporation so that the suit for damages claimed should be by the corporation rather
than by the stockholders. The stockholders may not directly claim those damages for
themselves for that would result in the appropriation by and the distribution among
them of part of the corporate assets before the dissolution of the corporation and the
liquidation of its debts and liabilities, something which cannot be legally done under
the Corporation Law.

lOMoARcPSD|28917416
But while it is to the corporation that the action should pertain in cases of this
nature, however, if the officers of the corporation who are the ones called upon to
protect their rights, refuse to sue or where a demand upon them to file the necessary
suit would be futile because they are the very ones to be sued or because they hold
the controlling interest in the corporation, there in that case any one of the
stockholders is allowed to bring suit. But in that case, the corporation itself and not
the plaintiff stockholder is the RPI, so that such damages as may be recovered shall
pertain to the corporation. In other words, it is a derivative suit brought by a
stockholder as the nominal party plaintiff for the benefit of the corporation, which is
the RPI.
In the present case, the plaintiff stockholders have brought the action not for the
benefit of the corporation but for their own benefit, since they ask that the
defendant make good the losses occasioned by his mismanagement and pay to them
the value of their respective participation in the corporate assets on the basis of their
respective holdings. Clearly, this cannot be done until all corporate debts, if there be
any, are paid and the existence of the corporation terminated by the limitation of its
charter or by lawful dissolution in view of the provisions of the Corporation Law. It
results that plaintiffs‘complaint shows no cause of action in their favor so that the LC
did not err in dismissing the complaint on that ground.
While plaintiffs asks for a remedy to which they are not entitled unless the
requirement of the Corporation Law be first complied with, SC noted that the action
stated in the complaint is susceptible of being converted into a derivative suit for the
benefit of the corporation by a mere change in the prayer. Such amendment,
however is not possible already since the SC upheld the finding of the LC that the
complaint has been filed in the wrong court, so that the same has to be dismissed if
that will be the case.
REPUBLIC BANK v. CUADERNO
Direct appeal from an order of the CFI dismissing Republic Bank‘s complaint on the
ground of failure to state cause of action. In the CFI, Damaso Perez, a stockholder of
Republic Bank, instituted a derivative suit for and in behalf of said bank against
Miguel Cuaderno (CB Governor), Bienvenido Dizon, Monetary Board of CB, Pablo
Roman (chairman of the BOD of Republic Bank and Executive Loan Committee) and
the other BOD members. For a cause of action, Perez alleged that he had complained
to the Monetary Board of the CB about certain frauds allegedly committed by Roman
in grave abuse of his fiduciary duty and taking advantage of his said positions and in
connivance with the other officials of the bank. Roman, primarily was accused to
have fraudulently granted or caused to be granted loans to fictitious and non-existing
persons and to their close friends, relatives and/or employees, who were in reality
their dummies, on the basis of fictitious and inflated values of real estate properties.
When investigated, other similar frauds were subsequently discovered. But before the

lOMoARcPSD|28917416
criminal case is filed, Roman hired the services of Cuaderno as technical consultant
and selected Dizon as chairman of the BOD with the consent of the other BOD
members. The complaint therefore prayed that a writ of PI against the Monetary
Board to prevent its confirmation of the appointments of Cuaderno and Dizon and
against Roman for appointing or selecting the officers or directors of the bank and
against the recognition of such appointees until final determination. Defendants filed
a MD which the court granted. Perez thereupon appealed to the SC.
Held: The Court held that such a suit need not be authorized by the corporation
where its objective is to nullify the action taken by its manager and the BOD, in
which case any demand for intra-corporate remedy would be futile.
A stockholder in a banking corporation has a right to maintain a suit for and on behalf
of the corporation, but the extent of such right depends upon when and for what
purpose he acquired the shares of stock of which he is the owner.
The complaint expressly pleads that the appointment of Cuaderno as technical

consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic
Bank, were made only to shield Pablo Roman from criminal prosecution and not to
further the interests of the Bank, and avers that both men are Roman's alter egos.
There is no denying that the facts thus pleaded in the complaint constitute a cause of
action for the bank: if the questioned appointments were made solely to protect
Roman from criminal prosecution, by a Board composed by Roman's creatures and
nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an
unlawful wastage or diversion of corporate funds, since the Republic Bank would have
no interest in shielding Roman, and the directors in approving the appointments
would be committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid
out for the purpose, as prayed for in the complaint in this case
IV. FUNDAMENTAL CHANGES
a) CHARTER AMENDMENTS
a. Articles of Incorporation
Amendment of Articles of Incorporation (Sec. 16, Corporation Code)
Requisites (unless otherwise prescribed by this Code or by special law)

1. majority vote of the board of directors or trustees
2. and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or the vote
or written assent of two-thirds (2/3) of the members if it be a
non-stock corporation
3. without prejudice to the appraisal right of dissenting stockholders
in accordance with the provisions of this Code 4. amendment
must be for legitimate purposes

lOMoARcPSD|28917416
- The original and amended articles together shall contain

all provisions required by law to be set out in the articles
of incorporation.
- Such articles, as amended, shall be indicated by

underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees
stating the fact that said amendment or amendments have
been duly approved by the required vote of the
stockholders or members, shall be submitted to the
Securities and Exchange Commission.
The amendment shall take effect:

1. upon its approval by the Securities and Exchange
Commission
2. or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for
a cause not attributable to the corporation.
b. By Laws
Amendments to By-Laws (Sec. 48, Corporation Code)
Requisites:
1. Majority vote of the board of directors or trustees
2. Approval vote of the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members
of a non-stock corporation, at a regular or special meeting duly
called for the purpose, may amend or repeal any by-laws or adopt
new by-laws.
3. DELEGATION OF POWER. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a
nonstock corporation may delegate to the board of directors or
trustees the power to amend or repeal any by-laws or adopt new
by-laws
- Delegated power to amend or repeal any by-laws or adopt
new by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the
outstanding capital stock or a majority of the members in
non-stock corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws is adopted, such amendment

or new by-laws shall be attached to the original by-laws in the office of
the corporation, and a copy thereof, duly certified under oath by the

lOMoARcPSD|28917416
corporate secretary and a majority of the directors or trustees, shall be

filed with the Securities and Exchange Commission, the same to be
attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance
by the Securities and Exchange Commission of a certification that the
same are not inconsistent with this Code.
b) COMBINATIONS
a. Concept of Merger and Consolidation
- Consolidation – union of two or more existing corporations to

form a new corporation called the consolidated corporation
o It is the combination by agreement between 2 or more
corporations by which their rights, franchises, privileges
and properties are united and become those of a single,
new corporation, composed generally, although not
necessarily, of the stockholders of the original corporations
o In consolidation, all the constituent corporations are
dissolved and absorbed by the new consolidated enterprise
- Merger – union whereby one or more existing corporations are
absorbed by another corporation which survives and continues
the combined business o In merger, all constituent corporations,
except the surviving corporation, are dissolved.
Two or more corporations may merge into a single corporation

which shall be one of the constituent corporations or may
consolidate into a new single corporation which shall be the
consolidated corporation (Sec. 76, Corporation Code)
b. Procedure
- Plan or Merger or Consolidation (Sec. 76, Corporation Code)
The board of directors or trustees of each corporation, party

to the merger or consolidation, shall approve a plan of merger
or consolidation setting forth the following:
1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
2. The terms of the merger or consolidation and the mode
of carrying the same into effect;
3. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of
merger; and, with respect to the consolidated

lOMoARcPSD|28917416
corporation in case of consolidation, all the statements

required to be set forth in the articles of incorporation
for corporations organized under this Code; and
4. Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable.
- Stockholders’ or Members’ Approval (Sec.

77, Corporation Code)
1. Approval vote of the majority of each of
the board of directors or trustees of the
constituent corporations of the plan of
merger or consolidation
2. Plan of merger or consolidation shall be
submitted for approval by the
stockholders or members of each of such
corporations at separate corporate
meetings duly called for the purpose.
3. Notice of such meetings shall be given to
all stockholders or members of the
respective corporations, at least two (2)
weeks prior to the date of the meeting,
either personally or by registered mail.
- Said notice shall state the purpose of the
meeting and shall include a copy or a
summary of the plan of merger or
consolidation, as the case may be.
4. The affirmative vote of stockholders representing at
least twothirds (2/3) of the outstanding capital stock of
each corporation in case of stock corporations or at
least two-thirds (2/3) of the members in case of non-
stock corporations, shall be necessary for the approval
of such plan.
5. Any dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with this
Code
- However, if after the approval by the stockholders of
such plan, the board of directors should decide to
abandon the plan, the appraisal right shall be
extinguished.
6. Any amendment to the plan of merger or consolidation
may be made, provided such amendment is approved
by majority vote of the respective boards of directors
or trustees of all the constituent corporations and

lOMoARcPSD|28917416
ratified by the affirmative vote of stockholders

representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the
members of each of the constituent corporations.
- Such plan, together with any amendment, shall be
considered as the agreement of merger or
consolidation.
- Articles of Merger or Consolidation (Sec. 78,

Corporation Code) After the approval by the
stockholders or members as required by the
preceding section, articles of merger or articles of
consolidation shall be executed by each of the
constituent corporations, to be signed by the
president or vice-president and certified by the
secretary or assistant secretary of each corporation
setting forth:
1. The plan of the merger or the plan of
consolidation;
2. As to stock corporations, the number of shares
outstanding, or in case of non-stock corporations,
the number of members; and
3. As to each corporation, the number of shares or
members voting for and against such plan,
respectively.
- Approval by the SEC (Sec. 79, Corporation Code)

1. The articles of merger or of consolidation, signed and
certified as hereinabove required, shall be submitted to
the Securities and Exchange Commission in quadruplicate
for its approval
2. In the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust
companies, insurance companies, public utilities,
educational institutions and other special corporations
governed by special laws, the favorable recommendation
of the appropriate government agency shall first be
obtained.
3. Where the Commission is satisfied that the merger or
consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of
consolidation, as the case may be, at which time the
merger or consolidation shall be effective.

lOMoARcPSD|28917416
4. If, upon investigation, the Securities and Exchange

Commission has reason to believe that the proposed
merger or consolidation is contrary to or inconsistent with
the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity
to be heard. Written notice of the date, time and place of
said hearing shall be given to each constituent corporation
at least two (2) weeks before said hearing. The
Commission shall thereafter proceed as provided in this
Code.
c. Effects of Merger and Consolidation (Sec. 80, Corporation Code)

The merger or consolidation, as provided in the preceding sections shall
have the following effects:
1. The constituent corporations shall become a single
corporation which, in case of merger, shall be the surviving
corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations
shall cease, except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities and powers and shall
be subject to all the duties and liabilities of a corporation
organized under this Code;
4. The surviving or the consolidated corporation shall
thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all
receivables due on whatever account, including
subscriptions to shares and other choses in action, and all
and every other interest of, or belonging to, or due to each
constituent corporation, shall be taken and deemed to be
transferred to and vested in such surviving or consolidated
corporation without further act or deed; and
5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations
of each of the constituent corporations in the same
manner as if such surviving or consolidated corporation had
itself incurred such liabilities or obligations; and any claim,
action or proceeding pending by or against any of such
constituent corporations may be prosecuted by or against
the surviving or consolidated corporation, as the case may

lOMoARcPSD|28917416
be. Neither the rights of creditors nor any lien upon the
property of any of such constituent corporations shall be
impaired by such merger or consolidation.
c) DISSOLUTION
a. Dissolution (Sec. 117, Corporation Code) — A corporation formed or

organized under the provisions of this Code may be dissolved voluntarily
or involuntarily.
Dissolutionsignifies the extinguishment of its franchise and the termination of its

corporate existence for business purpose. The mere fact that the corporation has
ceased to do business does not necessarily constitute a dissolution, if it is still solvent
and has not gone into liquidation.
Liquidation – settlement of the affairs of a corporation consisting of adjusting of

debts and claims, that is, collecting all that is due to the corporation, the settlement
and adjustment of claims against it and the payment of its just debts.
Dissolution always precedes liquidation and there is no legal basis to proceed with
liquidation without the corporation first having been dissolved. This is in accordance
with the trust fund doctrine.
1. Voluntary
- No creditors are affected (Sec. 118)
In case dissolution of a corporation does not prejudice the rights of any
creditor having a claim against such corporation, then such dissolution may be
effected by:
1. Majority vote of the board of directors or trustees
2. Resolution duly adopted by the affirmative vote of the
stockholders owning at least two-thirds (2/3) of the outstanding
capital stock or of at least two-thirds (2/3) of the members at a
meeting to be held on the call of the directors or trustees
3. Notice to meeting
- Publication of notice of the time, place and object of the
meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said
corporation is located
- and if no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines
- Sending of such notice to each stockholder or member
either by registered mail or personal delivery at least
thirty (30) days prior to said meeting.

lOMoARcPSD|28917416
4. A copy of the resolution authorizing the dissolution shall be

certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation.
5. The Securities and Exchange Commission shall thereupon issue
the certificate of dissolution.
- Creditors are affected (Sec. 119)
Where the dissolution of a corporation may prejudice the rights of any creditor, the
following shall be done:
1. A petition for dissolution of a corporation shall be filed with the
- The petition shall be signed by a majority of its board of directors
or trustees or other officers having the management of its affairs
- verified by its president or secretary or one of its directors or
trustees
- and shall set forth all claims and demands against it
- and that its dissolution was resolved upon by the affirmative vote
of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the
members at a meeting of its stockholders or members called for
that purpose.
2. If the petition is sufficient in form and substance, the Commission, by
an order reciting the purpose of the petition, shall fix a date on or
before which objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60) days after
the entry of the order.
- Before such date, a copy of the order shall be published at least
once a week for three (3) consecutive weeks in a newspaper of
general circulation published in the municipality or city where
the principal office of the corporation is situated,
- or if there be no such newspaper, then in a newspaper of general
circulation in the Philippines
- and a similar copy shall be posted for three (3) consecutive weeks
in three (3) public places in such municipality or city
2. Upon five (5) days notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall
proceed to hear the petition and try any issue made by the objections
filed;
3. and if no such objection is sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving the corporation
and directing such disposition of its assets as justice requires, and may

lOMoARcPSD|28917416
appoint a receiver to collect such assets and pay the debts of the
corporation.
2. Involuntary Dissolution (Sec. 121)- A corporation may be

dissolved by the Securities and Exchange Commission upon
filing of a verified complaint and after proper notice and
hearing on grounds provided by existing laws, rules and
regulations.
QUO WARRANTO, RULE 66 of the Rules of Court
Section 1. Action by Government against individuals. An action for the usurpation of a

public office, position or franchise may be commenced by a verified petition brought
in the name of the Republic of the Philippines against:
a. A person who usurps, intrudes into, or unlawfully holds or exercises a
public office, position or franchise;
b. A public officer who does or suffers an act which, by the provision of
law, constitutes a ground for the forfeiture of his office; or
c. An association which acts as a corporation within the Philippines without
being legally incorporated or without lawful authority so to act.
Sec. 2. When Solicitor General or public prosecutor must commence action. The
Solicitor General or a public prosecutor, when directed by the President of the
Philippines, or when upon complaint or otherwise he has good reason to believe that
any case specified in the preceding section can be established by proof, must
commence such action.
3. Expiration of Term (Sec. 122, Corporation Code)

Every corporation whose
- charter expires by its own limitation
- or is annulled by forfeiture or otherwise
- or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for
three (3) years after the time when it would have been so dissolved, for
the purpose of
 prosecuting and defending suits by or against it
 and enabling it to settle and close its affairs,
 to dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing the business for which it
was established.

lOMoARcPSD|28917416
- At any time during said three (3) years, said corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
- From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor
or stockholder or member who is unknown or cannot be found shall be escheated to
the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no

corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
4. Shortening of Corporate Term (Sec. 120)

a) A voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions of
this Code.
b) A copy of the amended articles of incorporation shall be submitted to the

Securities and Exchange Commission in accordance with this Code.
c) Upon approval of the amended articles of incorporation or the expiration of

the shortened term, as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the provisions of this
Code on liquidation.
5. Non-use of Corporate Charter and Continuous Inoperation

(Sec. 22, Corporation Code)
Rules:
a. If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2)
years from date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved.
b. However, if a corporation has commenced the transaction of its business
but subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of incorporation.

lOMoARcPSD|28917416
This provision shall not apply if the failure to organize, commence the
transaction of its business or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Republic v. Bisaya Land Transportaton Co.:
This case describes the solicitous attitude of the courts in remedying violations
committed by corporations before resorting to the extreme punishment of
forfeiture of franchise and dissolution
Bisaya Land Transportation was engaged in the business of land and water
transportation. The SolGen filed a petition for quo warranto for the dissolution of
Bisaya alleging that it had violated and offended the provisions of the Corporation
Law and other statutes of the Philippines by having committed acts amounting to a
forfeiture of its franchise, rights, and privileges and through various means misused
and abused the terms of its franchise, some of which were as follows:
1. falsely reconstituted its articles of incorporation by adding new purposes

not originally included
2. acquiring public lands and timber concessions
3. leasing of a pasture land
4. operating a general merchandise store which is neither necessary for nor
accomplishment of its principal purpose 5. engaging in mining operations
After a very careful and deliberate consideration of the evidence presented, the
Solgen came to the conclusion that the same did not warrant a quo warranto that
could justify to terminate corporate life and that the corporate acts or omissions
complained of had not resulted in substantial injury to the public. Hence, the Solgen
withdrew the quo warranto proceedings filed against Bisaya.
The issue before the SC was whether the Solgen is vested with full power to
discontinue such litigation if and in his opinion this could be done. The Court held
that the general rule is that the Solgen may do so with the approval of the court. The
purpose of the motion for the dismissal of the quo warranto is to take the State out
of an unnecessary court litigation.
According to the Court, dissolution is a serious remedy granted to the courts against
offending corporations. Courts, as a general rule, should not resort to dissolution
when the prejudice is not a prejudice against the public or not an outright abuse of,
or violation of the corporate charter.
Even if the prejudice is public in nature, the remedy is to enjoin or correct the
mistake. Only when it cannot be remedied anymore then that dissolution can come
in.

lOMoARcPSD|28917416
Government v. Phil. Sugar Estates Co.:
In this case, the SC refused to order right away the forfeiture of a franchise by a
corporation seriously offending its charter, but first directed the ousting of the
corporation from the unlawful act.
Philippine Sugar Estates Co. (PSEC) entered into a contract with the Tayabas Land
Company for the purpose of engaging in the business of purchasing lands along the
right of way of the Manila Railroad Company through the province of Tayabas with a
view of reselling the same to the Manila Railroad Company. PSEC by its charter was
authorized to engage in any mercantile or industrial enterprise. For a period of 18
months, it had misused its corporate authority, franchises and privileges and had
assumed privileges and franchises not granted. PSEC contended that the money given
to Tayabas Land Company was in a form of a loan.
The Court found that the purpose of the intervention of PSEC was for profit, to enrich
itself at the expense of the taxpayers. The franchise granted to PSEC should be
withdrawn and annulled and that it be disallowed to do and to continue doing
business in the Philippine Islands, unless it shall within a period of 6 months after
final decision, liquidate and dissolve and separate absolutely in every respect and in
all of its relations with Tayabas Land Company.
Republic v. Security Credit & Acceptance Corp.:
The Court directed immediately the forfeiture of the franchise of an offending

corporation since the damage to the public was imminent.
The Security Credit & Acceptance Corp. did not have authority to engage in banking
corporations as required by the General Banking Act. Security Credit nevertheless
received deposits from the public regularly. Such deposits were treated in the
Corporation‘s financial statements as conditional subscriptions to capital stock. Out
of the funds obtained from the public through the receipt of deposits or the sale of
securities, loans are made regularly to any person by Security Credit. The legal
counsel of the Central Bank of the Philippines rendered an opinion stating that
Security Credit was engaged innthe business of banking within the purview of RA 337.
A resolution was passed by the CB declaring that Security Credit should first comply
with the provisions of RA 337. Notwithstanding the resolution passed by the CB,
Security Credit still continued the functions and activities which had been declared to
constitute illegal banking operations.
The Court found the illegal transactions thus undertaken by Security Credit warranted
its dissolution. It was apparent from the fact proven that the misuse of the corporate
funds and franchise affects the essence of its business, that it is willful and has been
repeated 59,643 times, and that its continuance inflicts injury upon the public, owing
to the number of persons affected.

lOMoARcPSD|28917416
b. Liquidation of Corporate Assets (Sec. 122, Corporation Code)
Liquidation is the process by which all the assets of the corporation are converted in
liquid assets (cash) in order to pay for all claims of corporate creditors and the
remaining balance, if any, is to be distributed to the stockholders or members of the
corporation. A liquidation proceeding is a proceeding in rem so that all other
interested persons whether known to the parties or not may be bound by such
proceedings.
Every corporation whose

- charter expires by its own limitation
- or is annulled by forfeiture or otherwise
- or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for
three (3) years after the time when it would have been so dissolved, for
the purpose of
 prosecuting and defending suits by or against it
 and enabling it to settle and close its affairs,
 to dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing the business for which it
was established.
- At any time during said three (3) years, said corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
- From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate affairs, any asset distributable to any creditor
or stockholder or member who is unknown or cannot be found shall be escheated to
the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no

corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
Buenaflor v. Camarines Sur Industry: Camarines Sur Industry Corp is a former

grantee of a certificate of public convenience to operate an ice plant. However, its
corporate life expired. Despite expiration, Camarines Sur continued selling ice and

lOMoARcPSD|28917416
wanted to apply for a new certificated for the new Camarines Corporation. At this
point, Buenaflor also applied. Buenaflor claims it is more qualified to erect a 5-ton
ice plant. The Public Service Commission denied the application of Buenaflor claiming
Camarines Sur to be pioneer in the ice industry. Buenaflor questions the decision of
the Commission.
A corporate grantee of certificate of public convenience to operate an ice plant

cannot lawfully continue to sell ice after the expiration of its corporate life. And
neither can it apply for a new certificate for it is incapable of receiving a grant. At
the point of dissolution, the doctrines of corporation by estoppel or de facto
corporations are not made to apply to save the transaction. The general rule is that
there is no juridical personality after dissolution. If there is, it is only juridical
personality to serve but one purpose- for all transactions pertaining to liquidation.
Any matter entered into that is not for the purpose of liquidation will be void
transaction because of the non-existence of the corporate party.
National Abaca Corp. v. Pore: This case held that in the absence of statutory
provision to the contrary, pending actions by or against a corporation are abated
upon the expiration of the 3-year period allowed by law for the liquidation of its
affairs.
National Abaca filed for a collection suit against Apolonia Pore before the MTC. The
lower court on Nov. 18, 1953 ordered Pore to pay P272.49. National Abaca filed an
MR because what they are claiming is P1,213.64. The MR was denied. National Abaca
appealed to the CFI. Pore then filed MD upon the ground that National Abaca no
longer has legal capacity to sue it having been abolished by EO 372 (Nov. 24, 1950)
and created a Board of Liquidators which would settle National Abaca‘s affairs. The
MD was granted and the subsequent MR by National Abaca was as well denied. CA
certified the case to the SC.
The issue is WON an action commenced within 3 years after the abolition of National
Abaca as a corporation may be continued by the same after the expiration of said
period. The Court held that suits by or against a corporation abate when it ceases to
be an entity capable of suing or being sued but trustees to whom corporate assets
have been conveyed pursuant to the authority of Sec. 78 may sue and be sued as such
in all matters connected with liquidation.
The then Corporation Law contained no provision authorizing a corporation, after 3

years from the expiration of its lifetime, to continue in its corporate name, actions
instituted by it within said period of 3 years. The Court noted that it is precisely for
this reason that the reason that the Corporation Law also authorized the corporation,
―at any time during said 3 years…to convey all its property to trustees for the benefit
of its members, stockholders, creditors and others in interest‖ evidently for the
purpose among other, of enabling said trustees to prosecute and defend suits by or
against the corporation before the expiration of said period.

lOMoARcPSD|28917416
The complete loss of National Abaca‘s corporate existence after the expiration of the
period of 3 years for the settlement of its affairs is what impelled the President to
create a Board of Liquidators to continue the management of such matter as may
then be pending.
Tan Tiong Bio v. Commissioner:
This case would imply that even after the 3 –year period of liquidation, corporate
creditors can still pursue their claims against corporate assets against the officers
or stockholders who have taken over the properties of the corporation.
In this case, the Commissioner wrote the corporation that the investigations made by
the Bureau revealed that it was the corporation, not Dee Hong Lu, who was asking for
a refund, that had actually purchased the surplus goods from Foreign Liquidation
Commission and that the properties were invoiced in the name of Dee, in trust for the
corporation. The corporation was therefore assessed a deficiency sales tax by the
Collector. When the corporation appealed the assessment of the CTA, the Solgen
moved for the dismissal of the appeal on the ground that the corporation no longer
had the capacity to sue because the 3 year term of liquidation had expired.
The Court held that the State cannot insist on making tax assessment against a
corporation that no longer exists and then turn around and oppose the appeal
questioning the legality of the assessment precisely on the ground that the
corporation is non-existent and has no longer capacity to sue. The State cannot adopt
inconsistent stand and thereby deprive the officers and directors of a defunct
corporation of the remedy to question the validity and correctness of the assessment
for which, if sustained, they would be held personally liable as successors in interest
to the corporate property.
The Court observed that it may be true that in so far as the corporation is concerned,
it no longer exists and therefore no suits can be maintained for and against it. In
cases of taxes, the law specifically says that responsible corporate officers shall be
personally liable for deficiencies. When a corporation has distributed its properties,
those who have received the properties are in fact liable for corporate taxes. The
answer therefore as what remedy of the corporate assets have gone, wherever they
rested, be he a stockholder or a non-stockholder. The cause of action is to file an
action against that person who has control of the corporate assets.
Gelano v. Court of Appeals: Insular Sawmill had a corporate life of 50 years (Sept.
17,19451995). Gelano leased the paraphernal property of his wife to Insular and
received cash advances therefore. Gelano in turn made credit purchases of lumber
materials for Insular and did not pay. Collection suit was thus file by Insular thru
Atty. German Lee on May 29, 1959. In the meantime, Insular amended its AOI to
shorten its term to Dec. 31, 1960. The amendment was approved by the SEC but the

lOMoARcPSD|28917416
trial court was notified of such shortening of term so after four years from dissolution
of Insular, it rendered a decision in favor of Insular.
The issue brought before the SC is can the suit be abated absent a compliance of
Insular of the requisites of Sec. 78 which pertains to the giving of corporate
properties to a trustee or receiver.
It was held that a corporation with a pending court action may still continue
prosecuting or defending the same even after the lapse of the 3 years of liquidation,
and the counsel of record can be considered as the trustee in such case, with full
authority to continue prosecuting or defending the suit.
The term ―trustee‖ under the Corporation Code should be understood in its general
concept which would include the counsel to whom was entrusted in a pending case,
the prosecution of the suit filed by the corporation. The Court held:
The purpose in the transfer of the assets of the corporation to a trustee upon
its dissolution is more for the protection of its creditor and stockholders.
Debtors like the petitioners herein may not take advantage of the failure of
the corporation to transfer its assets to a trustee, assuming it has any to
transfer which petitioner has failed to show in the first place. To sustain
petitioner‘s contention would be to allow them to enrich themselves at the
expense of another, which all enlightened legal systems condemn.
Although Insular did not appoint any trustee of the corporation, yet the counsel who
prosecuted and defended the interest of the corporation in the instant case and who
in fact appeared in behalf of the corporation may be considered a trustee of the
corporation at least with respect to the matter in litigation only.
Said counsel had been handling the case when the same was pending before the TC
until it was appealed before the CA and finally to the SC, so the highest court
therefore held that there was substantial compliance of Sec. 78.
c. Methods of Liquidation
Board of Liquidators v. Kalaw: Pursuant to EO 272, NACOCO was abolished and

placed under the hands of the Board of Liquidators for the settlement of its affairs.
From the time NACOCO was placed under the hands of the liquidators, the 3 year
period provided by the Corporation Law has already lapse. The question is whether
NACOCO can still continue with the liquidation process even after the lapse of 3
years.

lOMoARcPSD|28917416
The Court held that the placing of the affairs and assets of the NACOCO in the hands
of a Board of Liquidators upon dissolution, did not terminate the power of the Board
to continue with the liquidation process of NACOCO even after the lapse of the 3 year
period, because the Board of Liquidators became the trustees; the Board took the
place of the corporation after the expiration of its affairs. Since no time limit has
been tacked to the existence of the Board and its functions of closing the affairs of
the corporation, it was held that the Board can still cases pending even after the
lapse of the 3 year period.
NACOCO has the government as its sole stockholder. The Board of Liquidators became
the trustee on behalf of the government by virtue of EO 272. EO 272 was an express
trust. The legal interest became vested in the trustee (Board of Liquidators).
However, the beneficial interest remained with the sole stockholder – the
government. At no time had the government withdrawn the property or the authority
to continue the present suit from the BOL.
China Banking Corp. v. Michelin & Cie: The appointment of a receiver by the court
to wind up the affairs of the corporation upon petition of voluntary dissolution does
not empower the court to hear and pass on the claims of the creditors of the
corporation at first hand. In such cases the receiver does not act as a receiver of an
insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of
a corporation consists of adjusting the debts and claims, that is, of collecting all that
is due the corporation, the settlement and adjustment of claims against it and the
payment of its just debts, all claims must be presented for allowance to the receiver
or trustee or other proper persons during the winding up proceedings which in this
jurisdiction would be within the three years provided by sections 77 and 78 of the
Corporation Law as the term for the corporate existence of the corporation, and if a
claim is disputed or unliquidated so that the receiver cannot safely allow the same, it
should be transferred to the proper court for trial and allowance, and the amount so
allowed then presented to the receiver or trustee for payment. The rulings of the
receiver on the validity of claims submitted are subject to review by the court
appointing such receiver though no appeal is taken to the latter's ruling and during
the winding up proceedings after dissolution, no creditor will be permitted by legal
process or otherwise to acquire priority, or to enforce his claim against the property
held for distribution as against the rights of other creditors.
A receiver in liquidation stands on a different legal basis from a trustee in liquidation.

A trusteeship is basically a contractual relationship governed by the Law on Trust and
generally centered upon the property, such that the trustee assumed naked title to
the property placed in trust. It is therefore a relationship that can be created by a
corporation through its BOD, without the need of judicial authorization. The trustee
in liquidation is not appointed by any court but he is actually a transferee who holds
legal title o the corporate assets and he is accountable under the terms of the trust
agreement. The trustee‘s fiduciary obligations are provided in the trust instrument
and by applicable legal provisions.

lOMoARcPSD|28917416
A receivership is created by means of judicial or quasi judicial appointment of the

receiver. The receiver is actually an officer of the court and must therefore be
accountable to the court.
Republic v. Marsman Development Company: Marsman Development Company was

dissolved and under liquidation. The liquidator holds the assets of the corporation for
the benefit of the corporation‘s creditors. The Republic demands payment of tax
assessment made within the 3 year period from the liquidator. However, the present
action filed by Republic was filed after the expiration of the 3 year period.
The Court held that Sec. 77 of the Corporation Law (now Sec. 122) provides for a 3
year period for the continuation of the corporate existence of the corporation for
purposes of liquidation, there is nothing in said provision which bars an action for the
recovery of debts of the corporation against the liquidator thereof, after the lapse of
the said 3 year period. The Court held: It is immaterial that the present action was
filed after the expiration of three years after April 23, 1954, for at the very least,
and assuming that judicial enforcement of taxes may not be initiated after said three
years despite the fact that the actual liquidation has not been terminated and the
one in charge thereof is still holding the assets of the corporation, obviously for the
benefit of all the creditors thereof, the assessment aforementioned, made within the
three years, definitely established the Government as a creditor of the corporation
for whom the liquidator is supposed to hold assets of the corporation.
Alhambra Cigar and Cigarette Manufacturing Corp v. SEC: It was held that a
corporation cannot extend its life by amendment of its AOI to be effected during the
3 year statutory period for liquidation when its original terms had already expired.
The 3 year statutory period for corporate liquidation is not for the purpose of
continuing the business for which is was established but strictly limited to liquidation.
The extension of corporate life of a corporation is deemed to constitute new business
and cannot be validly pursued during liquidation stage.
d. Rules for Non-stock corporations
Distribution of Assets in Non-Stock Corporations (Sec. 94)

1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made
therefor;
2. Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs by
reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but not held

lOMoARcPSD|28917416
upon a condition requiring return, transfer or conveyance by

reason of the dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations engaged
in activities in the Philippines substantially similar to those of
the dissolving corporation pursuant to a plan of distribution
adopted as provided in this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to
the extent that the articles of incorporation or the by-laws,
determine the distributive rights of members, or any class or
classes of members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not
organized for
profit, as may be specified in a plan of distribution as
provided in this Chapter.
Plan of Distribution of Assets (Sec. 95) — A plan providing for the

distribution of assets, not inconsistent with the provisions of this Title,
may be adopted by a non-stock corporation in the process of dissolution
in the following manner:
1. The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and directing
the submission thereof to a vote at a regular or special
meeting of members having voting rights.
2. Written notice setting forth the proposed plan of distribution
or a summary thereof; and the date, time and place of such
meeting shall be given to each member entitled to vote,
within the time and in the manner provided in this Code for
the giving of notice of meetings to members.
3. Such plan of distribution shall be adopted upon approval of at
least two-thirds (2/3) of the members having voting rights
present or represented by proxy at such meeting.
e. Right to Proportionate Share of Remaining Assets upon Dissolution
D. ROLE OF DIRECTORS AND OFFICERS
1. Functions of the Board of Directors

a. Role of Directors, officers and trustees
Generally

lOMoARcPSD|28917416
Benguet Electric v. NLRC: The general rule is that the members of the Board and
officers of a corporation who purport to act for and in behalf of the corporation, keep
within the lawful scope of their authority in so acting, and in GF, do not become
liable, whether civilly or otherwise, for the consequences of their acts. Those acts,
when they are such a nature and are done under such circumstances, are properly
attributed to the corporation alone and no personal liability is incurred by such
officers and Board members.
Banque Generale v. Walter Bull & Co.: Even in a situation where a contract was
entered into with the corporation and it specified that it was signed in consideration
of the President of the corporation and that if the latter should cease to be the
manager of the corporation that the contract would terminate, did not make the
President liable personally under the contract since the SC considered it as
―elementary that a corporation has a personality separate and distinct from the
persons composing it,‖ and nothing in the contract provided that the President would
be bound in his personal capacity.
Western Agro v. CA: A corporate officer cannot be held personally liable for a
corporate debt simply because he had executed the contract for and in behalf of the
corporation: when a corporate officer acts in behalf of a corporation pursuant to his
authority, is ―a corporate act for which only the corporation should be held liable for
any obligations arising from them.‖
2. Election and Tenure of Directors/Trustees

a. Qualifications of directors/trustees
Sec. 23, Corporation Code. The Board of Directors or Trustees. — Unless

otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors
are elected and qualified.
 Every director must own at least one (1) share of the capital
stock of the corporation of which he is a director, which share
shall stand in his name on the books of the corporation.
 Any director who ceases to be the owner of at least one (1) share
of the capital stock of the corporation of which he is a director
shall thereby cease to be a director.
 Trustees of non-stock corporations must be members thereof.
 A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.

lOMoARcPSD|28917416
Lee v. Court of Appeals: It was held in this case that under the old law, ―the
eligibility of a director, strictly speaking, cannot be adversely affected by the simple
act of such director being a party to a VTA inasmuch as he remains the owner
(although beneficial or equitable only) of the shares subject of the VTA pursuant to
which a transfer of the stockholder‘s shares in favor of the trustee is required…No
disqualification arises by virtue of the phrase ‗in his own right‘ provided under the
old Corporation Code.:
With the omission of the phrase ‗in his own right‘ under the present Code, the
election of trustees and other persons who are in fact not the beneficial owners of
the shares registered in their names on the books of the corporations becomes
formally legalized and therefore, is a clear indication that in order to be eligible as
director, what is material is the legal title to, not the beneficial ownership of , the
stock as appearing on the books of the corporation.
The disposition by a director of all of the shares in the corporation, through a VTA,
had the legal effect of him ceasing to be a director of the corporation and creating a
vacancy in the Board, since as a consequence of the execution of the VTA, such
director ceased to own at least one share standing in his name in the books of the
corporation.
Gokongwei v. SEC: A stockholder have no vested right to be elected to the BOD. Any
person who buys stock in a corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and that he impliedly contracts that the
will of the majority shall govern in all matters within the limits of the act o the
incorporation and lawfully enacted by-laws and not forbidden by law. To this extent,
therefore, the stockholder may be considered to have parted with his personal right
or privilege to regulate the disposition of his property which he has invested in the
capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. It cannot therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is infringed by any act of the
corporation which is authorized by a majority.
Detective & Protective Bureau v. Cloribel
Directors
Sec. 24, Corporation Code. Election of Directors or Trustees. —

1. At all elections of directors or trustees, there must be
present, either in person or by representative authorized
to act by written proxy, the owners of a majority of the

lOMoARcPSD|28917416
outstanding capital stock, or if there be no capital stock, a

majority of the members entitled to vote.
2. The election must be by ballot if requested by any voting
stockholder or member.
3. In stock corporations, every stockholder entitled to vote
shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in
the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time
of the election;
Said stockholder may vote such number of shares

 for as many persons as there are directors to be
elected
 or he may cumulate said shares and give one
candidate as many votes as the number of directors
to be elected multiplied by the number of his shares
shall equal
 or he may distribute them on the same principle
among as many candidates as he shall see fit
Provided, That the total number of votes cast by him shall not exceed
the number of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be elected
Provided, however, That no delinquent stock shall be voted.
For non-stock corporations:

Unless otherwise provided in the articles of incorporation or in the by-
laws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more
than one vote for one candidate.
4. Candidates receiving the highest number of votes shall be

declared elected.
5. Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time
but not sine die or indefinitely if, for any reason, no
election is held, or if there are not present or represented
by proxy, at the meeting, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a
majority of the member entitled to vote.

lOMoARcPSD|28917416
Sec. 26, Corporation Code.Report of Election of Directors, Trustees and

Officers.
 Within thirty (30) days after the election of the directors,

trustees and officers of the corporation, the secretary, or any
other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and
residences of the directors, trustees and officers elected.
 Should a director, trustee or officer die, resign or in any manner

cease to hold office, his heirs in case of his death, the secretary,
or any other officer of the corporation, or the director, trustee or
officer himself, shall immediately report such fact to the
Grace Christian HS v. CA: The SC has already held unlawful any attempt to grant to
any person a permanent seat in the Board of a corporation, thus: Any provision in the
by-laws or the practice of the corporation giving a stockholder a permanent seat in
the BOD of the corporation would be against the provisions of Sec. 28-29 of the
Corporation Code which requires member of the Board of corporations to be elected.
In addition, Sec. 23 of the Corporation Code which provides for the powers of the
BOD/BOT expressly requires them ―to be elected from among the holders of stock, or
when there is no stock, from among the members of the corporation.
Trustees
Sec.92, Corporation Code. Election and Term of Trustees. —
 Unless otherwise provided in the articles of incorporation or the
by-laws, the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be fixed in their
articles of incorporation or by-laws, shall, as soon as organized,
so classify themselves that the term of office of one-third (1/3)
of their number shall expire every year;
 and subsequent elections of trustees comprising one-third (1/3)
of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years.
 Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the
unexpired period.
Sec. 138, Corporation Code. Designation of Governing Boards. — The

provisions of specific provisions of this Code to the contrary
notwithstanding, non-stock or special corporations may, through their
articles of incorporation or their by-laws, designate their governing
boards by any name other than as board of trustees.

lOMoARcPSD|28917416
b. Cumulative Voting
1. Cole Formula
2. Glassner Formula
3. D‘Hondt Remainders Table
c. Vacancy in the Board
Sec. 29, Corporation Code. Vacancies in the Office of Director or

Trustee.
1. For any vacancy occurring in the board of directors or trustees

other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still
constituting a quorum
2. For vacancies due to removal or expiration of term, said
vacancies must be filled by the stockholders or members in a
regular or special meeting called for that purpose.
A director or trustee so elected to fill a vacancy shall be elected only

for the unexpired term of his predecessor in office.
d. Term of office; Hold-Over principle
Sec. 23, Corporation Code. The Board of Directors or Trustees. — Unless

otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors
are elected and qualified.
HOLD OVER PRINCIPLE: In the event no new board is elected and

qualified after the original one year term of the BOD/BOT, then under
this principle, the existing board, if still constituting a quorum is still a
legitimate board with full authority to bind the corporation.
Ponce v. Encarnacion: The Court held that where no meeting is called by the Board
for the stockholders to elect a new set of directors, one may be called by the
stockholders by a petition filed in the courts and the remedy for calling a
stockholders‘ meeting is similar to a preliminary injunction—it is possible for the
court to set it as an ex-parte hearing for granting it and there is no denial of due
process.

lOMoARcPSD|28917416
e. Removal of directors/trustees
Sec. 28, Corporation Code. Removal of Directors or Trustees. — Any

director or trustee of a corporation may be removed from office by
1. Vote of the stockholders holding or representing at least two-

thirds (2/3) of the outstanding capital stock or if the corporation
be a non-stock corporation, by a vote of at least two-thirds (2/3)
of the members entitled to vote
2. Such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose
 A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary on
order of the president or on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation,
on the written demand of a majority of the members entitled
to vote.
 Should the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may be
addressed directly to the stockholders or members by any
stockholder or member of the corporation signing the
demand.
3. Written notice and to stockholders or members of the corporation
of the intention to propose such removal at the meeting.
 Notice of the time and place of such meeting, as well as of
the intention to propose such removal, must be given by
publication or by written notice as prescribed in this Code.
4. The vacancy resulting from removal pursuant to this section may

be filled by election at the same meeting without further notice,
or at any regular or at any special meeting called for the purpose,
after giving notice as prescribed by this Code.
 Removal may be with or without cause
 That removal without cause may not be used to
deprive minority stockholders or members of the
right of representation to which they may be
entitled under Section 24 of this Code.
Roxas v. Dela Rosa: When the corporation Code says that a certain action has to be
done either by the Board of stockholders, and it says that notice has to be given, it is
more than directory, it is mandatory. So that in the removal of members of the

lOMoARcPSD|28917416
Board, it cannot be done in any meeting whether special or regular. It can only be
done in a meeting where previously notice has been given and such notice must
specify that one of the things that will be discussed is the removal of director. Even if
it is within the competence of those who attend the meetings, the resolution for the
removal of the director would not be voidable, it will be void, in spite of compliance
of the 2/3 required by law.
Rules in Removal of Directors

General Rule: Any directors may be removed from office by the 2/3 vote of the OCS
1. WITH CAUSE – Roxas case. Notice is necessary, as to time, place and
purpose. 2/3 vote is the minimum requirement to remove a director.
2. WITHOUT CAUSE – 2/3 vote of the OCS except if voted thru CUMULATIVE
VOTING in which case he may not be removed without cause even if there
is 2/3 vote.
3. Exercise of Directors’ Functions

a. Meetings of Directors/trustees
Sec. 49, Corporation Code. Kinds of Meetings. — Meetings of directors,

trustees, stockholders, or members may be regular or special.
Sec. 53, Corporation Code. Regular and Special Meetings of Directors or

Trustees.
1. Regular meetings of the board of directors or trustees of every

corporation shall be held monthly, unless the by-laws provide
otherwise.
2. Special meetings of the board of directors or trustees may be
held at any time upon the call of the president or as provided in
the by-laws.
Meetings of directors or trustees of corporations may be held anywhere

in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least one (1)
day prior to the scheduled meeting, unless otherwise provided by the
by-laws.
A director or trustee may waive this requirement, either expressly or

impliedly.
b. Compensation for directors/trustees
Sec. 30, Corporation Code. Compensation of Directors.

lOMoARcPSD|28917416
General Rule: directors shall not receive any compensation, as such

directors (they will only receive reasonable per diems)
Exceptions
1. When there is a any provision in the by-laws fixing their
compensation
2. Absent any provision, compensation (other than per diems) may
be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital
stock at a regular or special stockholders' meeting.
In no case shall the total yearly compensation of directors, as such

directors, exceed ten (10%) percent of the net income before income
tax of the corporation during the preceding year.
4. Officers
Sec. 25, Corporation Code. Corporate Officers, Quorum. —Immediately after their
election, the directors of a corporation must formally organize by the election of a:
1. President, who shall be a director
2. Treasurer who may or may not be a director
3. Secretary who shall be a resident and citizen of the Philippines
4. And such other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held concurrently by the same person, except
that no one shall act as president and secretary or as president and treasurer at the
same time.
The directors or trustees and officers to be elected shall perform the duties enjoined
on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate business
Important: And every decision of at least a majority of the directors or trustees

present at a meeting at which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the vote of a majority of all
the members of the board.
Thus:
1. In case of passing resolutions and corporate acts other than election of
officers, vote of at least majority of the directors/trustees present at the
meeting (there must be quorum) is enough to make such acts valid

lOMoARcPSD|28917416
2. In case of election of officers, vote of the majority of ALL the members of

the board is necessary
Directors or trustees cannot attend or vote by proxy at board meetings.
Ongkingco v. NLRC: It was held that the dismissal or non-appointment of a corporate

officer is clearly an intra-corporate matter and jurisdiction properly belonged to the
SEC (now RTC). Section 5(c) of PD 902-A expressly covers both election and
appointment of corporate directors, trustees, officers and managers, and that
jurisdiction pertains to the SEC (now RTC) even if the complaint by a corporate
officer includes money claims since such claims are actually part of the perquisites of
his position, and therefore interlinked with his relations with the corporations.
Tabang v. NLRC: The president, VP, secretary, treasurer are commonly regarded as
the principal of executive officers of a corporation, and modern corporation statutes
usually designate them as the officers of the corporation. However, the other officers
are sometimes created by the charter or by laws of the corporation, or the BOD may
be empowered under the by-laws of a corporation to create additional offices as may
be necessary.
Gurrea v. Lezama: It was held by the SC that the term ―corporate officer‖ refers
only to officers of a corporation who are given that character either by the then
Corporation Law or by the corporation‘s by-laws
PSBA v. Leano: The Court, in holding that the SEC (now the RTC) has jurisdiction over
the ouster of the Executive VP, took note that said position was provided for in the
corporate bylaws. However, in that same case, it was also held by Justice Melencio-
Herrera that: The matter of whom to elect is a prerogative that belongs to the Board,
and involves the exercise of deliberate choice and the faculty of discriminative
selection. Generally speaking, the relationship of a person to a corporation, whether
as officers or as agent or employee, is not determined by the nature of the services
performed, but by the incidents of the relationship as they actually exists.
The ponente cited the American case of Bruce v. Travelers Ins., Co. which reiterated
the doctrine in common law jurisdiction that the distinction between an agent or
employee and an officer is not determined by the nature of the work performed but
by the nature of the relationship of the particular individual to the corporation.
One distinction between officers and agents of employees of a corporation lies

in the manner of their creation. An Office is usually created by the charter of
by-laws of the corporation, while an agency or employment is created usually
by the officers. A further distinction may thus be drawn between an officer
and an employee of a private corporation in that the latter is subordinate to
the officers and under their control and discretion… it is clear that the two
terms officers and agents are by no means interchangeable.

lOMoARcPSD|28917416
Pearson & George, Inc. v. NLRC: Any question relating or incident to the election of
a new Board of Directors, the non-reelection of Llorente as Director, his loss of the
position of Managing Director, or the abolition of said office are intracorporate
matters. Disputes arising therefrom are intra-corporate disputes which, if unresolved
within the corporate structure of the corporation, may be resolved in an appropriate
action only the SEC (now the RTC) pursuant to its authority under PD 902-A.
Reahs Corporation v. NLRC: As a general rule established by legal fiction, the

corporation has a personality separate and distinct from its officers, stockholders and
members. Hence, officers of a corporation are not personally liable for their official
acts unless it is shown that they have exceeded their authority. This fictional veil,
however, can be pierced by the very same law which created it when "the notion of
the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for
the evasion of an existing obligation, and to confuse legitimate issues". Under the
Labor Code, for instance, when a corporation violates a provision declared to be
penal in nature, the penalty shall be imposed upon the guilty officer or officers of the
corporation.
At the very least, as what we held in Pabalan v. NLRC, 12 to justify solidary liability,
"there must be an allegation or showing that the officers of the corporation
deliberately or maliciously designed to evade the financial obligation of the
corporation to its employees", or a showing that the officers indiscriminately stopped
its business to perpetrate an illegal act, as a vehicle for the evasion of existing
obligations, in circumvention of statutes, and to confuse legitimate issues.
While there is no sufficient evidence to conclude that petitioners have

indiscriminately stopped the entity's business, at the same time, petitioners have
opted to abstain from presenting sufficient evidence to establish the serious and
adverse financial condition of the company.
This uncaring attitude on the part of the officers of Reah's gives credence to
the supposition that they simply ignored the side of the workers who, more or
less, were only demanding what is due them in accordance with law. In fine,
these officers were conscious that the corporation was violating labor standard
provisions but they did not act to correct these violations; instead, they
abruptly closed business. Neither did they offer separation pay to the
employees as they conveniently resorted to a lame excuse that they suffered
serious business losses, knowing fully well that they had no substantial proof in
their hands to prove such losses.
FROM THESE LINES OF CASES WE CAN INFER THAT WE CAN ONLY REGARD AS
OFFICER OF A CORPORATION THOSE WHO ARE GIVEN THE CHARACTER EITHER BY:
a) CORPORATION LAW OR
b) THE CORPORATION’S BY-LAWS

lOMoARcPSD|28917416
A CORPORATE OFFICER’S DISMISSAL IS ALWAYS A CORPORATE ACT OR AN

INTRACORPORATE CONTROVERSY WITHIN THE SEC’S JURISDICTION (NOW THE RTC).
Nacpil v. IBC: Intra corporate controversy is now within the RTC‘s jurisdiction.
5. Duties of Directors and Officers

a. Duty of Obedience
- elected directors/trustees/officers shall perform duties enjoined
on them by law and by the by-laws of the corporation
- they will direct the affairs of the corporation in accordance only
with the purposes for which it was organized
b. Duty of Diligence; Business Judgment Rule – the basis for the liability is
negligence.
Sec. 31, Corporation Code. Liability of Directors, Trustees or Officers.
SOLIDARY LIABILITY OF Directors or trustees or officers who:

a) willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or
b) are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors, or trustees
c) attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter
which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to
the corporation.
Smith v. Van Gorkom: Gauge to determine if a corporate act is within the BJR: It
must be an INFORMED BUSINESS JUDGMENT. That is, WON the directors informed
themselves prior to making a business decision of all material information reasonably
available to them.
Montelibano v. Bacolod-Murcia: When a principle is passed in GF by the BOD, it is

valid and binding, and WON it will cause losses or decrease the profits of the
corporation, the court has no authority to review them. It is a well known rule of law
that questions of policy or management are left solely to the honest decision of
officers and directors of a corporation and the court is without authority to substitute
its judgment for that of the BOD; the board is the business manager of the
corporation and so long as it acts in GF its orders are not reviewable by the courts.

lOMoARcPSD|28917416
Board of Liquidators v. Kalaw: Rightfully had it been said that bad faith does not
simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it means breach of a known duty thru
some motive or interest or ill will; it partakes of the nature of fraud. 34 Applying this
precept to the given facts herein, we find that there was no "dishonest purpose," or
"some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or
"some motive or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal reasons,
or to serve their own private interests, or to pocket money at the expense of the
corporation. 35 We have had occasion to affirm that bad faith contemplates a "state
of mind affirmatively operating with furtive design or with some motive of self-
interest or ill will or for ulterior purpose." "Upon a close examination of all the
reported cases, although there are many dicta not easily reconcilable, yet I have
found no judgment or decree which has held directors to account, except when they
have themselves been personally guilty of some fraud on the corporation, or have
known and connived at some fraud in others, or where such fraud might have been
prevented had they given ordinary attention to their duties . . ." Plaintiff did not
even dare charge its defendant-directors with any of these malevolent acts.
c. Duty of Loyalty; Doctrine of Corporate Opportunity
Sec. 31, Corporation Code. Liability of Directors, Trustees or Officers. — Directors or

trustees who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors, or trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his

duty, any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation.
Sec. 34, Corporation Code. Disloyalty of a Director. — Where a director, by virtue of

his office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he must
account to the latter for all such profits by refunding the same, unless his act has
been ratified by a vote of the stockholders, owning or representing at least two-
thirds (2/3) of the outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the venture.
Comparison/ Summarization of rules under Sec. 31 and 34

lOMoARcPSD|28917416
Sec. 31 Sec. 34
(Directors/Trustees/Officers) (Directors/Trustees)
- acquisition or attempts to acquire - acquisition of business opportunity

personal or pecuniary interest in which belongs to the corporation
conflict with his duty
LIABILITY LIABILITY
a. jointly and severally liable for Gen. Rule: Refund to the corporation
all damages all the profits acquired therefrom
b. accountable for the profits
which would otherwise have Exception: if the act was ratified by
accrued to the corporation 2/3 vote of the OCS/members
Rationale for the ratification:

delegation of powers. Stockholders
gave power to directors/trustees by
direct election. Thus they have also
the power to waive any cause of
action against their delegates.
d. Corporate Dealings
General Rule: A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation
Exception: Unless all the following conditions are present (which means contract is
valid)
1. That the presence of such director or trustee in the board meeting in which
the contract was approved was not necessary to constitute a quorum for
such meeting;
2. That the vote of such director or trustee was not necessary for the approval
of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been
previously authorized by the Board of Directors.
Remedy if any of the first two conditions set forth above is absent
1. Ratification vote of the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of two-thirds (2/3) of the members in a
meeting called for the purpose

lOMoARcPSD|28917416
2. There is full disclosure of the adverse interest of the directors or trustees

involved is made at such meeting
3. The contract is fair and reasonable under the circumstances.
Mead v. McCullough: It was held that while a corporation remains solvent, there is no
reason ―why a director or officer, by the authority of a majority of the stockholders
or board of managers, may not deal with the corporation, loan it money or buy
property from it, in like manner as a stranger. So long as a purely private corporation
remains solvent, its directors are agents or trustees for the stockholders. They owe
no duties or obligations to others. But the moment such a corporation becomes
insolvent, its directors are trustees of all the creditors, whether they are members of
the corporation or not, and must manage its property and assets with strict regard to
their interest; and if they are themselves creditors while the insolvent corporation is
under their management, they will not be permitted to secure to themselves by
purchasing the corporate property or otherwise any personal advantage over the
other creditors. Nevertheless, a director or officer may in good faith and for an
adequate consideration purchase from a majority of the directors or stockholders the
property even of an insolvent corporation, and a sale thus made to him is valid and
binding upon the minority.
It also held that where a director in a corporation accepts a position in which his
duties are incompatible with those as such director, it is presumed that he has
abandoned his office as director of the corporation.
Prime White Cement V. IAC: In this case the Court recognized that the provisions of
Sec. 31 of the Corporation Code on self-dealing merely incorporated well-established
principles in Corporate Law, applied the procedure required therein for determining
the validity of a contract entered into by the corporation with its director.
The facts of this case showed that a director entered into a Dealership Agreement
with the corporation, signed by its chairman and president, for the corporation to
supply 20,000 bags of white cement per month for 5 years at a fixed price of P9.70
per bag. Subsequently, the Board refused to abide by the contract unless new
conditions are accepted providing for new price formula. The dealing director sued
fro specific performance on the contract. The Court held that although the general
rule when it comes to President entering into a contract for the corporation is that
when the contract is in the ordinary course of the business, provided the same is
reasonable under the circumstances, the contract binds the corporation,
nevertheless, the rule does not apply when the contract is entered into with a
director or officer of the corporation itself. A director holds a position of trust and as
such, he owes a duty of loyalty to his corporation and his contracts with the
corporation must always be at reasonable terms otherwise the contract is void nor
voidable at the option of the corporation.

lOMoARcPSD|28917416
The Court found that the terms of the Dealership Agreement were unreasonable for
the corporation. It held that the dealing director was a businessman himself and must
have known or at least must have presumed to know that at that time, prices of
commodities in general and white cement in particular, were not stable and were
expected to rise. At the time of the contract, petitioner corporation had not even
commenced the manufacture of white cement, the reason why delivery was not to
begin until 14 months later…no provision was made in the dealership agreement to
allow for an increase in price mutually acceptable to the parties. It held that the
unfairness in the contract is also a basis which renders a contract entered into by the
President, without authority from the BOD, void voidable, although it may have been
in the ordinary course of business. Finally, it noted that there was no showing that
the stockholders had ratified the agreement or that they were fully aware of its
provisions.
e. Contracts between corporations with interlocking directors
Sec. 33, Corporation Code. Contracts Between Corporations with Interlocking

Directors.
 Interlocking Directors—one or some of all of the directors of one corporation

is/are director(s) in another corporation
General rule: Valid if not attended by fraud and if the contract is fair and reasonable
under the circumstances
Exception: Voidable if stockholdings of interlocking director exceed 20% of the OCS
 Sec. 32 (Self-dealing director/trustee) shall apply if the interest of the

interlocking director in a corporation is SUBSTANTIAL which means his
stockholdings exceed 20% of the OCS

Day 1. 8.22.2023

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Day 1. 8.22.2023

Uploaded by

Copyright:

Available Formats

lOMoARcPSD|28917416

A. In relation to the State

1. Public – those formed or organized for the government or for a portion of

National Coal Co. vs. CIR

Davao Water District v. CSC: Employees of government-owned and controlled

 Domestic – one incorporated under the laws of the Philippines

Sec.140, Corporation Code. Stock Ownership in Certain Corporations. — Pursuant

Maximum limits may be set by the Batasang Pambansa for stockholdings in

each other by consanguinity or affinity or by close business interests, or whenever it

In recommending to the Batasang Pambansa corporations, businesses or industries to

1. Exploitation of Natural Resources

2. Public Utilities: (60%)

Notes on Corporation Law |4

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

4. Advertising Industry- (70%)

5. War Time Test

6. Grandfather Rule – method by which the percentage of Filipino equity in a

Notes on Corporation Law |5

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

Sec. 109, Corporation Code. Classes of religious corporations. - Religious

Sec. 116, Corporation Code. Religious societies.

Sec. 106, Corporation Code. Incorporation. - Educational corporations shall be

Notes on Corporation Law |6

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

Sec. 108, Corporation Code Board of trustees. - Trustees of educational institutions

Government assistance to such schools for educational programs shall be used

- Charitable, Scientific or Vocational

- Aggregate Corporation- incorporated by an aggregate of persons

Section 111. Articles of incorporation. - In order to become a corporation sole, the

Notes on Corporation Law |7

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

Section 112. Submission of the articles of incorporation. - The articles of

Notes on Corporation Law |8

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

The declaration of dissolution shall set forth:

Notes on Corporation Law |9

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

Upon approval of such declaration of dissolution by the Securities and Exchange

Republic v. Villanueva (1982): corporation sole is disqualified to acquire or hold

Notes on Corporation Law |10

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

for the furtherance of the purpose or purposes for which the

Section 88. Purposes. - Non-stock corporations may be formed or organized for

g. As to relationship of management and control

Notes on Corporation Law |11

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

- Parent and subsidiary company

- Definition (Sec. 96, Corporation Code) - one whose articles of incorporation

Any corporation may be incorporated as a close corporation, except mining or oil

The articles of incorporation of a close corporation may provide:

Notes on Corporation Law |12

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

3. The stockholders of the corporation shall be subject to all liabilities of

- Pre-emptive Rights (Sec. 102, Corporation Code) - The pre-emptive right of

Note: right of pre-emption is a matter of absolute right on the part of the

- Amendment (Sec. 103, Corporation Code)

- Restriction on Transfer of Shares (Secs.98, Corporation Code)

Section 99. Effects of issuance or transfer of stock in breach of qualifying

Notes on Corporation Law |13

Downloaded by MARK ANTHONY JUSTO (mhark181992@gmail.com)

person is conclusively presumed to have notice of the fact of his ineligibility to

- Agreements by Stockholder (Sec. 100, Corporation Code)

Notes on Corporation Law |14