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The Corporation Code of The Philippines
The Corporation Code of The Philippines
CHAPTER 1: INTRODUCTION law is necessary for its creation such that the mere agreement of the
persons composing it or intending to organize it does not warrant the
KINDS OF BUSINESS ORGANIZATION grant of its independent existence as a juridical entity;
1. SOLE PROPRIETORSHIP – one conducted for profit by a lone or 2. ARTIFICIAL BEING – it has a juridical personality, separate and
single individual who owns all assets, personally owes and answers all distinct from the persons composing it.
the liabilities or suffers all the losses and enjoys all the profits to the
exclusion of others. 3. RIGHT OF SUCCESSION – unlike in a partnership, the death,
incapacity or civil interdiction of one or more of its stockholder does not
ADVANTAGES DISADVANTAGES result in its dissolution;
Eliminates the bureaucratic process Unlimited personal liability of the
common in corporations where the proprietor 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY
board of directors must sit as a AUTDHORIZED BY LAW – it can exercise only such powers and can
body to have a valid transaction. hold only such properties as are granted to it by the enabling statutes
The proprietor makes his own unlike natural persons who can do anything as they please.
decisions and can act without delay.
Proprietor owns all the profits Capital is limited by the proprietor’s LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602 [Sept. 21,
without having to share the same personal resources 1994]) – Private respondent Carloto, incumbent President-Manager of private
respondent Rural Bank of Labason, alleged that he was instructerd to go to
2. PARTNERSHIP – a contract where two or more persons bind Manila to follow up on the Bank’s plan of payment of rediscounting
themselves to contribute money, property or industry to a common fund obligations with Central Bank’s main office, where he purchased a round trip
with the intention of dividing the profits among themselves (Art. 1767, ticket and phone his sister to send him P1,000 for his pocket money which
Civil Code) LBC failed to deliver and eventually Carloto was not able to submit the
rediscounting documents and the Bank was made to pay the Central Bank
3. JOINT VENTURE – a one-time grouping of two or more persons, P32,000 s penalty interest and alleged that he suffered embarrassment and
natural or juridical, in a specified undertaking. humiliation. Respondent Rural Bank was later on joined as one of the plaintiff
and prayed for the reimbursement of P32,000. Carloto and the Bank was
PARTNERSHIP JOINT VENTURE awarded moral and exemplary damages of P10,000 and P5,000, respectively.
Has a personality separate and Does not acquire a separate and
distinct from the partners distinct personality from the ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
venturers awarded moral damages?
Has for its object a general business Object is an undertaking of a
of particular kind, although there particular or single transaction HELD: No. Moral damages are granted in recompense for physical suffering,
may be partnership for a single mental anguish, fright, serious anxiety, besmirched reputation, wounded
transaction feelings, oral shock, social humiliation and social injury. A corporation, being
an artificial person and having existence only in legal contemplation, has no
Corporations, generally are not Corporations may enter joint
allowed to enter into partnerships* ventures feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows and grieves
*A corporation is generally not allowed to enter into partnerships because (1)
of life – all of which cannot be suffered by respondent bank as an artificial
the identity of the corporation is lost or merged with that of another; and (2)
person.
the discretion of the officials is placed in other hands other than those
permitted by the law in its creation.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases of libel,
slander and other forms of defamation, a corporation is entitled to moral
EXCEPTION to the rule is when the following conditions are met:
damages.
a. The articles of incorporation expressly authorized the corporation to enter
into contracts of partnership;
C. ADVANTAGES OF THE CORPORATE FORM OF BUSINESS
b. The agreement or articles of partnership must provide that all the partners
will manage the partnership; and
1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons
c. The articles of partnership must stipulate that all the partners are and shall
may unite in a single enterprise without using their names, without
be jointly and severally liable for all obligations of the partnership
difficulty or inconvenience, and with the valuable right to contract, to
sue and be sued, and to hold or convey property, in the corporate
4. CORPORATION – an artificial being created by operation of law,
name;
having the right of succession and the powers, attributes and properties
2. LIMITED SHAREHOLDER‘S LIABILITY – the limit of his liability since
expressly authorized by law or incident to its existence (Sec. 1,
stockholders are not personally liable for the debts of the corporation;
Corporation Code [CC])
3. CONTINUITY OF EXISTENCE – rights and obligations of a
corporation are not affected by the death, incapacity or replacement of
the individual members;
CHAPTER 2: DEFINITION AND ATTRIBUTES
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the
individuals to cooperate in order to furnish the large amounts of capital
A. DEFINITION
necessary to finance large scale enterprises;
5. TRANSFERABILITY OF SHARES – unless reasonably restricted,
Sec. 2. Corporation Defined – A corporation is an artificial being created
shares of stocks, being personal properties, can be transferred by the
by operation of law, having the right of succession and the powers, attributes
owner without the consent of the other stockholders;
and properties expressly authorized by law or incident to its existence.
6. CENTRALIZED MANAGEMENT – the vesting of powers of
management and appointing officers and agents in board of directors
B. ATTRIBUTES (CARP)
gives to a corporation the benefit of a centralized administration which
is a practical business necessity in any large organization; and
1. CREATED BY OPERATION OF LAW – the formal requirement of the
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT
State’s consent through compliance with the requirements imposed by
AND FINANCE – which are provided under a well-drawn general
HELD: No. The fact that the capital of the Club is divided into shares does
Moreover, for a stock corporation to exists, two requisites must be It is to be observed, however, that the mere fact that the undertaking in
complied with: (1) a capital stock divided into shares; and (2) an which a corporation is engaged in is one which the State itself might enter
authority to distribute to the holders of such shares, dividends or into as part of its public work does not make it a public one. Nor is the fact
allotments of surplus profits on the basis of the shares held. In the that the State has granted property or special privileges to a corporation
case at bar, nowhere it its AOI or by-laws could be found an authority for the render it public. Likewise, the fact that some or all of the stocks in the
distribution of its dividends or surplus profits. Strictly speaking, it cannot corporation are held by the government does not make it a public
therefore, be considered as stock corporation, within the contemplation of corporation.
the Corporation Code.
The TRUE TEST to determine the nature of a corporation is found in the
B. CORPORATIONS CREATED BY SPECIAL LAW OR CHARTER relation of the body to the State. Strictly speaking, a public corporation is
one that is created, formed or organized for political or governmental
Sec. 4. Corporations created by special laws or charters. - purposes with political powers to be exercised for purposes connected with
Corporations created by special laws or charters shall be governed primarily the public good in the administration of the civil government.
by the provisions of the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code, insofar as they are The GOCCs are regarded as private corporations despite common
applicable. misconceptions.
HELD: Yes. Employees of GOCCs, whether created by special law or formed LAY CORPORATIONS: are those organized for purposes other than
as subsidiaries under the Corporation Law are governed by the Civil Service religion. They may further be classified as:
Law and not the Labor Code, under the 1973 Constitution has been a. ELEEMOSYNARY: created for charitable and benevolent purposes such
supplanted by the present Constitution. as those organized for the purpose of maintaining hospitals and houses for
the sick, aged or poor.
Thus, under the present state of the law, the test in determining b. CIVIL: organized not for the purpose of public charity but for the benefit,
whether a GOCC is subject to the Civil Service Law is the manner of pecuniary or otherwise, of its members.
its creation, such that government corporations created by special
charter are subject to its provisions while those incorporated under 3. AGGREGATE AND SOLE CORPORATIONS
the General Corporaiton Law are not within its coverage.
AGGREGATE CORPORATIONS: are those composed of a number of
PNOC has its special charter, but its subsidiary, PNOC-EDC, having been individuals vested with corporate powers.
incorporated under the General Corporation Law was held to be a GOCC
whose employees are subject to the provisions of the Labor Code. CORPORATION SOLE: those consist of one person or individual only and
who are made as bodies corporate and politic in order to give them some
C. OTHER CLASSES OF CORPORATIONS legal capacity and advantage which, as natural persons, they cannot have.
Under the Code, a corporation sole may be formed by the chief archbishop,
1. PUBLIC AND PRIVATE CORPORATIONS bishop, priest, minister, rabbi, or other presiding elder or religious
DE JURE CORPORATIONS: are juridical entities created or organized in CONTENTS OF THE ARTICLES OF INCORPORATION
strict or substantial compliance with statutory requirements of incorporation
and whose rights to exist as such cannot be successfully attacked even by Contents of the articles of incorporation. - All corporations organized
(http://www.disini.ph/res_sec__mc142000.html) Armed with the Resolution of the Supreme Court, the Lyceum of the
Philippines then wrote all the educational institutions it could find using the
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO. (60 Phil. word "Lyceum" as part of their corporate name, and advised them to
549; Sept. 6, 1934) – A certificate of public convenience was issued in the discontinue such use of "Lyceum." Unheaded, Lyceum of the Philippines
name of Rural Transit Co. by the Public Service Commission despite instituted before the SEC an action to enforce what Lyceum of the Philippines
opposition of herein petitioner-appellant Red Line Transportation Co.. It claims as its proprietary right to the word "Lyceum." The SEC rendered a
appears that ―Red Line Transit Co.‖ is being used as a trade name of Bahrach decision sustaining petitioner's claim to an exclusive right to use the word
Motors Co. "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of
Baguio, Inc. case.
ISSUE: Who is the real party in interest, Rural Transit Co. which appears in
the face of the application? Or Bahrach Motors, Inc. using the name of the On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan, Lyceum Of
former as a trade name? Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of Tuao, Inc., Buhi
Lyceum, Central Lyceum Of Catanduanes, Lyceum Of Southern Philippines,
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC or any Lyceum Of Eastern Mindanao, Inc. and Western Pangasinan Lyceum, Inc.,,
court in this jurisdiction to authorize one corporation to assume the name of which are also educational institutions, to the SEC En Banc, the decision of
another corporation as a trade name. Both Rural Transit and Bahrach are the hearing officer was reversed and set aside. The SEC En Banc did not
Philippine corporations and the very law of their creation and continued consider the word "Lyceum" to have become so identified with Lyceum of the
existence requires each to adopt and certify a distinctive name. Philippines as to render use thereof by other institutions as productive of
confusion about the identity of the schools concerned in the mind of the
The incorporators constitute a body politic and corporate under the name general public. Unlike its hearing officer, the SEC En Banc held that the
state in the certificate (Sec. 11, Act. No. 1459). A corporation has the power attaching of geographical names to the word "Lyceum" served sufficiently to
of succession in its corporate name (Sec. 13). The name of a corporation is distinguish the schools from one another, especially in view of the fact that
Herein, the Court does not consider that the corporate names of the ISSUE: WON Standard Philips should be directed to delete the word PHILIPS
academic institutions are "identical with, or deceptively or confusingly similar" from its corporate name?
to that of Lyceum of the Philippines Inc.. True enough, the corporate names
of the other schools (defendant institutions) entities all carry the word HELD: Yes. As early as Western Equipment and Supply Co. v. Reyes , 51 Phil.
"Lyceum" but confusion and deception are effectively precluded by the 115 (1927), the Court declared that a corporation's right to use its
appending of geographic names to the word "Lyceum." Thus, the "Lyceum of corporate and trade name is a property right, a right in rem, which
Aparri" cannot be mistaken by the general public for the Lyceum of the it may assert and protect against the world in the same manner as it
Philippines, or that the "Lyceum of Camalaniugan" would be confused with may protect its tangible property, real or personal, against trespass
the Lyceum of the Philippines. Further, etymologically, the word "Lyceum" is or conversion. It is regarded, to a certain extent, as a property right
the Latin word for the Greek lykeion which in turn referred to a locality on the and one which cannot be impaired or defeated by subsequent
river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo appropriation by another corporation in the same field (Red Line
and adorned with fountains and buildings erected by Pisistratus, Pericles and Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching." A name is peculiarly important as necessary to the very existence of
a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L
In time, the word "Lyceum" became associated with schools and other ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First
institutions providing public lectures and concerts and public discussions. National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its
Thus today, the word "Lyceum" generally refers to a school or an institution name is one of its attributes, an element of its existence, and essential to its
of learning. Since "Lyceum" or "Liceo" denotes a school or institution of identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations
learning, it is not unnatural to use this word to designate an entity which is is that each corporation must have a name by which it is to sue and
organized and operating as an educational institution. To determine whether be sued and do all legal acts. The name of a corporation in this
a given corporate name is "identical" or "confusingly or deceptively similar" respect designates the corporation in the same manner as the name
with another entity's corporate name, it is not enough to ascertain the of an individual designates the person (Cincinnati Cooperage Co. vs.
presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH
names in their entirety and when the name of Lyceum of the Philippines is 123); and the right to use its corporate name is as much a part of the
juxtaposed with the names of private respondents, they are not reasonably corporate franchise as any other privilege granted (Federal Secur. Co.
regarded as "identical" or "confusingly or deceptively similar" with each other. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs.
Portuguese Beneficial Association, 18 RI 165, 26 A 36).
ISSUE2: WON the word ―Lyceum‖ has acquired a secondary meaning
although originally generic? A corporation acquires its name by choice and need not select a name
identical with or similar to one already appropriated by a senior corporation
HELD: No. The Court of Appeals recognized this issue and answered it in the while an individual's name is thrust upon him (See Standard Oil Co. of New
negative: "Under the doctrine of secondary meaning, a word or phrase Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A
originally incapable of exclusive appropriation with reference to an article in corporation can no more use a corporate name in violation of the
the market, because geographical or otherwise descriptive might rights of others than an individual can use his name legally acquired
nevertheless have been used so long and so exclusively by one producer with so as to mislead the public and injure another (Armington vs. Palmer,
reference to this article that, in that trade and to that group of the 21 RI 109. 42 A 308).
purchasing public, the word or phrase has come to mean that the article was
his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance The statutory prohibition (under Sec. 18 of the Corporation Code) cannot be
has been referred to as the distinctiveness into which the name or any clearer. To come within its scope, two requisites must be proven,
phrase has evolved through the substantial and exclusive use of the namely:
same for a considerable period of time. . . . No evidence was ever
presented in the hearing before the Commission which sufficiently proved (1) that the complainant corporation acquired a prior right over the use of
that the word 'Lyceum' has indeed acquired secondary meaning in favor of such corporate name; and
the appellant. If there was any of this kind, the same tend to prove only that (2) the proposed name is either:
the appellant had been using the disputed word for a long period of time. (a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation
The number alone of the private respondents in the present case suggests or to any other name already protected by law; or
strongly that the Lyceum of the Philippines' use of the word "Lyceum" has (c) patently deceptive, confusing or contrary to existing law.
not been attended with the exclusivity essential for applicability of the
doctrine of secondary meaning. It may be noted also that at least one of the The right to the exclusive use of a corporate name with freedom
private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the from infringement by similarity is determined by priority of
term "Lyceum" 17 years before Lyceum of the Philippines registered its own adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63,
corporate name with the SEC and began using the word "Lyceum." It follows 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac.
Respondent’s argue that there were no evidence presented that there was The statement of the objects or purpose or powers in the charter results
actual confusion. It is settled, however, that proof of actual confusion practically in defining the scope of authority of the corporate enterprise or
need not be shown. It suffices that confusion is probably or likely to undertaking. This statement both congers and also limits the actual authority
occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases). of the corporate representatives.
Moreover, Given Private Respondent's underlined primary purpose in its AOI, The reasons for requiring a statement of the purposes or objects:
nothing could prevent it from dealing in the same line of business of electrical 1. In order that the stockholder who contemplates on an investment in a
devices, products or supplies which fall under its primary purposes. Besides, business enterprise shall know within what lines of business his money is to
there is showing that Private Respondent not only manufactured and sold be put at risks;
ballasts for fluorescent lamps with their corporate name printed thereon but 2. So that the board of directors and management my now within what
also advertised the same as, among others, Standard Philips (TSN, before the lines of business they are authorized to act; and
SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As 3. So that anyone who deals with the company may ascertain whether a
aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as contract or transaction into which he contemplates entering is one within the
part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to general authority of the management.
show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" ( Rollo, p. 137). SECONDARY PURPOSE: Although the Corporation Code does not restrict
The subsequent appropriator of the name or one confusingly similar thereto nor limit the number of purpose or purposes which a corporation may have,
usually seeks an unfair advantage, a free ride of another's goodwill (American Sec. 14 thereof, requires that if it has more than one purpose, the primary
Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC purpose as well as the secondary ones must be indicated therein.
269, 191 F 2d 488).
PROHIBITION: The following are prohibited by special laws for having any
In allowing Private Respondent the continued use of its corporate name, the other purpose not peculiar to them:
SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL 1. Educational, religious, and other non-stock corporations cannot include any
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least other purpose which would change or contradict its nature or to engage in
two words different from that of the corporate name of respondent any enterprise to make profits for is members;
STANDARD PHILIPS CORPORATION, which words will readily identify Private 2. Insurance companies cannot engage in commercial banking at the same
Respondent from Petitioners and vice-versa. time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to them.
True, under the Guidelines in the Approval of Corporate and Partnership
Names formulated by the SEC, the proposed name "should not be similar to RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
one already used by another corporation or partnership. If the proposed 1. As a general rule, the purpose or purposes must be lawful. Hence, the SEC
name contains a word already used as part of the firm name or style of a is duty bound to determine the legality of the corporate purpose/s before it
registered company; the proposed name must contain two other issues the certificate of registration;
words different from the company already registered" (Emphasis 2. A corporation may not be formed for the purpose of practicing a profession
ours). It is then pointed out that Petitioners Philips Electrical and Philips like law, medicine or accountancy, either directly or indirectly. These are
Industrial have two words different from that of Private Respondent's name. reserved exclusively for professional partnerships;
3. The retail trade, where the corporate capital is less than $2.5M, or its peso
What is lost sight of, however, is that PHILIPS is a trademark or trade name equivalent are reserved exclusively for Filipinos, or for corporations or
which was registered as far back as 1922. Petitioners, therefore, have the partnerships wholly owned by such citizen.
exclusive right to its use which must be free from any infringement by 4. As a general rule, corporations with foreign equity are not allowed to
similarity. A corporation has an exclusive right to the use of its name, engage in restaurant business but corporations with such foreign equity can
which may be protected by injunction upon a principle similar to purse such undertaking if it is incidental or in connection with hotel or inn-
that upon which persons are protected in the use of trademarks and keeping business.
tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it 5. Management consultants, advisers and/or specialists, must submit the
is a fraud on the corporation which has acquired a right to that name and personal information sheet of the incorporators and directors in order that
perhaps carried on its business thereunder, that another should attempt to the SEC may be able to find out or determine whether or not the applicant
use the same name, or the same name with a slight variation in such a way corporation is qualified to act as such.
as to induce persons to deal with it in the belief that they are dealing with the 6. As a matter of policy, financing companies are required by the SEC to
corporation which has given a reputation to the name (6 Fletcher [Perm Ed], submit certain additional documents together with their applications for
pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 registration to verify compliance with RA 8556.
F 510). Notably, too, Private Respondent's name actually contains only a 7. For bonded warehousing companies, an undertaking to comply with the
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379; Feb. 18, CORPORATORS apply to all who compose the corporation at any given time
1967) – The New Cagayan Grocery filed a complaint against CRS for some and need not be among those who executed the AOI at the start of its
irregularities in the transmission of a message which changed the context formation or organization.
and purport causing damages. The complaint was filed in the City Court of
Cagayan de Oro. INCORPORATORS are those mentioned in the AOI as originally forming
the corporation and who are signatories in the AOI.
ISSUE: WON the action will prosper?
An incorporator may be considered as a corporator as long as he continues to
HELD: No. The action was based on tort and not upon a written contract and be a stockholder or a member, but not all corporators are incorporators.
as such, under the Rules of Court, it should be filed in the municipality where
the defendant or any of the defendants resides or may be served with
Sec. 10. Number and qualifications of incorporators. - Any number of
summons.
natural persons not less than five (5) but not more than fifteen (15), all of
legal age and a majority of whom are residents of the Philippines, may form
Settled is the principle in corporation law that the residence of a
a private corporation for any lawful purpose or purposes. Each of the
corporation is the place where the principal office is established.
incorporators of a stock corporation must own or be a subscriber to at least
Since it is not disputed that CRS has its principal office in Manila, it follows
one (1) share of the capital stock of the corporation.
that the suit against it may properly be filed in the City of Manila.
QUALIFICATIONS OF INCORPORATORS:
The fact that CRS maintains branch office in some parts of the country does
1. Must be natural persons. It implies that a corporation or a partnership
not mean that it can be sued in any of these places. To allow such would
cannot become incorporators. EXCEPTION: (1) cooperatives; (2)
create confusion and work untold inconveniences to the corporation.
corporations primarily organized to hold equities in rural banks and may
rightfully become incorporators thereof. It must be noted likewise that the
e. TERM OF EXISTENCE
law does not preclude firms and other entities from becoming stockholders or
xxx
subscribers to the shares of a stock corporation. Thus, while they cannot
FOURTH: That the term for which said corporation is to exist
qualify as incorporators, they can become corporators or stockholders.
is............... years from and after the date of issuance of the
2. Of Legal Age. Minors cannot be incorporators. They may, however,
certificate of incorporation;
Name of Subscriber Amount Subscribed Total Paid-Up SHARES OF STOCKS AND THEIR CLASSIFICATIONS
.............................. .............................. ....................
.............................. .............................. .................... SHARES OF STOCK designate the units into which the proprietary interest
.............................. .............................. .................... in a corporation is divided. They represent the proportionate integers or
.............................. .............................. .................... units, the sum of which constitutes the capital stock of the corporation. It is
.............................. .............................. .................... likewise the interest or right which the owner, called the stockholders or
shareholder, has in the management of the corporation, and in the surplus
(Modify Nos. 8 and 9 if shares are with no par value. In case the profits and in case of distribution, in all of its assets remaining after the
corporation is non-stock, Nos. 7, 8 and 9 of the above articles may payment of its debts.
be modified accordingly, and it is sufficient if the articles state the
amount of capital or money contributed or donated by specified CERTIFICATE OF STOCK is a document or instrument evidencing the
persons, stating the names, nationalities and residences of the interest of a stockholder in the corporation.
contributors or donors and the respective amount given by each.)
xxx
Sec. 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or both, any of
The Corporation Code requires the AOI to state the authorized capital stock,
which classes or series of shares may have such rights, privileges or
the number of shares and/or kind of shares into which the authorized capital
restrictions as may be stated in the articles of incorporation: Provided, That
is divided, the par value of each share, if there by any, the names,
no share may be deprived of voting rights except those classified and issued
nationalities and residences of the original subscribers, and the amount
as "preferred" or "redeemable" shares, unless otherwise provided in this
subscribed and paid by each. At least 25% of the subscribed capital must be
Code: Provided, further, That there shall always be a class or series of shares
paid and in no case may the paid-up capital be less than P5,000.
which have complete voting rights. Any or all of the shares or series of shares
may have a par value or have no par value as may be provided for in the
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in the articles
articles of incorporation: Provided, however, That banks, trust companies,
to be subscribed and paid-in or secured to be paid by the subscribers. It may
insurance companies, public utilities, and building and loan associations shall
also refer to the maximum number of shares that a corporation can issue.
not be permitted to issue no-par value shares of stock.
SUBSCRIBED CAPITAL STOCK is the total number of shares and its total
Preferred shares of stock issued by any corporation may be given preference
value for which there are contracts for their acquisition or subscription. It is
in the distribution of the assets of the corporation in case of liquidation and in
in effect, the stockholder’s equity account showing that part of the authorized
the distribution of dividends, or such other preferences as may be stated in
capital stock which has been paid or promised to be paid, or that portion of
the articles of incorporation which are not violative of the provisions of this
the authorized capital stock which has been subscribed by the subscribers or
Code: Provided, That preferred shares of stock may be issued only with a
stockholders.
stated par value. The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock
PAID UP CAPITAL STOCK or paid-in capital is the actual amount or value
or any series thereof: Provided, That such terms and conditions shall be
which has been actually contributed or paid to the corporation in
effective upon the filing of a certificate thereof with the Securities and
consideration of the subscriptions made thereon. It may be in the form of
Exchange Commission.
cash, property or in the form of services actually rendered to the corporation
as provided under Sec. 62 of the Corporation Code:
Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a corporation or to its creditors in respect thereto: Provided; That shares
consideration less than the par or issued price thereof. Consideration for the without par value may not be issued for a consideration less than the value
issuance of stock may be any or a combination of any two or more of the of five (P5.00) pesos per share: Provided, further, That the entire
following: consideration received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as dividends.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and A corporation may, furthermore, classify its shares for the purpose of insuring
necessary or convenient for its use and lawful purposes at a fair valuation compliance with constitutional or legal requirements.
equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation; Except as otherwise provided in the articles of incorporation and stated in the
4. Previously incurred indebtedness of the corporation; certificate of stock, each share shall be equal in all respects to every other
5. Amounts transferred from unrestricted retained earnings to stated capital; share.
and
6. Outstanding shares exchanged for stocks in the event of reclassification or Where the articles of incorporation provide for non-voting shares in the cases
conversion. allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be 1. Amendment of the articles of incorporation;
determined by the incorporators or the board of directors, subject to approval 2. Adoption and amendment of by-laws;
by the Securities and Exchange Commission. 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
Shares of stock shall not be issued in exchange for promissory notes or 4. Incurring, creating or increasing bonded indebtedness;
future service. 5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or
The same considerations provided for in this section, insofar as they may be other corporations;
applicable, may be used for the issuance of bonds by the corporation. 7. Investment of corporate funds in another corporation or business in
COMMON STOCKS are the most commonly issued shares of stock of a c. Preference Upon Liquidation
corporation. Although no clear cut definition can be found, it has been Such preference must also be stated in the contract, accordingly giving tem
described as one which entitles it owner to an equal or pro-rata division of the preference to the distribution of corporate assets upon liquidation or
profits, if there are any, but without any preference or advantage in that termination of corporate existence. If the preferred shares are cumulative,
respect over any other stockholder or class of stockholders. they have the right to any arrears in arrears in priority to any distribution of
assets to the common stockholders.
A common share usually carries with it the right to vote, and frequently, the
exclusively right to do so. However, where the AOI is silent, all issued and PAR AND NON-PAR VALUE SHARES
outstanding shares shall be considered to have the right to vote and be voted
for. Par Value Shares are those whose values are fixed in the AOI. Its par value is
the minimum subscription or original issue price of the shares and indicates
PREFERRED STOCKS is a stock that gives the holder preference over the the amount which the original subscribers are supposed to contribute to the
holder of common stocks with respect to the payment of dividends and/or capital, which, however, may not reflect the true value of the shares because
with respect to distribution of capital upon liquidation. LIMITATIONS imposed the same may fluctuate depending on the liability and networth of the
by the Code in the issuance of preferred stocks: (1) They can be issued only enterprise.
with a stated par value; and (2) The preference must be stated in the AOI
and in the certificate of stock otherwise each share shall be, in all respect, Watered Stocks are those issued at less than par value where the
equal to every other share. stockholders will remain liable for the difference between what he paid and
the actual par value thereof (Sec. 65).
a. PREFERENCE AS TO DIVIDENDS
They have the privilege of being paid dividends first before any other No Par Value Shares are those whose issued price are not stated in the
stockholders are paid theirs. The guaranty is not absolute so as to create a certificate of stock but may be fixed in the AOI, or by the BOD when so
relation of debtor and creditor between the corporation and the holders of authorized the articles or the by-laws, or in the absence thereof, the
such stock. The amount of preference is stated in the contract of subscription stockholders themselves. They do not purport to represent ay stated
and is usually a fixed percentage or by specified amount indicated therein. proportionate interest in the capital measured by value, but only an aliquot
part of the whole number of shares of the corporation issuing it.
Participating and Non-Participating Preferred Shares
If the preferred shares is participating, they are entitled to participate in The Code allows the issuance of no par value shares, subject to the following
dividends with the common shareholders beyond their stated preference. limitations provided in Sec. 6:
Non-participating preferred shares on the other hand are entitled to its fixed 1. Such shares once issued, are deemed fully paid and thus, non-assessable;
priority or preference only. 2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not available for
Cumulative and Non-cumulative Preference Shares dividend declaration;
Cumulative preferred shares are those that entitle the owner thereof to 4. They cannot be issued as preferred stock; and
payment not only of current dividends but also back dividends not previously 5. They cannot be issued by banks, trust companies, insurance companies,
paid whether or not, during the pas years, dividends were declared or paid. public utilities and building and loans associations.
In light of the provision of the Code stating that all shares are equal in all
respects unless otherwise stated in the AOI, a preferred share to be Advantages of no-par value shares:
considered cumulative, the same must be provided for and specified in the 1. Flexibility in price – no par shares may be issued from time to time at
certificate. different prices with the exception only that it shall not be issued at less than
P5;
Non-cumulative preferred shares are those which grant the holders of such 2. The issuance thereof practically results to the evasion of the danger of
shares only to the payment of current dividends but not back dividends, liability upon watered stock in case of overvaluation of the consideration paid
when and if dividends are paid, to the extent agreed upon before any other for it;
stockholders are paid the same. This type may be divided into three groups: 3. There is a disappearance of personal liability on the part of the holder for
1. Discretionary dividend type – depends on the judgment or discretion of the unpaid subscription since they are already deemed fully paid and non-
board of directors. Unless there is grave abuse of discretion as to result in assessable.
oppression, fraud or unfair discrimination, the dividend right of stockholders
of a particular year cannot be made up in subsequent years; VOTING AND NON-VOTING SHARES
2. Mandatory if earned – impose a positive duty on directors to declare Voting shares as the name suggests, gives the holder thereof the right to
Non-voting shares do not grant the holder thereof, a voice in the election of COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66 SCRA 14;
directors and some other matter requiring stockholders’ vote. Aug. 6, 1975) – Julius Reese owned 24,700 of the 25,000 authorized capital
stock of Manta Trading and Supply Co., the rest are owned by herein
Only preferred and redeemable shares may be denied the right to vote. But, respondents. Upon Reese’ death, his shares was held in trust by the law firm
even if denied such right, they may still vote on the following matters: Ross, Carrascoso and Janda for the private respondent, who were to continue
management of the corporation. These shares considered by the respondents
1. Amendment of the articles of incorporation; as treasury shares, prior to full payment, were declared as stock dividends.
2. Adoption and amendment of by-laws; Such declaration was assessed by the BIR as distribution of assets subject to
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or income tax.
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness; ISSUE: WON the subject shares are treasury shares?
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or HELD: No. Treasury shares are stocks issued and fully paid for and
other corporations; reacquired by the corporation either by purchase, donation, forfeiture or
7. Investment of corporate funds in another corporation or business in other means and do not have the status of outstanding shares. They may be
accordance with this Code; and re-issued or sold again and while held by the company participates neither in
8. Dissolution of the corporation dividends, because dividends cannot be declared by the corporation to itself,
nor in meeting of the corporation as voting stock for otherwise equal
distribution of voting powers among stockholders will be effectively lost and
FOUNDERS‘ SHARES are shares issued to the founders of the corporation the directors wil be able to perpetuate their control of the corporation,
which are granted certain right and privileges such as the exclusive right to though it still represent a paid for interest in the property of the corporation.
vote and be voted for in the election of directors. These features of a treasury stock are lacking in the questioned shares.
Sec. 7. Founders' shares. - Founders' shares classified as such in the In this case, and under the terms of the trust agreement, the shares of stock
articles of incorporation may be given certain rights and privileges not of Reese participated in dividends which the trustee received and the said
enjoyed by the owners of other stocks, provided that where the exclusive shares were voted upon by the trustee in all corporate meetings. They were
right to vote and be voted for in the election of directors is granted, it must not, therefore, treasury shares. The 24,700 shares were outstanding shares
be for a limited period not to exceed five (5) years subject to the approval of of Reese’s estate until they were fully paid. Such being the case, their
the Securities and Exchange Commission. The five-year period shall declaration as treasury stock dividend was a complete nullity.
commence from the date of the aforesaid approval by the Securities and
Exchange Commission. CAPITAL REQUIREMENTS
The period of 5 years is non-extendable because it may result in the almost Sec. 12. Minimum capital stock required of stock corporations. -
perpetual disqualification of other stockholders to elect or be elected as Stock corporations incorporated under this Code shall not be required to have
members of the BOD resulting to the lack of proper representation thereat. any minimum authorized capital stock except as otherwise specifically
provided for by special law, and subject to the provisions of the following
REDEEMABLE SHARES are those subject to redemption as may be section
provided in the subscription contract, which are usually attached to preferred
shares and other debt securities like bonds.
Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of the
Sec. 8. Redeemable shares. - Redeemable shares may be issued by the authorized capital stock as stated in the articles of incorporation must be
corporation when expressly so provided in the articles of incorporation. They subscribed at the time of incorporation, and at least twenty-five (25%) per
may be purchased or taken up by the corporation upon the expiration of a cent of the total subscription must be paid upon subscription, the balance to
fixed period, regardless of the existence of unrestricted retained earnings in be payable on a date or dates fixed in the contract of subscription without
the books of the corporation, and upon such other terms and conditions as need of call, or in the absence of a fixed date or dates, upon call for payment
may be stated in the articles of incorporation, which terms and conditions by the board of directors: Provided, however, That in no case shall the paid-
must also be stated in the certificate of stock representing said shares up capital be less than five Thousand (P5,000.00) pesos
These types of shares grants the corporation the right to repurchase the From the above provisions, it can be said that there is no minimum capital
shares at its option or at the option of the holder based on the face or issued requirement in order that a corporation may be duly incorporated except in
value plus specified premium, such redemption may be optional or special cases and provided that at least P5,000 should be paid-in, which
mandatory at a fixed or future date. effectively would make the P5,000 the minimum capital requirement.
Such repurchase may also be made regardless if there are unrestricted The 25% minimum paid-in capital can be paid by any shareholder, meaning
retained earnings. (see Power to Acquire Own Shares) that it is not particularly required that each subscriber pay 25% of their
subscription.
TREASURY SHARES
There are instances were the SEC, by virtue of an existing law, rules and
Sec. 9. Treasury shares. - Treasury shares are shares of stock which have regulations or policies, requires the payment of more than the amount
been issued and fully paid for, but subsequently reacquired by the issuing provided in the Code, such as Financing Companies where he required
corporation by purchase, redemption, donation or through some other lawful minimum paid-up capital be P10,000,000 (within Metro Manila), P5,000,000
means. Such shares may again be disposed of for a reasonable price fixed by (other cities), and P2,000,000 (municipalities).
the board of directors.
i. RESTRICTIONS AND PREFERENCES
Treasury shares, as provided in Sec. 9, are reacquired but not retired. They
may be issued for a price, even less than par, and the purchaser will not be Corporations are not required to provide for certain restrictions and
REPUBLIC OF THE PHILIPPINES ) The above grounds are not exclusive. There may be other reasons for
CITY/MUNICIPALITY OF ) S.S. rejection or disapproval such as the corporate name is not legally permissible
PROVINCE OF ) or that the minimum capital requirement is not sufficient.
I,..................................., being duly sworn, depose and say: 3. COMMENCEMENT OF CORPORATE EXISTENCE
That I have been elected by the subscribers of the corporation as
Treasurer thereof, to act as such until my successor has been duly Corporate existence is reckoned from the time of the issuance of its
elected and qualified in accordance with the by-laws of the CERTIFICATE OF INCORPORATION or registration. It is only from this
Sec. 19. Commencement of corporate existence. - A private Sec. 20. De facto corporations. - The due incorporation of any
corporation formed or organized under this Code commences to have corporation claiming in good faith to be a corporation under this Code, and its
corporate existence and juridical personality and is deemed incorporated from right to exercise corporate powers, shall not be inquired into collaterally in
the date the Securities and Exchange Commission issues a certificate of any private suit to which such corporation may be a party. Such inquiry may
incorporation under its official seal; and thereupon the incorporators, be made by the Solicitor General in a quo warranto proceeding
stockholders/members and their successors shall constitute a body politic and
corporate under the name stated in the articles of incorporation for the ATTACK: From the above provision, the only purpose of determining
period of time mentioned therein, unless said period is extended or the whether it is a de facto or de jure corporation is the applicability of the rules
corporation is sooner dissolved in accordance with law. on collateral and direct attack. Such that a de jure is impregnable to either,
while a de facto corporation’s existence can only be questioned in a direct
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil. 233; proceeding by the State through a quo warranto. A de facto corporation’s
Dec. 23, 1937) – On May 31, 1930, Manuel Tabora executed a Deed of Sale corporate existence however cannot be attacked collaterally.
where he sold four parcels of land in favor of herein petitioner Cagayan
Fishing Development Co., said to be under the process of incorporation. THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER
Plaintiff company filed its AOI with the Bureau of Commerce and Industry on MACAORAO BALINDONG, petitioners,
Oct. 22, 1930. A year later, before the issuance of the certificate of vs.
incorporation, the BD of the company adopted a resolution to sell the four PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN
parcels of land to Teodoro Sandiko for P42,000. MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG
ANDOY, MACALABA INDAR LAO. Respondents
ISSUE: WON the subsequent sale to Sandiko is valid? GR No. L-28113; March 28, 1969)
HELD: No. A duly organized corporation has the power to purchase and hold FACTS: The Municipality of Balabagan was created from the barrios and
real property as the purpose for which such corporation was formed may sitios of the Municipality of Malabang by virtue of EO No 386 issued by
permit and for this purpose may enter into such contract as may be President Garcia by virtue of Sec. 68 of the Revised Administrative Code.
necessary. But before a corporation may be said to be lawfully organized Following the decision of the Court in Pelaez vs. Auditor General, which
many thing have to be done. Among which, the law requires the filing of the declared Sec. 68 unconstitutional and that the President had no power to
AOI. create a municipality, herein petitioners sought to nullify EO 386 and to
restrain the respondents, who are officers of Balabagan, to vacate said their
It cannot be denied that the plaintiff was not incorporated when it entered office and desist from performing their functions.
into the contract of sale. It was not even a de facto corporation at that time.
Not being in legal existence then, it did not possess juridical personality to Respondents argue that it is at least a de facto corporation and the ruling in
enter into the contract. Pelaez is not applicable to it, having been organized under color of a statute
before it was declared unconstitutional, its officers having been either elected
Corporations are creatures of the law, and can only come into existence in or appointed, and the municipality itself having discharged corporate
the manner prescribed by the law. That a corporation should have a full and functions for the past five years. That as a de facto corporation, its existence
complete organization and existence as an entity before it can enter into a cannot be collaterally attacked.
contract or transact any business, would seem to be self-evident. A
corporation, until organized, has no being, franchises or faculties. Nor do ISSUE: WON the Municipality of Balabagan is a de facto corporation?
those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter, there is no corporation, nr does it HELD: No. In cases where a de facto municipal corporation was recognized
possess franchise or faculties for it to exercise, until it acquires complete as such despite the fact that the statute creating it was later invalidated, the
existence. decision could be fairly made to rest on the consideration that there was
some other valid law giving validity to the organization. Hence, in the
If the company could not and did not acquire the four parcels of and here case at bar, the mere fact that Balabagan was organized at the time when
involved, it follows that it did not have the resultant right to dispose the same the statute had not been invalidated cannot conceivably make it a de facto
to the defendant. corporation, as independently of the Administrative Code provision in
question, there is no other valid statute to give color of authority for its
D. DEFECTIVELY FORMED CORPORATIONS creation.
A corporation de jure is one created in strict or substantial compliance to the An unconstitutional act is not a law; it confers no rights; it imposes no duties;
governing corporation statutes and whose right to exist and act as such could it affords no protection; it creates no office; it is, in legal contemplation, as
not be attacked in a either collaterally or through a direct proceeding for that inoperative as though it had never been passed.
purpose even by the State.
HALL VS. PICCIO (86 Phil 603 June 29, 1950) – Petitioner, together with
1. DE FACTO CORPORATIONS private respondents signed and acknowledged the AOI of Far East Lumber
and Commercial Co., Inc., after the execution of which the corporation
A de facto corporation is one that is so defectively created as not to be a de proceeded to do business by adopting its by-laws and election of its officers.
jure corporation but nevertheless exists, for all practical purposes, as a Subsequently, pending action on the AOI, the respondents filed with the CFI
corporate body, by virtue of its bona fide attempt to incorporate under alleging the corporation to be an unregistered partnership and praying for its
existing statutory authority, coupled with the exercise of corporate powers. dissolution, which was granted.
REQUISITES: Herein petitioner claims that the corporation is a de facto corporation, that its
a. There is a valid statute under which the corporation could have been dissolution may be ordered only in a quo warranto proceedings instituted by
Sec. 21. Corporation by estoppel. - All persons who assume to act as a HELD: Yes. On account of non-registration, University cannot be considered
corporation knowing it to be without authority to do so shall be liable as a corporation, not even a corporation de facto. It has therefore, no
general partners for all debts, liabilities and damages incurred or arising as a personality separate from Aruego it cannot be sued independently.
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 The doctrine of corporation by estoppel is inapplicable. Aruego represented a
committed by it as such, it shall not be allowed to use as a defense its lack of non-existent entity and induced not only the plaintiff but even the court of
corporate personality. belief of such representation. He signed the contract as ―President‖ of
University and obviously misled plaintiff in to believing that University is a
On who assumes an obligation to an ostensible corporation as such, cannot ―corporation duly organized and existing under the laws of the Philippines‖.
resist performance thereof on the ground that there was in fact no One who has induced another to act upon his wilful
corporation. misrepresentation that a corporation was duly organized and
existing under the law, cannot, thereafter, set up against his victim
From the above provision, it is clear that the doctrine of estoppel may apply the principle of corporation by estoppel.
to the alleged corporation or to a third party transacting with the former.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23, 1958) –
As to the Corporation – the members who purported to be a corporate body Petitioner Manuel T. Vda de Salvatierra, owner of a parcel of land, entered
cannot deny their purported existence as a corporation in an action against into a contract of lease with Philippine Fibers Processing Co., Inc., allegedly a
them on the contract, where the third persons were induced to deal with the corporation. For failure to comply with the obligations under the lease,
supposed corporation. They cannot avoid liability on the ground of lack of petitioner filed a complaint in the CFI where the company was declared in
personality to be sued. default and decision was rendered in favor of petitioner. Defendant Refuerzo
filed a motion claiming that he should not be made personally liable in the
As to third persons – they are estopped from denying the existence of the decision which was granted by the Court. Hence, this petition.
alleged corporation in a suit to enforce a contract. However, the association
of persons must have purported or acted, and were treated by the third ISSUE: WON Refuerzon can be made personally liable?
persons, as corporations. The doctrine also applies when the third person
tries to escape liability on a contract from which he has benefited on the HELD: Yes. While as a general rule, a person who has contracted or dealt
irrelevant ground of defective incorporation. 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
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977) – Petitioner transaction or dealing, yet this doctrine may not be held applicable
Reynaldo Lozano and respondent Antontio Anda agreed to consolidate their where fraud takes part in the said transaction. In the instant case, on
respective Jeepney Associations, to which they are presidents. They plaintiff’s charge that she was unaware of the fact that the company had no
conducted an election for one set of officers of the consolidated association, juridical personality, defendant Refuerzo gave no confirmation or denial and
where petitioner was the winner. Respondent, however, refused to abide by the circumstances surrounding the execution of the contract led to the
the agreement which prompted petitioner to institute an action for damages inescapable conclusion that plaintiff Salvatierra was really made to believe
in the trial court which was denied for being intra-corporate, and was held to that such corporation was duly organized in accordance with law.
be within the jurisdiction of the SEC.
The rule on the separate personality of a corporation is understood to refer
ISSUE: WON there is corporation by estoppel placing the case within SEC merely to registered corporations and cannot be made applicable to the
jurisdiction? liability of members of an unincorporated association. The reason behind this
doctrine is obvious – since an organization which before the law is
HELD: None. The unified association was still a proposal and had not been non-existent has no personality and would be incompetent to act on
approved by the SEC, neither had its officers and members submitted their its behalf; thus, those who act or purport to act as its
WHO SHOULD BEAR THE LOSS: The better view is that those who actively CORPORATE CHARTER signifies an instrument or authority from the
participated in holding out the association as a corporation should be held sovereign power, bestowing rights or power, and is often used convertibly
personally liable by virtue of the express provision of Sec. 21 which provides with the term ―act of incorporation‖, where the corporation was formed under
that ―all persons who assume to act as a corporation knowing it to be a special act of the legislature, and with the ―articles of incorporation‖, when
without authority to do so shall be liable as general partners for all debts, the corporation was formed under a general law.
liabilities and damages incurred or arising‖ therefrom.
THREE-FOLD CONTRACT:
4. ORGANIZATION AND COMMENCEMENT OF BUSINESS 1. Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation’
a. CORPORATE ORGANIZATION 2. Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
Sec. 22. Effects on non-use of corporate charter and continuous 3. Between and among the stockholders or members themselves as far as
inoperation of a corporation.- If a corporation does not formally organize their relationship with one another is concerned.
and commence the transaction of its business or the construction of its works
within two (2) years from the date of its incorporation, its corporate powers FRANCHISE: appropriately applies to the right or privilege itself to be and
cease and the corporation shall be deemed dissolved. However, if a act as a corporation or to do a certain act while charter applies to the
corporation has commenced the transaction of its business but subsequently instrument by which the state vests such right or privilege. Franchise may
becomes continuously inoperative for a period of at least five (5) years, the either be: (1) Primary – nothing more than the right or privilege of being a
same shall be a ground for the suspension or revocation of its corporate corporation; or (2) Secondary – the powers and privileges vested in, and to
franchise or certificate of incorporation. be exercised by the corporate body as such. Example: Employment Agencies,
primary franchise is the certificate of incorporation from the SEC, the
This provision shall not apply if the failure to organize, commence the secondary franchise is the license issued by the POEA.
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the corporation B. CORPORATE ENTITY THEORY
as may be determined by the Securities and Exchange Commission.
As a legal entity, the corporation is possessed with a juridical personality
Once the certificate of incorporation has been issued, the corporation MUST separate and distinct from the individual stockholders or members and is not
formally organize and commence its business. affected by the personal rights, obligations or transactions of the latter. The
properties it possesses belongs to it exclusively as a separate juridical entity
NON-USE OF CORPORATE CHARTER: Apparent from the above provision such that the personal creditors of its stockholders or members cannot attach
is that the failure of the corporation to organize within 2 years would corporate properties to satisfy their claims.
result in it automatic dissolution, unless, of course, its failure to do so is
due to causes beyond its control. On the other hand, the corporation is not likewise liable for the debts,
obligations or liabilities of its stockholders. Neither may it properties be made
FORMAL ORGANIZATION: refers to the process of structuring the answerable to satisfy the claim of creditors against its stockholders or
corporation to enable it to effectively pursue the purpose for which it was member even if the stockholder concerned is its president.
organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD; SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA,
b. Adoption of by-laws, if not simultaneously filed with the AOI, and its INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) – Plaintiff-
subsequent filing with the SEC which must be within 1 month from the appellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the
issuance of the certificate of incorporation; recovery of 28,000 square meters of land for and in behalf of it members,
c. Organizational meeting of the BOD to elect the corporate officers, who were themselves and their predecessors-in-interest pioneered in the
adoption of corporate seal, accepting pre-incorporation subscriptions, clearing of the land and cultivated the same since the Spanish Regime and
establishing the principal office and such other steps necessary to have been in continuous possession of the same. The action was dismissed
transact the legitimate business for which the corporation was formed. on the ground that there is no cause of action. On appeal, the CA certified
the case to the SC for the legal issues involved.
The most that can be said is that they benefited from the services, but that ISSUE: WON the corporate president is liable to refund the amount state in
surely is no justification t hold them personally liable therefor. Otherwise, all the NHA ruling?
other stockholders of the corporation, including those who came in later, and
regardless of the amount of their stockholdings would be equally and HELD: No. As a general rule, a corporation may not be made to answer for
personally liable also with the petitioners for the claims of the private acts or liabilities of its stockholders or those of the legal entities to which it
respondents. may be connected and vice versa. However, the veil of corporate fiction may
be pierced when it is used as a shield to further an end subversive of justice;
Petitioners are not liable under the challenged decision. or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA 665; Oct. crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent
19, 1992) – Petitioner Rustan entered into a conract of sale with respondent the law or perpetuate deception; or as an alter ego, adjunct or business
Lluch which was later on stopped by Rustan through a letter. Lluch sent a conduit for the sole benefit of the stockholders.
letter to clarify whether the letter sent by Rustan was for the stoppage of
delivery or termination of the contract of sale. Unanswered, respondent Lluch We find no badges of fraud on petitioners’ part. They had literally relied,
resumed devliveries and later on filed a complaint for contractual breach albeit mistakenly, on its contract with private respondent when it rescinded
which was dimissed. On appeal, the CA modified the decision of the trial the contract to sell extrajudicially and had sold it to another person.
court directing petitioner including Tantoco, president and general manager,
and Vergara, resident manager, to pay private respondents. No sufficient proof exists on record that said petitioner used the corporation
to defraud private respondent. He cannot, therefore, be made personally
ISSUE: WON individual petitioners may be held liable? liable just because he ―appears to be the controlling stockholder‖. Mere
ownership by a single stockholder or by another corporation of all
Done this 10th day of August 1964 at Bacarra, Ilocos Norte. PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA 1011; Aug.
31, 1962) – Alfredo Carillo, a driver of herein respondent corporation, ran
(Sgd.) Paulino Soriano over the child of herein petitioner Mario Palacio, and was found guilty of the
PAULINO SORIANO criminal case filed against him. Isabelo Calingasan, the employer, was held
President subsidiarily liable and not the defendant corporation. Plaintiffs now contend
that the defendant corporation should be made subsidiarily liable for
(Sgd.) Nenita C. Esperanza damages in the criminal case because the sale to it of the jeep in question,
NENITA C. ESPERANZA after the conviction of Carillo was merely an attempt on the part of
Sec. Treasurer Calingasan, its president and general manager, to evade his subsidiary civil
liability.
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO ISSUE: WON the corporation can be held liable for the subsidiary civil
E. ACOSTA Director, Official liability of Isabelo Calingasan?
Representative
HELD: Yes. It is evident that Calingasan’s main purpose in forming the
(Sgd.) A. Macadangdang corporation was to evade his subsidiary civil liability resulting from the
A.G. MACADANGDANG conviction of his driver. This conclusion is borned out by the fact that the
Manager incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his
son, Dr. Calingasan, and his two daughters. We believe that this one case
ISSUE: WON petitioners are liable? where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to
HELD: No. We cannot accept the conclusion that the official designations of allow it to do so would be to sanction the use of the fiction of
petitioners were written on the document merely as meaningless and hollow corporate entity as a shield to further an end of subversive of
decorations or as mere descripto personae without any relevance to the justice. Furthermore, the failure of the defendant corporation to prove that
liability of the corporation these officers obviously represented. Indeed, it has other property other than the jeep strengthens the conviction that its
taking in conjunction with the other obtaining circumstances, the receipt formation was for the purpose above indicated.
discloses the capacity by which the petitioners entered into the ―deal‖ with
private respondent. MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil. 376;
Feb. 24, 1954) – Plaintiffs, as stockholders of Marvel Building Corporation
The subject receipt itself states tht the conditions contained therein were sought to enjoin the defendant Collector of Internal Revenue from selling at a
between the private respondent and the ―Association‖. The lower court held public auction properties which were said to be registered in the name of said
that the ―Association‖ referred only to the signatories. We disagree. It is quite corporation. Said properties were seized and distrained by defendant to
plain and we are convinced that the ―Association is none other than the collect war profits taxes against Maria Castro who the former claims to be the
Bacarra (I.N.) Facoma, Inc. which is a farmer’s cooperative marketing sole owner of the said corporation. Maria Castro owns P250,000 of the
association. Not only that , we cannot find any cogent reason why the P1,025,000 capital of the corporation, of the rest of the incorporators were
petitioners used the word ―Association‖ when they could have more easily her half-brothers, half-sister and a brother-in-law.
and conveniently placed ―the undersigned‖ or words to the same effect in its
In our opinion, the facts and circumstances duly set forth, all of which have FACTS: Herein respondent entered into an agreement with Jackbilt where
been proved to our satisfaction, prove conclusively and beyond reasonable the former was made the sole and exclusive distributor of concrete blocks
doubt that Maria Castro is the sole and exclusive owner of all the shares of manufactured by Jackbilt and accordingly every order of a customer of
stock of the corporation and that the other partners are her dummies. Norton was transmitted to Jackbilt which delivered the merchandise directly
to the customer. Payment of the goods, however, is made to Norton, which
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961) – Herein in turn pays Jackbilt the amount charged the customer less a certain amount,
petitioner Yutivo purchased its cars and trucks from General Motors Overseas as its compensation or profit.
Corporation (GM), the latter paying the sales tax once on original sales,
Yutivo no longer paid sales tax on its sales to the public. Later no, GM During the existence of the agreement, Norton acquired by purchase all the
withdrew from the Philippines and appointed Yutivo as importer. Yutivo in outstanding stocks of Jackbilt. Due to this, the Commissioner of Internal
turn exclusively sold to Southern Motors, Inc. (SM), a corporation where the Revenue, assess respondent Norton for deficiency taxes making the basis of
incorporators are sons fo the founders of Yutivo. Under this arrangement, sales tax the sales of Norton to the public, which is the higher price compare
Yutivo paid the sales tax on original sale, while SM did not subject to sales to the sale of Jackbilt to Norton. The CTA decided in favor of Norton.
tax its sales to the public.
ISSE: WON the two corporations may be merged into a single corporation?
The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes
which the CTA affirmed. HELD: Yes. It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
ISSUE: WON Yutivo is liable for the deficiency taxes? identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding distinct
HELD: No. It is elementary rule and fundamental principle of corporation law personalities. However, in the case at bar, we find sufficient grounds to
that a corporation is an entity separate and distinct from its stockholders and support the theory that the separate identities of the two companies should
from other corporations to which it may be connected. However, when the be disregarded.
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard the corporation as an (a) Norton owned all the outstanding stocks of Jackbilt;
association of persons, or in case of two corporations merge them into one. (b) Norton constituted Jackbilt’s directors;
Another rule is that, when the corporation is a mere alter-ego or business (c) Norton financed the operations of Jackbilt;
conduit of a person, it may disregarded. (d) Norton treats Jackbilt’s employees as its own;
(e) Compensation given to board members of Jackbilt indicate that Jackbilt is
The sales tax liability of Yutivo did not arise until it became the importer and merely a department of Norton;
simply continued its practice of selling to SM. The decision, therefore, of the (f) The offices of Norton and Jackbilt are located in the same compound;
Tax Court that SM was organized purposely as a tax evasion device runs (g) Payments were effected by Norton of accounts for Jackbilt and vice versa;
counter to the fact that there was no tax to evade. (h) Payments were also made to Norton of accounts due or payable to
Jackbilt and vice versa.
We are, however, inclined to agree with the court below that SM was actually
owned and controlled by petitioner as to make it a mere subsidiary or branch The circumstances presented by the facts of the case, yields to the
of the latter created for the purpose of selling the vehicles at retail and conclusion that Jackbiltis merely an adjunct, business conduit or alter-ego of
maintaining stores for spare parts as well as service repair shops. It is not Norton and that the fiction of corporate entities, separate and distinct from
disputed that the petitioner, which is engaged principally in hardware each other should be disregarded.
supplies and equipment, is completely controlled by the Yutivo, Young and Yu
family. The founders of the corporation are closely related to each other LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG MGA
either by blood or affinity and most of its stockholders are members of the Yu MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160; May 25, 1953) –
(Yutivo or Young) family. Tan Tong, one of herein petitioners, is engaged in the buying and selling of
guagua under the trade name La Campana Guagua Packing. Later on, Tong
According to the AOI, the amount of P62,500 was actually advanced by and his family organized a family corporation known as La Campana Coffee
Yutivo. The additional subscriptions to SM were paid by Yutivo. The Factory Co, Inc. with its principal office located at the same place as that of
shareholders in SM are mere nominal stockholders holding the share for and La Campana Guagua Packing.
in behalf of Yutivo, so even conceding that the original subscribers were bona
fide stockholders, Yutivo was at all tie in control of the stock of SM and that Tan Tong’s employees later on formed a union (herein respondent) through
the latter was a mere subsidiary of the former. which they demanded (from both companies) higher salaries and more
privileges. As the demand was not granted and an attempt at a settlement
SM is under the management control of Yutivo by virtue of the management through mediation had given no result, the Department of Labor certified the
contract entered into between the two parties. In fact, the controlling dispute to the Court of Industrial Relations (CIR). Petitioners filled a motion
TAN BOON BEE & CO., INC., petitioner, ―While the records show that originally, the incorporators were aliens, friends
vs. or third-parties in relation of one to another, in the course of its existence, it
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF developed into a close family corporation. The BOD and stockholders belong
BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC to one family the head of which FL Cease always retained the majority and
PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY, hence, the control and management of its affairs. In fact, during the
respondents reconstruction of its records before the SEC, only 9 nominal shares out of 300
(GR No. L-41337; 163 SCRA 205; June 30, 1988) appear in the name of his 3 eldest children then and another person close to
them (Ternate). It is likewise noteworthy to observe that as his children
FACTS: For failure of private respondent Graphic Publishing Inc. to pay increase or perhaps become of age, he continued distributing his shares
paper products purchased from petitioner (doing business under the name among them adding Florence, Teresa and Marion until at the time of his
and style Anchor Supply, Inc.), petitioner filed a complaint in the CFI of death, only 190 were left to his name. Definitely, only the members of his
Manila. A writ of Execution was issued levying a printing machine which family benefited from the corporation.
private respondent Philippine American Drug Company claimed as its own.
PADCO filed a third party claim and asked the court to nullify the auction sale The accounts of the corporation and therefore its operation, as well as that of
already conducted, which herein respondent judge granted. the family appears to be indistinguishable and apparently joined together. As
admitted by the defendants, the corporation ―never‖ had any account with
ISSUE: WON the respondent judge should be upheld? any banking institution or if any account was carried in a bank on its behalf, it
was in the name of FL Cease. In brief, the operation of the Corporation is
HELD: No. It is true that a corporation, upon coming into being, is invested merged with those of the majority stockholders, the latter using the former
by law with a personality separate and distinct from that of the persons as his instrumentality and for the exclusive benefit of all his family. From the
composing it as well as from any other legal entity to which it may be foregoing indication, therefore, there is truth in plaintiffs’ allegation that the
related. As a matter of fact, the doctrine that a corporation is a legal entity corporation is only a business conduit of his father and an extension of his
distinct and separate from the members and stockholders who compose it is personality, they are once and the same thing. Thus, the assets of the
recognized and respected in all cases which are within reason and the law. corporation are also the estate of FL Cease, the father of the parties herein
However, this separate and distinct personality is merely a fiction who are al legitimate children of full blood‖
created by law for convenience and to promote justice. Accordingly,
this separate personality of the corporation may be disregarded, or Were we to sustain petitioners, the legal fiction of separate corporate
the veil of corporate fiction pierced, in cases where it is used as a personality shall have been used to delay and ultimately deprive and defraud
cloak or cover for fraud or illegality, or to work an injustice, or the respondents of their successional right to the estate of their deceased
where necessary to achieve equity or when necessary for the father.
protection of creditors. Corporations are composed of natural
persons and the legal fiction of a separate corporate personality is D. WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
not a shield for the commission of injustice and inequity. Likewise,
this is true when the corporation is merely an adjunct, business WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
conduit or alter-ego of another corporation. In such case, the fiction
of separate and distinct corporate entities should be disregarded. 1. Absent any of the following circumstances, the courts will not be
justified in disregarding the corporate entity;
In the instant case, petitioner’s evidence established that PADCO never a. The corporation is used or being used to defeat public
engaged in the printing business; that the BOD and the officers of PADCO convenience;
and Graphic are the same; and that PADCO holds 50% share of stock of b. Justify wrong;
Graphic. The printing machine in question was in the premises of Graphic, c. Protect fraud;
long before PADCO even acquired its alleged title from Capitol Publishing. d. Defend crime;
e. Confuse legitimate issues;
Considering the above, respondent judge should have pierced PADCO’s veil of f. Circumvent the law;
corporate identity. g. Perpetuate deception; or
h. An alter-ego, adjunct or business conduit for the sole benefit of a
CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) – Forrest L. Cease is the stockholder or a group of stockholders or another corporation.
common predecessor-in-interest of the parties. He and other American 2. The wrong doing must be clearly and convincingly established. It
citizens organized the Tiaong Milling and Plantation Company and in the cannot be justified by speculation and can never be presumed.
ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable? AC RANSOM – The distinguishing mark of fraud were clearly apparent in AC
Ransom, when such corporation ceased operation after the decision of the
HELD: No. The facts of the case show that there is no cogent basis to pierce CIR and new one replacing it which was owned by the same family, engaging
the corporate veil of Akron and hold petitioner personally liable for its in the same business and operating in the same compound. In the present
obligation to private respondent. While it is true that he is a member of the case, not only has there been failure to establish fraud, but it has
board at the time the resolution to purchase the trucks were adopted, it does also not been shown that petitioner is the corporation officer
not appear that said resolution was intended to defraud anyone. It was responsible for PR‘s predicament. It must be emphasized that the claims
Coprada who negotiated with respondent and the one who signed the were actually directed against the employer, PHILSA became liable only
promissory note. The word ―We‖ in the said promissory note must refer to because of its undertaking to be jointly and severally bound with the foreign
the corporation and COprada and not of its stockholders and directors. employer, as required by POEA rules.
Petitioner did not sign such note so he cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted on private INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205 SCRA
respondent in that there was forthcoming loan from the DBP when in fact 697; Feb. 3, 1992) - On April 1987, petitioner and Indophil Textile Mills, Inc.
there as none, it is Coprada who should account for the same and not the executed a CBA effective from April 1, 1987 to March 31, 1990. On
petitioner. November 3, 1987, Indophil ACRYLIC MANUFACTURING CORP was formed
and registered with the SEC and in 1988 became operation and hired workers
according to its own criteria and standards.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) - Pursuant to a
complaint for money claims which was ultimately decided by the NLRC In 1989, the workers of ACRYLIC unionized and a CBA was executed. In
against PHILSA Construction and Trading Co. (recruiter) and Arieb 1990, petitioner union claimed that the plant facilities build and set up by
Enterprises (employer), a writ of execution was issed by the POEA which was ACRYLIC should be considered an extension or expansion of the facilities of
returned unsatisfied as PHILSA was no longer operating and was financially TEXTILE MILLS, to make ACRYLIC part of the TEXTILE MILLS bargaining unit.
incapable of satisfying the judgment. Public respondent voluntary arbitrator Calica declared that the CBA of
petitioner DOES NOT extend to employees of ACRYLIC.
At the motion of private respondent, an alias writ was issued against the
properties of Mr. Francisco del Rosario and if insufficient, against the cash ISSUE: WON the veil of corporate entity should be pierced?
and/or surety bond of the Bonding Company concerned.
HELD: No. Under the doctrine of piercing the veil of corporate entity, when
Petitioner appealed to the NLRC which was denied together with his MR. valid grounds therefore exist, the legal fiction that a corporation is an entity
with a juridical personality separate and distinct from its members or
ISSUE: WON the writ of execution must be upheld? stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or
HELD: No. Under the law, a corporation is bestowed juridical personality, stockholders of a corporation will be considered as the corporation,
separate and distinct from its stockholders. But when the juridical personality that is, liability will attach directly to the officers and stockholders.
of the corporation is used to defeat public convenience, Justify wrong,
protect fraud or defend crime, the corporation shall be considered as a In the case at bar, petitioner alleges that the creation of the ACRYLIC is a
mere association of persons, and its responsible officers and/or devise to evade the application of the CBA between petitioner and TEXTILE
stockholders shall be held individually liable. For the same reasons, a MILL. While we do not discount the possibility of the similarities of the
corporation shall be liable for he obligation of a stockholder or a corporation businesses of the two corporations, neither are we inclined to apply the
doctrine invoked by petitioner.
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July 31, 2001) c. The aforesaid control and breach of duty must proximately cause
- PNB International Finance Ltd. (IFL), a wholly-owned subsidiary of PNB, the injury or unjust loss complained of.
organized and doing business in HK, extended a letter of credit in favor of
respondent RITRATTO in the amount of US$300K , later increased to 1.14M, The absence of any one of these elements prevents ―piercing the
to 1.29M, to 1.425M and decreased to 1,421,316.18, secured by a real corporate veil‖. In applying the ―instrumentality‖ or ―alter-ego‖ doctrine,
estate mortgage constituted in 4 parcels of land in Makati City. the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant‘s relationship
As of April 1998, the outstanding obligation of respondents stood at to the operation. (Concept Builders, Inc vs. NLRC)
US$1,497,274.70. Pursuant to the terms of the mortgages, IFL, through its
attorney-in-fact PNB, notified respondents of the foreclosure of all the real Aside from the fact that IFL is a wholly owned subsidiary, there is no showing
estate mortgages and that the properties would be sold at a public auction. of the indicative factors that the it is a mere instrumentality of PNB. Neither is
there a demonstration that any of the evils sought to be prevented by
Respondents filed a complaint for injunction for which a TRO was issued and the doctrine of piercing the corporate veil based on the alter-ego or
later on a writ of preliminary injunction, which petitioner assailed with the CA instrumentality doctrine finds application in the case at bar.
through petition for certiorari.
The injunction suit was directed against PNB, as agent of IFL and not as
The CA dismissed the petition. parent. A suit against an agent, cannot, without compelling reasons be
considered a suit against the principal, for he is not the real party in interest
ISSUE: WON the corporate entity of IFL may be disregarded? provided under the Rules of Court.
HELD: No. Respondents, therefore do not have any cause of action against
it. The trial court erred in disregarding the corporate entity by saying that IFL YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN, ROQUE
is a wholly owned subsidiary of PNB and that it is a mere alter-ego or ESTOCE AND RODRIGO SANTOS (245 SCRA 134) - Private respondents
business conduit of the latter. were employees of Tanduay Distillery, Inc. (TDI). On March 29, 1988, 22
employees of TDI, including PRs, received a memorandum from TDI,
The mere fact that a corporation owns all of the stocks of another terminating their services for reasons of retrenchment, because First Pacific
corporation, taken alone is not sufficient to justify their being Metro Corporation is buying TDI’s assets, which purchase did not push
treated as one entity. If used to perform legitimate functions, a through.
subsidiary‘s separate existence may be respected, and the liability
of the parent corporation as well as the subsidiary will be confined On June 1, 1988, after employees had ceased as such, Twin Ace Holdings,
to those arising in their respective businesses. Inc. took over the business and assumed the name Tanduay Distillers
(Tanduay).
KOPPEL PHIL VS. YATCO – this Court disregarded the separate existence
of the parent and subsidiary on the ground that the latter was formed Labor Arbiter, on a case originally filed in April 26, decided in favor of PRs
merely for the purpose of evading the payment of higher taxes. In the case holding the retrenchment illegal, which was affirmed by the NLRC. Petitioners
at bar, respondents failed to show any cogent reason why the filed an opposition against the motion for execution (which was directed
separate entities of PNB and IFL should be disregarded. towards them and TDI) contending that Tanduay is a separate entity distinct
from TDI, and respondents James Yu and Wilson Young, which was
While there exists no definite test of general application in determining when dismissed by the NLRC.
a subsidiary may be treated as a mere instrumentality of the parent
corporation some factors have been identified that will justify the application ISSUE1: WON the order of execution is void?
of the treatment of the doctrine of piercing the corporate veil:
HELD: Yes. The decision dated May 24, 1989, was already final and
1. As a general rule, the stock ownership alone by one corporation ofhte executory and cannot be amended or corrected except for clerical errors or
stock of anoher does not thereby render the dominant corporation liable for mistakes. An examination of the said decision does not in any manner
the torts of the subsidiary unless the separate corporate existence of obligate Tanduay or even petitioners Yu and Young to reinstate PRs. Only
the subsidiary is a mere sham, or unless the control of the TDI was held liable upto the time of change of ownership. The order of
subsidiary is such that it is by an instrumentality or adjunct of the execution in effect amended the decision. It is beyond the power and
dominant corporation (Garrett vs. Southern Railway Co.; Tennessee SC); competence of Labor Arbiter Cueto to amend a final decision. The writ of
execution must not go beyond the scope of judgment.
2. The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of ISSUE2: WON NLRC committed grave abuse of discretion in holding
a corporation is abused or used for wrongful purpose. The doctrine applies petitioner Yu and Young liable?
when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or when it is used as a shield to
confuse legitimate issues or where the corporation is so organized and
Such a stance is not supported by the facts. The name of the company The steps to be followed for an effective amendment of the articles of
for whom the petitioners are working is Twin Ace Holdings incorporation would thus be:
Corporation. As stated by the SolGen, Twin Ace is part of the Allied Banking 1. Resolution by at least a majority of the board of directors or trustees;
Group although it conducts the rum business under the name of Tanduay 2. Vote OR WRITTEN ASSENT of the stockholders representing at least
Distillers. The use of a similar sounding or almost identical name is an 2/3 of the outstanding capital stocks or members in case of a non-stock
obvious device to capitalize on the goodwill which Tanduay Rhum has built corporation. (Note: non-voting shares are considered in determining the
over the years. Twin Ace or Tanduay Distillers and TDI are distinct voting and quorum requirement in case of amendments of the articles of
and separate corporations. There is nothing to suggest that the incorporation as provided in Sec. 6);
owners of TDI, have any common relationship as to identify it with 3. Submission and filing of the amendments with the SEC as follows:
Allied Banking Group which runs Tanduay Distillery. a. The original and amended articles together shall contain all the
provision required by law to be set out in the articles of
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin incorporation. Such articles, as amended, shall be indicated by
Ace was only a subsequent interested buyer. PRs have not presented any underscoring the change or changes made;
proof as to communality of ownership and management to support b. A copy thereof, duly certified under oath by the corporate secretary
their contention that the two companies are one firm or closely and a majority of the directors or trustees stating the fact that such
related. amendments have been approved by the required vote of the
stockholders or members;
The complaint was filed against TDI. Only later when the manufacture c. Favorable recommendation of the appropriate government agency
and sale of Tanduay products was taken over by Twin Ace or concerned in the case where the corporation is under its
Tanduay Distillers were James Yu and Wilson Young impleaded. The supervision such as banking and insurance companies, etc.
corporation itself was never made a party to the case.
When to take effect? (1) Upon approval by the SEC; or (2) From the date of
The buyer (Twin Ace) did not buy TDI as a corporation, only most of its filing if not acted upon within 6 months for a cause not attributed to the
assets, equiment and machinery. Thus, Tanduay Distillers or Twin-Ace corporation (does not apply to increasing or decreasing the capital stock or
did not take over the corporate personality of TDI although they shortening the corporate term, which shall require the approval of the SEC
manufacture the same product at the same plant with the same [Sec. 38 and 120])
equipment and machinery. Obviously, the trade name ―Tanduay‖ went
with the sale because the new firm does business as Tanduay Distillers and SPECIAL AMENDMENTS
its main product of rum is sold as Tanduay Rum. There is no showing,
however, that TDI itself was absorbed by Twin Ace or that it ceased Sec. 37.Power to extend or shorten corporate term. - A private
to exist as a separate corporation. In point of fact, TDI is now herein a corporation may extend or shorten its term as stated in the articles of
party respondent represented by its own counsel. incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least
The fiction of separate and distinct corporate entites cannot, in the instant two-thirds (2/3) of the outstanding capital stock or by at least two-thirds
case, be disregarded and brushed aside, there being not the lease (2/3) of the members in case of non-stock corporations. Written notice of the
indication that the second corporation was a dummy or servces as a proposed action and of the time and place of the meeting shall be addressed
client of the first corporate entity. 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: Provided, That in case of
AMENDMENT OF THE CORPORATE CHARTER extension of corporate term, any dissenting stockholder may exercise his
appraisal right under the conditions provided in this code.
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity: Sec. 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or
xxx decrease its capital stock or incur, create or increase any bonded
4. To amend its articles of incorporation in accordance with the provisions of indebtedness unless approved by a majority vote of the board of directors
this Code; and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
of the outstanding capital stock shall favor the increase or diminution of the
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise capital stock, or the incurring, creating or increasing of any bonded
prescribed by this Code or by special law, and for legitimate purposes, any indebtedness. Written notice of the proposed increase or diminution of the
provision or matter stated in the articles of incorporation may be amended by capital stock or of the incurring, creating, or increasing of any bonded
a majority vote of the board of directors or trustees and the vote or written indebtedness and of the time and place of the stockholder's meeting at which
assent of the stockholders representing at least two-thirds (2/3) of the the proposed increase or diminution of the capital stock or the incurring or
outstanding capital stock, without prejudice to the appraisal right of increasing of any bonded indebtedness is to be considered, must be
dissenting stockholders in accordance with the provisions of this Code, or the addressed to each stockholder at his place of residence as shown on the
vote or written assent of at least two-thirds (2/3) of the members if it be a books of the corporation and deposited to the addressee in the post office
non-stock corporation. with postage prepaid, or served personally.
The original and amended articles together shall contain all provisions A certificate in duplicate must be signed by a majority of the directors of the
required by law to be set out in the articles of incorporation. Such articles, as corporation and countersigned by the chairman and the secretary of the
amended shall be indicated by underscoring the change or changes made, stockholders' meeting, setting forth:
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 (1) That the requirements of this section have been complied with;
amendments have been duly approved by the required vote of the (2) The amount of the increase or diminution of the capital stock;
stockholders or members, shall be submitted to the Securities and Exchange (3) If an increase of the capital stock, the amount of capital stock or number
Commission. of shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
The amendments shall take effect upon their approval by the Securities and number of no-par stock subscribed by each, and the amount paid by each on
CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS The failure of the defendant corporation to make an issue in its answer with
regard to the authority of Ramon Fernandez to bind it, and particularly to
Unless the law so provides, corporate powers may be delegated to deny specifically under oath the genuineness and due execution of the
individual directors or other officers or agents. Whether or not the acts contracts sued upon have the effect of eliminating the question of his
of the individual director, officer or agent would bind the corporation depend authority from the case.
on the nature of the agency created or the poers conferred upon such person
by the statute, the corporate charter, the by-laws, the corporate action of the It is declared under Sec. 28 (now 23) that corporate powers shall be
board or stockholders, or whether it is necessary or incidental to one’s office. exericsed, and all corporate business conducted by the board of
directors, and this principle is recognized in the by-laws of the
The general rule is that a corporation is bound by the acts of its corporation in question which contain a provision declaring that the
corporate officers who act within the scope of the 5 classification of power to make contracts shall be vested in the board of directors.
powers of corporate agents, which are:
1. Those expressly conferred or those granted by the articles of It is true that it is also true in the by-laws, that the president shall have the
incorporation, corporate by-laws or by the official act of the board of power and it shall be his duty, to sigh contract; but this has reference
directors; rahter to the formality of reducing to proper form the contract which
2. Those that are incidental or those acts as are naturally and ordinarily are authorized by the board and is not intended to confer an independent
done which are reasonable and necessary to carry out the corporate power to make contract binding on the corporation.
purpose or purposes;
3. Those that are inherent or acts that go with the office; The fact that the power to make corporate contracts is thus vested in the
4. Those that are apparent or those acts which although not actually board of directors does not signify that a formal vote of the board must
granted, the principal knowingly allows or permits it to be done; and always be taken before contractual liability can be fixed upon a corporation;
5. Powers arising out of customs, usage or emergency. for a board can create liability, like an individual, by other means
than by a formal expression of its will.
J. F. RAMIREZ, plaintiff-appellee,
vs. Participation of the stockholders. The letter accepting the offer was
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants- dispatched in a meeting of the board called by Ramon Fernandez, where 4
appellants members, including the president was present. The minutes add that terms
(G.R. No. 11897 September 24, 1918) of this offer were approved; but at the suggestion of Fernandez it was
decided to call a special meeting of the stockholders to consider the matter
FACTS: The Board of Directors were apprised of the fact the plaintiff JF and definite action was postponed. From the meeting of the stockholders, it
Ramirez, who is based in Paris and represented by his son Jose Ramirez, had can be inferred that this body was then cognizant that the offer had already
control of agencies for two different marks of films, ―Éclair Films‖ and ―Milano been accepted. It is not, however, necessary to find the judgment of the
Films‖. stockholder proceedings, even if the assumption is that they did not approve
of the contract.
Negotiations began between Jose Ramirez and the board of directors of
Orientalist Co. where Ramon Fernandez, one of the members of the board Both upon the principle and authority it is clear that the action of the
and TOC’s treasurer was chiefly active. stockholders, whatever its character, must be ignored. The theory of
a corporation is that the stockholders may have all the profits but shall
Near the end of July 1913, Jose Ramirez offered to supply from Paris the turn over the complete management of the enterprise to their
aforesaid films to TOC through Fernandez. Accordingly, Fernandez had an representatives and agents, called directors. Accordingly, there is little
informal conference with the BOD except one, and with approval of those for the stockholders to do beyond electing directors, making by-laws, and
whom he had communicated, accepted the offer through letters signed by exercising certain other special powers defined by law. In conformity with
Fernandez in his capacity as treasurer. this idea, it is settled that contract between a corporation and third
person must be made by the director and not by the stockholders.
Upon arrival of the said films, it turned out that TOC was without funds, so The corporation, in such matters, is represented by the former and not by the
the first drafts, taken in the name of TOC were received and paid by its latter. It results that where a meeting of the stockholders is called for the
president, Hernandez, through his own funds and such films were treated by purpose of passing on the propriety of making a corporate contract, its
him as his own property; and in fact, they never came into the possession of resolutions are at most advisory and not in any wise binding on the board.
TOC and were rented by Hernandez to TOC as they are exhibited in the
Oriental Theater. BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8, 1932) –
Petitioners, directors of respondent upto March 1929, sought to recover 1%
Other films arrived together with their drafts, taken in the name of TOC (to each plaintiff) of the profits of the copany for the year 1929, under and in
through its president, which were not paid and gave rise to the present accordance with an amendment to the by-laws which was made at the
action. TOC was declared the principal debtor and Ramon Fernandez, the general meeting of the stockholders on Feb. 1929, to which the lower court
guarantor. rendered in their favor.
DBP declined to receive the summons saying it is not authorized, Alfa having HELD: No. There is no record showing that Jose dela Rosa owned a share of
a personality separate and distinct. The trial court, in turn ordered private stock in the corporation. If he did not own any share of stock, certainly he
respondents to take the appropriate steps to serve the summons to Alfa could not be a director pursuant to Sec. 30 of the Corporation Law and
which they made through the officers and later on, was later on declared to consequently he cannot be a managing director by virtue of the by-laws of
be proper service of summons. the corporation that the manager shall be elected by the BOD among its
members.
After the second motion for reconsideration, the trial court reversed itself,
saying that the service of summons upon the petitioners were not proper, Accordingly, Faustino Alberto could not be compelled to vacate his office and
them not being officers of the corporation anymore. On appeal, the CA cede the same to dela Rosa because the by-laws provide that the Directors
reversed the trial court. shall serve until the election and qualification of their duly qualified successor.
ISSUE: WON the petitioners can still be authorized to receive the summons ELECTION AND VOTING
despite the voting trust agreement with DBP?
Sec. 24. Election of directors or trustees. - At all elections of directors or
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more trustees, there must be present, either in person or by representative
definitive meaning. By its very nature, a VTA results in the separation of the authorized to act by written proxy, the owners of a majority of the
voting right of a stockholder from his other rights such as the right to receive outstanding capital stock, or if there be no capital stock, a majority of the
dividends, the right to inspect the books of the corporation, the right to sell members entitled to vote. The election must be by ballot if requested by any
certain interests in the assets of the corporation and other rights to which a voting stockholder or member. In stock corporations, every stockholder
stockholder may be entitled until the liquidation of the corporation. However, entitled to vote shall have the right to vote in person or by proxy the number
A complaint was filed before the labor arbiter who decided in favor of private ISSUE: WON Chen had the power to bind the corporation under a contract
respondents. of that character?
ISSUE: WON the gratuity pay should be paid? HELD: No. The general rule is that the power to bind a corporation by
contract lies with its board of directors or trustees, but this power may either
HELD: Yes. The general rules is that a corporation, through its board of be expressly or impliedly be delegated to other officers or agents of the
directors, should act in the manner and within the formalities, if corporation, and it is well settled that except where the authority of
any, prescribed by its charter or by the general law. Thus, the employing servants and agents is expressly vested in the BOD/T, an
secretary, the call for the meeting may be addressed directly to the
upon such demand or fail or refuse to give the notice, or if there is no
FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan
stockholders or members by any stockholder or member of the corporation (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
signing the demand. Notice of the time and place of such meeting, as well as Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray
of the intention to propose such removal, must be given by publication or by Gamboa were elected as BOD during the Annual Stockholders’ Meeting
written notice prescribed in this Code. Removal may be with or without of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the
cause: Provided, That removal without cause may not be used to deprive requisite quorum could not be obtained so they continued to act as directors
minority stockholders or members of the right of representation to which they
in a hold-over capacity.
may be entitled under Section 24 of this Code.
On September 1, 1998, Dinglasan resigned, BOD still constituting a
NOTE:
quorom elected Eric Roxas (Roxas) followed by Macalintal.
1. By-laws may provide for casues or grounds for removal of a director;
2. A director representing the minority may not be removed except for
those causes;
On March 6, 2001, Jose Ramirez (Ramirez) was elected by the remaining
BOD. Respondent Africa (Africa), a member of VVCC, questioned the election
3. A director NOT representing the minority may be removed even without
of Roxas and Ramirez as members of the VVCC Board with the Securities and
a cause.
Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary
to Sec. 23 and 29 of the Corporation Code.
REQUIREMENTS FOR A VALID REMOVAL:
1. The removal should take place at a general or special meeting duly call
The RTC decided in favor of Africa.
for that purpose;
2. The removal must be by the vote of the stockholders holding or
ISSUE: WON the appointment of Roxas and Ramirez made by the remaining
representing 2/3 of the outstanding capital stock or the members
members of the Board, still constituting a quorum, were valid?
entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the
HELD: No. The resolution of this legal issue is significantly hinged on the
intention to propose such removal at the meeting either by publication
determination of what constitutes a director’s term of office.
or on written notice to the stockholders or members.
The holdover period is not part of the term of office of a member of
JURISDICTION OF THE COURT: The law, as it stands now, grants the
the board of directors. The word ―term‖ has acquired a definite meaning in
proper court, the power and authority to hear and decide cases ―involving
jurisprudence. In several cases, we have defined ―term‖ as the time
controversies in the election or appointment of directors, trustees, officers, or
during which the officer may claim to hold the office as of right, and
managers of such corporation, partnership or association.‖
fixes the interval after which the several incumbents shall succeed one
another. The term of office is not affected by the holdover. The term is
DEADLOCK: In the case of deadlock in a close corporation, the SEC is also
fixed by statute and it does not change simply because the office may have
authorized to issue an Order as it deems appropriate ―canceling, altering or
become vacant, nor because the incumbent holds over in office beyond the
enjoining any resolution or other act of the corporation or its board of
Based on the above discussion, when Section 23 of the Corporation Code Sec. 30. Compensation of directors. - In the absence of any provision in
declares that ―the board of directors…shall hold office for one (1) year until the by-laws fixing their compensation, the directors shall not receive any
their successors are elected and qualified,‖ we construe the provision to compensation, as such directors, except for reasonable per diems: Provided,
mean that the term of the members of the board of directors shall be however, That any such compensation other than per diems may be granted
only for one year; their term expires one year after election to the office. to directors by the vote of the stockholders representing at least a majority of
The holdover period – that time from the lapse of one year from a member’s the outstanding capital stock at a regular or special stockholders' meeting. In
election to the Board and until his successor’s election and qualification – is no case shall the total yearly compensation of directors, as such directors,
not part of the director’s original term of office, nor is it a new term; the exceed ten (10%) percent of the net income before income tax of the
holdover period, however, constitutes part of his tenure. Corollary, when an corporation during the preceding year.
incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, GENERALLY: Directors are not entitled to receive any compensation,
and the incumbent is holding the succeeding term. EXCEPT:
1. Reasonable per diems;
After the lapse of one year from his election as member of the VVCC Board in 2. As provided in the by-laws or upon a majority vote of the stockholders;
1996, Makalintal’s term of office is deemed to have already expired. That he and
continued to serve in the VVCC Board in a holdover capacity cannot be 3. If they are performing functions other than that of a director.
considered as extending his term. This holdover period is not to be
considered as part of his term, which, as declared, had already expired. (3) above: Sec. 30 is clear on the point when it provides ―as such directors‖.
Therefore, special and extraordinary service rendered, outside of the regular
With the expiration of Makalintal’s term of office, a vacancy resulted which, duties, may form the basis for a claim of special compensation, such as when
by the terms of Section 29 of the Corporation Code, must be filled by the a director acts as a general counsel.
stockholders of VVCC in a regular or special meeting called for the purpose.
To assume – as VVCC does – that the vacancy is caused by Makalintal’s REASON: the office of a director is usually filled up by those chiefly
resignation in 1998, not by the expiration of his term in 1997, is both illogical interested in the welfare of the institution by virtue of their interest in stock
and unreasonable. His resignation as a holdover director did not change the or other advantages and such interests are presumed to be the motive for
nature of the vacancy; the vacancy due to the expiration of Makalintal’s term executing duties of the office without compensation.
had been created long before his resignation.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF
The powers of the corporation‘s board of directors emanate from COMPENSATION? The courts will not generally undertake to review the
its stockholders fairness of official salaries, at the suit of a stockholder unless wrongdoing and
oppression or possible abuse of fiduciary position are shown.
This theory of delegated power of the board of directors similarly explains
why, under Section 29 of the Corporation Code, in cases where the vacancy When the recipient does not stand in the dual relation of the (1) one
in the corporation’s board of directors is caused not by the expiration of a compensated and (2) a participant in fixing his own compensation, it is
member’s term, the successor ―so elected to fill in a vacancy shall be elected considered outside the proper judicial function to go into business policy
only for the unexpired term of the his predecessor in office.‖ The law has question of the fairness or reasonableness of compensation as fixed by the
authorized the remaining members of the board to fill in a vacancy only in board. Otherwise, it will call for a scrutiny of the reasonableness or fairness
specified instances, so as not to retard or impair the corporation’s operations; of the compensation. Likewise, even if consented to by the majority of
yet, in recognition of the stockholders’ right to elect the members of the stockholders, the courts may still look into such reasonableness if: (1) it
board, it limited the period during which the successor shall serve only to the would amount to giving away corporate funds in the guise of compensation
―unexpired term of his predecessor in office.‖ as against the interest of the dissenting minority; or (2) in fraud of creditors,
either amounting to wastage of assets.
It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the director‘s term of office. When a CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA
vacancy is created by the expiration of a term, logically, there is no more 593; June 30, 1970) – This is a complaint filed by herein petitioner CCE for
unexpired term to speak of. Hence, Section 29 declares that it shall be the the refund of certain amounts received by respondent when he served as
corporation’s stockholders who shall possess the authority to fill in a vacancy member of the board of directors of CCE, which were said t be per diems and
caused by the expiration of a member’s term. transportation expenses, representation expenses and cummutable
discretionary funds.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the ISSUE: WON the BOD had the power to appropriate funds for the expenses
BOD to the SEC: claimed by respondent?
Sec. 26. Report of election of directors, trustees and officers. - Within HELD: No. The by-laws expressly reserved unto the stockholders the power
thirty (30) days after the election of the directors, trustees and officers of the to determine the compensation of the members of the BOD, and the
corporation, the secretary, or any other officer of the corporation, shall stockholders did restrict such compensation to (1) actual transportation
submit to the Securities and Exchange Commission, the names, nationalities expenses plus (2) per diems of P30 and (3) actual expenses while waiting.
and residences of the directors, trustees, and officers elected. Should a Even without the express prohibition, the directors are not entitled to
director, trustee or officer die, resign or in any manner cease to hold office, compensation for ―The law is well-settled that directors of
his heirs in case of his death, the secretary, or any other officer of the corporations presumptively serve without compensation and in the
corporation, or the director, trustee or officer himself, shall immediately absence of an express agreement or a resolution thereto, no claim
report such fact to the Securities and Exchange Commission can be asserted therefor. Thus it has been held that there can be no
recovery of compensation, unless expressly provided for, when
PURPOSE: to give public information, under sanction of oath responsible director serves as president or vice-president, as secretary or
ISSUE: WON the resolution granting compensation to OFFICERS of the ISSUE: WON Ong should be held jointly and severally liable?
corporation is valid?
HELD: No. It was an error to hold David Ong jointly and severally liable with
HELD: Yes. The proscription under Sec. 30, is against granting compensation TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
to directors/trustees of a corporation is not a sweeping rule. Worthy of note acted, not in his personal capacity, but as an officer of a corporation,
is the clear phraseology of Sec 30 which states ―… [T]he directors shall not TRAMAT, with a distinct and separate personality. As such, it should only be
receive any compensation, as such directors, …‖ The phrase as such the corporation, not the person acting for and on its behalf, that properly
directors is not without significance for it delimits the scope of the could be made liable thereon.
prohibition to compensation given to them for services performed
purely in their capacity as directors or trustees. The unambiguous Personal liability of a corporate director, trustee or officer along
implication is that members of the board may receive compensation, in (although not necessarily) with the corporation may so validly
addition to reasonable per diems, when they render services to the attach, as a rule, only when —
corporation in a capacity other than as directors/trustees. In the case
at bench, the Resolution granted monthly compensation to private 1. He assents (a) to a patently unlawful act of the corporation, or
respondents not in their capacity as members of the board, but rather as (b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict
officers of the corporation, more particularly as Chairman, Vice-Chairman, of interest, resulting in damages to the corporation, its stockholders or other
Treasurer and Secretary of WIT. persons;
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the 2. He consents to the issuance of watered stocks or who, having knowledge
compensation to 10% of the net income before income tax does not likewise thereof, does not forthwith file with the corporate secretary his written
find application in this case since the compensation is being given to private objection thereto;
respondents in their capacity as officers of WIT and not as board members.
3. He agrees to hold himself personally and solidarily liable with the
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) – corporation;
The members of the board of El Hogar Filipino receives 5% of the net profit
as shown in the balance sheet and is distributed in proportion to their 4. He is made, by a specific provision of law, to personally answer for his
attendance to meetings of the board. A complaint was filed against the, and corporate action.
the sixth cause of action alleged that the directors, instead of serving without
pay, or receiving nominal pay or a fixed salary - as the complainant In the case at bench, there is no indication that petitioner David Ong could
supposes would be proper – have been receiving large compensation in be held personally accountable under any of the abovementioned cases.
varying amounts.
RICARDO A. LLAMADO, petitioner,
ISSUE: WON the courts may declared the by-law provision null and void? vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
HELD: No. The Corporation Law does not undertake to prescribe the (GR No. 99032; 270 SCRA 423; March 26, 1997)
rate of compensation for the directors of corporations. The power to
fixed the compensation they shall receive, if any, is left to the corporation, to FACTS: Private complainant Leon Gaw delivered to the accused Ricardo
be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this Llamado and Jacinto Pascual the amount of P180,000 which is to be repaid in
authority the compensation for the directors of El Hogar Filipino has been 6 months with 12% interest. As security, the accused issued and signed a
fixed in section 92 of its by-laws, as already stated. The justice and postdated check which was later on stopped and dishonored for being drawn
propriety of this provision was a proper matter for the shareholders against insufficient funds. Gaw filed a complaint for violation of BP Blg. 22.
when the by-laws were framed; and the circumstance that, with the Pascual remained at large and the trial on the merits against Llamado was
growth of the corporation, the amount paid as compensation to the conducted. The trial court convicted Llamado.
directors has increased beyond what would probably be necessary
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting
vs. or assenting, either willfully or knowingly, to patently unlawful acts thereby
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, making the responsible director liable for damages resulting therefrom;
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997) DILIGENCE: Under the second part of Sec. 31, the directors are required to
manage the corporate affairs with reasonable care and prudence. This is
FACTS: Private respondents were employees of Crispa, Inc. who were because the liability of a corporation is not limited to willful breach of trust or
dismissed due to alleged retrenchment. They filed an illegal dismissal excess of power, but extends also to negligence. Their liability rests upon the
complaint with the NLRC against Crispa, Inc., Valeriano Floro (major common law rule which renders liable every agent who violates his authority
stockholder, incorporation and director of Crispa) and petitioners, who were or neglects his duty to the damage of his principal.
high ranking officials and directors of Crispa. The Lbor Arbiter dismissed the
complaint but ordered petitioners, Floro and Crispa to pay separation pay. The degree of diligence is relative. The more fair and satisfactory rule is that
degree of care and diligence which an ordinary prudent director could
ISSUE: WON petitioners can be held liable? reasonably be expected to exercise in a like position under similar
circumstances.
HELD: Yes. 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 BUSINESS JUDGMENT RULE: Although directors are commonly said to be
people comprising it. The general rule is that obligations incurred by the responsible both for reasonable care and also prudence, the formula is
corporation, acting through its directors, officers and employees, are its sole continually repeated that they are not liable for losses due to imprudence or
liabilities. There are times, however, when solidary liabilities may be incurred honest error of judgment. The business judgment rule in effect states that
but only when exceptional circumstances warrant such as in the following questions of policy and management are left solely to the honest decision of
cases: the board of directors and the courts are without authority to substitute its
judgment as against the former. The directors are business managers and as
―1. When directors and trustees or, in appropriate cases, the long as they act in good faith, its actuations are not subject to judicial review.
officers of a corporation: (a) vote for or assent to patently
unlawful acts of the corporation; (b) act in bad faith or with ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
gross negligence in directing the corporate affairs; (c) are vs.
guilty of conflict of interest to the prejudice of the BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
corporation, its stockholders or members, and other persons; (GR No. L-15092; 5 SCRA 36; May 18, 1962)
2. When a director or officer has consented to the issuance of
watered stocks or who, having knowledge thereof, did not FACTS: Appellants have been sugar planter adhered to defendat-appellees
forthwith file with the corporate secretary his written sugar central mill under identical milling contracts with a 55% share of the
objection thereto; resulting product. There was a proposal to increase the planter’s share to
3. When a director, trustee or officer has contractually agreed 60% which was adopted by defendant in an Amended Milling Contract and
or stipulated to hold himself personally and solidarily liable consequently a Board Resolution.
with the corporation; or
4. When a director, trustee or officer is made, by specific In 1953, the appellants initiated the present action, contending that three
provision of law, personally liable for his corporate action.‖i Negros sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a
total annual production exceeding one-third of the production of all the sugar
In labor cases, particularly, corporate directors and officers are central mills in the province, had already granted increased participation (of
solidarily liable with the corporation for the termination of 62.5%) to their planters, and that under paragraph 9 of the resolution of
employment of corporate employees done with malice or in bad August 20, 1936, heretofore quoted, the appellee had become obligated to
faith. In this case, it is undisputed that petitioners have a direct hand in the grant similar concessions to the plaintiffs (appellants herein). The appellee
illegal dismissal of respondent employees. They were the ones, who as high- Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging
And it appearing undisputed in this appeal that sugar centrals of La Carlota, RATIFICATION:
Hawaiian Philippines, San Carlos and Binalbagan (which produce over one- 1. The second paragraph of Sec. 31 which makes a director liable to
third of the entire annual sugar production in Occidental Negros) have account for profits if he attempts to acquire or acquires any interest
granted progressively increasing participations to their adhered planter at an adverse to the corporation in respect to any matter reposed in him in
average rate of confidence as to which equity imposes a disability upon him to deal in
his own behalf is not subject to ratification.
62.333% for the 1951-52 crop year;
2. Whereas, in Sec. 34, if a director acquires a business opportunity which
64.2% for 1952-53; should belong to the corporation, he is bound to account for such profits
unless his act is ratified by the stockholders owing or representing at
64.3% for 1953-54; least 2/3 of the outstanding capital stock.
64.5% for 1954-55; and Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell
his property with a fair market value of P100M for P90M.
63.5% for 1955-56, a. If it was offered first to A, and A made a profit of P90M, this would fall
under Sec. 34 and may be subject to ratification; A merely acquired a
the appellee Bacolod-Murcia Milling Company is, under the terms of its business opportunity owing to the corporation.
Resolution of August 20, 1936, duty bound to grant similar increases to b. If it was offered to REALTY CORP., and A, later on offered to buy it for
plaintiffs-appellants herein. P95 and sold it making a profit of P5M, it would fall under Sec. 31 and
not subject to ratification, A should return the profits to REALTY CORP.
It was a matter reposed in him in confidence.
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:
Generally: a director is not liable for the acts of their co-directors, unless: (1) STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) – the Governor of the
He connives or participates; or (2) He is negligent in not discovering or acting Philippine Islands, on behalf of the government, made an offer of purchase
to prevent it. Thus, absent of actual knowledge of the wrongful activities, on for the total sum of $6,,043,219.47 in gold for all the friar lands, though
the part of the co-directors, the same cannot be imputed to the other director owned by different owners.
unless in the exercise of reasonable care attending his responsibilities, he
should have been aware of suspicious circumstances demanding correlative While this state of things existed, and before the final offer had been made
action. by the Governor, the defendant, although still holding out for a higher price
for the lands, took steps to purchase the 800 shares of stock in his own
LOYALTY: refers to the proscription imposed on directors on acquiring any company from Mrs. Strong, which he knew were in the possession of F.
personal or pecuniary interest in conflict with their duty as director. Their Stuart Jones, as her agent. The defendant employed Krauffman and the
relationship is regarded as ―fiduciary relation‖. As fiduciaries, they are obliged latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr. Sloan,
to act with utmost candor and fair dealing for the interest of the corporation the husband, did not know who wanted to buy the shares nor did Jones
and without selfish motives. when he was spoken to. Jones would not have sold at the price he did had
he known it was the defendant who was purchasing, because, as he said, it
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his would show increased value, as the defendant would not be likely to
office, acquires for himself a business opportunity which should belong to the purchase ore stock unless the price was going up.
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 ISSUE: WON it was the duty of the defendant to disclose to the agent of the
his act has been ratified by a vote of the stockholders owning or representing plaintiff the facts bearing upon or which might affect the value of the stock?
at least two-thirds (2/3) of the outstanding capital stock. This provision shall
In this case, the facts clearly indicate that a director of a corporation owning FACTS: Respondent Alejandro Te, a director of petitioner corporation, was
friar lands in the Philippine Islands, and who controlled the action of the awarded a dealership agreement whereby Te would be the exclusive dealer
corporation, had so concealed his exclusive knowledge of the impending sale and/or distributor of the corporation in the entire Mindanao. As a
to the government from a shareholder from whom he purchased, through an consequence, Te entered into different contracts for selling white cement.
agent, shares in the corporation, that the concealment was in violation of his Laer on, defendant corporation decided to impose certain conditions upon the
duty as a director to disclose such knowledge, and amounted to deceit dealership agreement.
sufficient to avoid the sale; and, under such circumstances, it was immaterial
whether the shareholder's agent did or did not have power to sell the stock. Several demands to comply with the agreement were made by Te to the
corporation but was refused and Te was constrained to cancel the contracts
In addition to his ownership of almost three-fourths of the shares of the stock he entered into.
of the company, the defendant was one of the five directors of the company,
and was elected by the board the agent and administrator general of such Defendant corporation entered into an exclusive dealership agreement with
company, "with exclusive intervention in the management" of its general Napoleon Co for the marketing of white cement in Mindanao. Hence, this
business. suit.
Concealing his identity when procuring the purchase of stock, by his agent, ISSUE: WON the dealership agreement entered into by Te with his own
was in itself stock evidence of fraud on the part of the defendant. The corporation is valid and binding?
concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful machination HELD: No. In the instant case respondent Te was not an ordinary
to obtain the purchase without giving information whatever as to the state stockholder; he was a member of the Board of Directors and Auditor of the
and probable result of the negotiations, to the vendor of the stock, and to, in corporation as well. He was what is often referred to as a "self-dealing"
that way, obtain the same at a lower price. director.
G. SELF-DEALING DIRECTORS A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interests conflict with those of
The self-dealing director is one who deals or transacts business with his own the corporation, he cannot sacrifice the latter to his own advantage and
corporation. benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is not
Sec. 32. Dealings of directors, trustees or officers with the a matter of statutory or technical law. It springs from the fact that directors
corporation. - A contract of the corporation with one or more of its directors have the control and guidance of corporate affairs and property and hence of
or trustees or officers is voidable, at the option of such corporation, unless all the property interests of the stockholders.
the following conditions are present:
Granting arguendo that the "dealership agreement" involved here would be
1. That the presence of such director or trustee in the board meeting in valid and enforceable if entered into with a person other than a director or
which the contract was approved was not necessary to constitute a quorum officer of the corporation, the fact that the other party to the contract was a
for such meeting; Director and Auditor of the petitioner corporation changes the whole
2. That the vote of such director or trustee was nor necessary for the situation. First of all, We believe that the contract was neither fair nor
approval of the contract; reasonable. The "dealership agreement" entered into in July, 1969, was to
3. That the contract is fair and reasonable under the circumstances; and sell and supply to respondent Te 20,000 bags of white cement per month, for
4. That in case of an officer, the contract has been previously authorized by five years starting September, 1970, at the fixed price of P9.70 per bag.
the board of directors. Respondent Te is a businessman himself and must have known, or at least
must be presumed to know, that at that time, prices of commodities in
Where any of the first two conditions set forth in the preceding paragraph is general, and white cement in particular, were not stable and were expected
absent, in the case of a contract with a director or trustee, such contract may to rise. At the time of the contract, petitioner corporation had not even
be ratified by the vote of the stockholders representing at least two-thirds commenced the manufacture of white cement, the reason why delivery was
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the not to begin until 14 months later. He must have known that within that
members in a meeting called for the purpose: Provided, That full disclosure period of six years, there would be a considerable rise in the price of white
of the adverse interest of the directors or trustees involved is made at such cement. In fact, respondent Te's own Memorandum shows that in
meeting: Provided, however, That the contract is fair and reasonable under September, 1970, the price per bag was P14.50, and by the middle of 1975,
the circumstances. it was already P37.50 per bag. Despite this, no provision was made in the
"dealership agreement" to allow for an increase in price mutually acceptable
Generally: A contract entered into by a director with his own corporation is to the parties. Instead, the price was pegged at P9.70 per bag for the whole
voidable at the latter’s option, except when all the conditions laid down in five years of the contract. Fairness on his part as a director of the corporation
Sec. 32 are met. On the other hand, where any of the first two conditions is from whom he was to buy the cement, would require such a provision. In
absent, the contract becomes voidable subject to the ratification of the fact, this unfairness in the contract is also a basis which renders a contract
stockholders representing 2/3 of the outstanding capital stock – the entered into by the President, without authority from the Board of Directors,
requirements of which are: (1) there must be a meeting called for that void or voidable, although it may have been in the ordinary course of
purpose; (2) full disclosure of the adverse interest of the director; and (3) the business. We believe that the fixed price of P9.70 per bag for a period of five
contract is fair and reasonable under the circumstances. years was not fair and reasonable. Respondent Te, himself, when he
subsequently entered into contracts to resell the cement to his "new dealers"
If the self-dealing director owns all or substantially all of the shares of stock, Henry Wee and Gaudencio Galang stipulated as follows:
thereby making ratification easily possible, the last sentence of Sec. 32 The price of white cement shall be mutually determined by us but in no
should be made to apply by determining reasonableness of the transaction to case shall the same be less than P14.00 per bag (94 lbs)
ISSUE: WON officers or directors of the corporation may purchase the We therefore conclude that the sale or transfer made by the quorum of the
corporate property? board of directors — a majority of the stockholders — is valid and binding
upon the majority-the plaintiff.
HELD: Yes. While a corporation remains solvent, we can see no reason why
a director or officer, by the authority of a majority of the stockholders or H. INTERLOCKING DIRECTORS
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 An interlocking director is a director in one corporation who deals or transacts
corporation remains solvent, its directors are agents or trustees for the with another corporation of which he is also a director. In such case, there
stockholders. They owe no duties or obligations to others. But the moment may effectively be a dual agency, a divided allegiance where allegiance in
such a corporation becomes insolvent, its directors are trustees of all the one corporation may subordinated to the other.
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 The prevailing view is that these contracts entered into where there is an
are themselves creditors while the insolvent corporation is under their interlocking director is not voidable merely by reason of conflicting duties or
management, they will not be permitted to secure to themselves by interest as to corporations represented, even when a majority or all of the
purchasing the corporate property or otherwise any personal advantage over directors are common to both corporations. It is recognized that such will be
the other creditors. Nevertheless, a director or officer may in good faith and upheld if there is no bad faith or unfairness or collusion.
for an adequate consideration purchase from a majority of the directors or
stockholders the property even of an insolvent corporation, and a sale thus Sec. 33. Contracts between corporations with interlocking directors.
made to him is valid and binding upon the minority. (Beach et al. vs. Miller, – (1) Except in cases of fraud, and provided (2) the contract is fair and
supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., reasonable under the circumstances, a contract between two or more
299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New corporations having interlocking directors shall not be invalidated on that
Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations ground alone: Provided, That if the interest of the interlocking director in
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 one corporation is substantial and his interest in the other corporation or
Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage corporations is merely nominal, he shall be subject to the provisions of the
Company, 21 Fed. Rep., 577.) preceding section insofar as the latter corporation or corporations are
concerned.
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
Stockholdings exceeding twenty (20%) percent of the outstanding capital
That a director of a joint-stock corporation occupies one of those stock shall be considered substantial for purposes of interlocking directors.
fiduciary relations where his dealings with the subject-matter of his trust
or agency, and with the beneficiary or party whose interest is confided NOTE:
to his care, is viewed with jealousy by the courts, and may be set aside 1. The contract between corporations with interlocking director is valid
on slight grounds, is a doctrine founded on the soundest morality, and absent fraud and provided it is reasonable under the circumstances;
which has received the clearest recognition in this court and others. 2. If the interest of the interlocking director in one corporation exceeds
(Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co. 20% and in the other merely nominal, the contract becomes voidable at
vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553; the latter corporation’s option. In effect, the director would be treated
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general as a self-dealing director under Sec. 32;
doctrine, however, in regard to contracts of this class, is, not that they 3. If the interest in both companies is either both substantial or both
are absolutely void, but that they are voidable at the election of the nominal, Sec. 33 will apply.
party whose interest has been so represented by the party claiming
under it. We say, this is the general rule; for there may be cases where I. DERIVATIVE SUIT
such contracts would be void ab initio; as when an agent to sell buys of
himself, and by his power of attorney conveys to himself that which he In case of a wrongful or fraudulent act of a director, officer or agent,
was authorized to sell. but even here, acts which amount t a ratification stockholders have the following options:
by the principal may validate the sale 1. Individual or Personal Action – for direct injury to his rights, such as
denial of his right to inspect corporate books and records or pre-emptive
rights;
HELD: Yes. The defendants mainly controvert the right of plaintiff to HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of
question the appointment and selection of defendants Cuaderno and Dizon, the Republic Bank's board of directors. The suit is aimed at preventing the
which they contend to be the result of corporate acts with which plaintiff, as waste or diversion of corporate funds in paying officers appointed solely to
stockholder, cannot interfere. Normally, this is correct, but Philippine protect Pablo Roman from criminal prosecution, and not to carry on the
jurisprudence is settled that an individual stockholder is permitted to corporation's bank business. Whether the complaint's allegations to such
institute a derivative or representative suit on behalf of the effect are true or not must be determined after due hearing.
corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever (1) the officials of the corporation WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under
refuse to sue, or (2) are the ones to be sued or (3) hold the control Compensation of Directors) – Petitioners assert that the motion for
of the corporation. In such actions, the suing stockholder is reconsideration of the civil aspect of the RTC decision acquitting respondents
regarded as a nominal party, with the corporation as the real party is a derivative suit brought by them as minority stockholders of WIT for and
in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia on behalf of the corporation
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs.
Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in ISSUE: WON the appeal may be considered as a derivative action?
conformity, with these principles. He is neither alleging nor vindicating
his own individual interest or prejudice, but the interest of the
The claim that respondent Justiniani did not take steps to remedy the illegal HELD: No. The complaint shows that the action is for damages resulting
importation for a period of two years is also without merit. During that period from mismanagement of the affairs and assets of the corporation by its
of time respondent had the right to assume and expect that the directors principal officer, it being alleged that defendant's maladministration has
would remedy the anomalous situation of the corporation brought about by brought about the ruin of the corporation and the consequent loss of value of
their own wrong doing. Only after such period of time had elapsed could its stocks. The injury complained of is thus primarily to that of the
respondent conclude that the directors were remiss in their duty to protect corporation, so that the suit for the damages claimed should be by the
the corporation property and business. corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
In short, corporate authority may be classified as: The purpose is to render it reasonably certain that the corporation
1. Express powers – those expressly granted by law inclusive of the will receive prompt and proper notice in an action against it or to
corporate charter or AOI; insure that the summons be served on a representative so
2. Implied Powers – those impliedly granted as are essential or reasonably integrated with the corporation that such person will know what to
necessary to the carrying out of the express powers; and do with the legal papers served on him. In other words, "to bring
3. Incidental Powers – those incidental to its existence. home to the corporation notice of the filing of the action". (35A C.J.S.
288 citing Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs.
A. POWER TO SUE AND BE SUED Langston D.C. Fla., 23 F.R.D. 249).
A corporation may sue and be sued in its corporate name just like any other In the instant case the Manila court did not acquire jurisdiction over Delta
person. Motor because it was not properly served with summons. The service of
summons on Dionisia G. Miranda, who is not among the persons mentioned
VENUE: the action filed against it must be instituted at the place of principal in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor.
office of the corporation. Courts acquire jurisdiction over the person of a party defendant and of the
subject-matter of the action by vertue of the service of summons in the
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court provide: manner required by law. Where there is no service of summons or a
voluntary general appearance by the defendant, the court acquires no
Sec. 11. Service upon domestic private juridical entity. When the jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and Pacific
defendant is a corporation, partnership or association organized under the Commercial Co. vs. Tan Cueco, 36 Phil. 556).
laws of the Philippines with a juridical personality, service may be made on
the president, managing partner, general manager, corporate secretary, Consequently, the order of default, the judgment by default and the
treasurer, or in-house counsel. execution in Civil Case No. 97373 are void and should be set aside.
Service of summons upon persons other than those named under than those E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
named in the above provision is without force and effect. vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC,
DELTA MOTOR SALES CORPORATION, petitioner, Branch 132, Makati City and IMPERIAL DEVELOPMENT CORPORATION,
vs. respondent.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First (GR No. 136426; Aug. 6, 1999)
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
PAMINTUAN, respondents FACTS: Petitioner is a limited partnership with principal office address at
(GR No. L-41667; April 30, 1976) Davao City and with branch offices at Parañaque, Metro Manila and Lapasan,
Cagayan de Oro City.
FACTS: Herein respondent Pamintuan initiated an action against petitioner
Delta Motors for the alleged defective Toyota car sold to him and for failure Petitioner and private respondent executed a Deed of Sale with Development
to fulfill the warranty obligation by not repairing the car. Agreement wherein the former agreed to develop certain parcels of land
located at Cagayan de Oro belonging to the latter into a housing subdivision
The summons were served on Dionisia Miranda, employee of the petitioner. for the construction of low cost housing units. They further agreed that in
Delta Motors failed to answer the complaint and was declared in default and case of litigation regarding any dispute arising therefrom, the venue shall be
evidence was presented and a decision was rendered against herein in the proper courts of Makati.
petitioner.
Private respondent, as plaintiff, filed a Complaint for Breach of Contract and
Petitioner filed a motion to lift the order of default and to set aside the Damages against petitioner, as defendant, before the RTC Makati for failure
judgment and for new trial, which was denied. of the latter to comply with its contractual obligation in that, other than a few
unfinished low cost houses, there were no substantial developments therein.
ISSUE: WON there was proper service of summons?
Summons, together with the complaint, were served upon the defendant,
HELD: No. Rule 14 of the Revised Rules of Court provides: through its Branch Manager at the stated address at Cagayan de Oro City but
the Sheriff's Return of Service stated that the summons was duly served
SEC. 13. Service upoin private domestic corporation or partnership. — If "upon defendant E.B. Villarosa & Partner Co., Ltd. thru its Branch Manager
defendant is a corporation organized under the laws of the Philippines or a Engr. at their new office Villa Gonzalo, Nazareth, Cagayan de Oro City, and
partnership duly registered, service may be made on the president, evidenced by the signature on the face of the original copy of the summons.
manager, secretary, cashier, agent, or any of its directors.
Defendant filed a motion to dismiss on the ground of improper service of
For the purpose of receiving service of summons and being bound summons which was denied.
by it, a corporation is identified with its agent or officer who under
the rule is designated to accept service of process. "The corporate ISSUE: WON the court acquired jurisdiction?
power to receive and act on such service, so far as to make it known
to the corporation, is thus vested in such officer or agent." (Lafayette HELD: No. Earlier cases have uphold service of summons upon a
Insurance Co. vs. French, 15 L. Ed. 451, 453). construction project manager; a corporation's assistant manager; ordinary
clerk of a corporation; private secretary of corporate executives; retained
A strict compliance with the mode of service is necessary to confer counsel; officials who had charge or control of the operations of the
jurisdiction of the court over a corporation. The officer upon whon service is corporation, like the assistant general manager; or the corporation's Chief
The designation of persons or officers who are authorized to accept summons The procedures for the exercise of this right are provided under Sec. 16, Sec.
for a domestic corporation or partnership is now limited and more clearly 37 and 38 as discussed earlier under CHAPTER 5: CORPORATE CHARTER
specified in Section 11, Rule 14 of the 1997 Rules of Civil Procedure. The rule AND ITS AMENDMENTS.
now states "general manager" instead of only "manager"; "corporate
secretary" instead of "secretary"; and "treasurer" instead of "cashier." The As far as corporations created by special law are concerned, amendment may
phrase "agent, or any of its directors" is conspicuously deleted in the new NOT be considered as a matter of right. The law creating it may or may not
rule. authorize or empower the corporation to make any changes in its AOI or
charter. However, whether empowered or not, Congress may amend or
The particular revision under Section 11 of Rule 14 was explained by retired repeal a corporate charter by virtue of its inherent authority to amend or
Supreme Court Justice Florenz Regalado, thus: repeal laws under the Consitution.
. . . the then Sec. 13 of this Rule allowed service upon a
defendant corporation to "be made on the president, manager, E. POWER TO ADOPT BY-LAWS
secretary, cashier, agent or any of its directors." The aforesaid
terms were obviously ambiguous and susceptible of broad and The Corporation Code actually REQUIRES a corporation to adopt by-laws, not
sometimes illogical interpretations, especially the word "agent" contrary to law, morals, or public policy, within 1 month from receipt of
of the corporation. The Filoil case, involving the litigation official notice of the issuance of the certificate of incorporation or registration
lawyer of the corporation who precisely appeared to challenge (Sec. 46).
the validity of service of summons but whose very appearance
for that purpose was seized upon to validate the defective Amendment of the by-laws are allowed subject to the procedure and
service, is an illustration of the need for this revised section requirement provided under Sec. 48.
with limited scope and specific terminology. Thus the absurd
result in the Filoil case necessitated the amendment permitting F. POWER TO ISSUE OR SELL STOCKS AND TO ADMIT MEMBERS
service only on the in-house counsel of the corporation who is
in effect an employee of the corporation, as distinguished from The power of a corporation to issue or sell its stocks is an inherent right of
an independent practitioner. (emphasis supplied). any stock corporation except only as it may be regulated by law or by the
AOI.
Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court
Revision Committee, stated that "(T)he rule must be strictly observed. Admission, as well as termination of members is a prerogative granted by law
Service must be made to one named in (the) statute . . . to non-stock corporations and the manner, requirements or procedures for
such admission or termination may be contained in the AOI or by-laws.
It should be noted that even prior to the effectivity of the 1997 Rules of Civil
Procedure, strict compliance with the rules has been enjoined. In the case of G. POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL
Delta Motor Sales Corporation vs. Mangosing, the Court held: PROPERTY
A strict compliance with the mode of service is necessary to When a corporation is expressly empowered by law to acquire or alienate real
confer jurisdiction of the court over a corporation. The officer and/or personal properties, the limitations imposed by Sec. 36 are as follows:
upon whom service is made must be one who is named in the
statute; otherwise the service is insufficient. . . . Sec. 36. Xxx
The purpose is to render it reasonably certain that the corporation will 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
receive prompt and proper notice in an action against it or to insure that mortgage and otherwise deal with such real and personal property, including
the summons be served on a representative so integrated with the securities and bonds of other corporations, (1) as the transaction of the
corporation that such person will know what to do with the legal papers lawful business of the corporation may reasonably and necessarily
served on him. In other words, "to bring home to the corporation notice require, (2) subject to the limitations prescribed by law and the
of the filing of the action." . . . . Constitution.
The liberal construction rule cannot be invoked and utilized as a The first limitation practically sets the limit of the corporate authority to
substitute for the plain legal requirements as to the manner in acquire, own, hold or alienate property. As it has been said the purpose
which summons should be served on a domestic corporation. . . clause in the AOI grants as well as limits the powers which a corporation may
. . (emphasis supplied). exercise. Verily, WON the acquisition of such property is within the corporate
powers or authority may reasonably be determined from the purpose or
Accordingly, we rule that the service of summons upon the branch manager purposes indicated in the AOI.
of petitioner at its branch office at Cagayan de Oro, instead of upon the
general manager at its principal office at Davao City is improper. LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC., ET AL.,
Consequently, the trial court did not acquire jurisdiction over the person of respondents (Gr No. 17716; July 31, 1962) – Nicolas Concepcion executed a
the petitioner. chattel mortgage covering a certificate of public convenience grnted to him to
operate taxicab service of 27 units in Manila, in favor of petitioner, to secure
B. POWER OF SUCCESSION a loan evidenced by a promissory note guaranteed by Concepcion and one
Placido Esteban.
This right basically means that the corporation persists to exist despite death,
incapacity, civil interdiction, or withdrawal of the stockholders or members Concepcion mortgaged the same certificate to cover a second loan with
thereof. Rehabilitation Finance.
C. POWER TO ADOPT AND USE A COMMON SEAL Petitioner filed an action to foreclose the mortgage. While it was pending, RF
also foreclosed the second chattel mortgage where the certificate was sold at
This right has be expressly granted by law. However, it is not mandatory but a public auction in favor of AD Santos who applied for the approval of the
merely permissive. This is because the corporate seal performs no further or sale which was granted by the Public Service Commission.
ISSUE: WON Petitioner may acquire the certificate of public convenience? When an occasion arises for an investment in real property for either of
the purposes specified in the statute the national bank act permits
HELD: No. Petitioner claims in this regard that its corporate purposes are to banking associations to act as any prudent person would act in making
carry on a general mercantile and commercial business, etc., and that it is an investment in real estate, and to exercise the same measure of
authorized in its articles of incorporation to operate and otherwise deal in and judgment and discretion. The act ought not to be construed in such a
concerning automobiles and automobile accessories' business in all its way as to compel a national bank, when it acquires real property for a
multifarious ramification (petitioner's brief p. 7) and to operate, etc., and legitimate purpose, to deal with it otherwise than a prudent land owner
otherwise dispose of vessels and boats, etc., and to own and operate would ordinarily deal with such property.
steamship and sailing ships and other floating craft and deal in the same and
engage in the Philippine Islands and elsewhere in the transportation of At any rate the weight of judicial opinion is so overwhelmingly in favor of
persons, merchandise and chattels by water; all this incidental to the sustaining the validity of the acts alleged in the second cause of action to
transportation of automobiles (id. pp. 7-8 and Exhibit B). have been done by the respondent in excess of its powers that we refrain
from commenting at any length upon said cases. The ground stated in the
We find nothing in the legal provision and the provisions of petitioner's second cause of action is in our opinion without merit.
articles of incorporation relied upon that could justify petitioner's contention
in this case. To the contrary, they are precisely the best evidence that it has THE DIRECTOR OF LANDS, petitioner,
no authority at all to engage in the business of land transportation and vs.
operate a taxicab service. That it may operate and otherwise deal in THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
automobiles and automobile accessories; that it may engage in the respondents
transportation of persons by water does not mean that it may engage in the (GR No. L56613; March 14, 1988)
business of land transportation — an entirely different line of business. If it
could not thus engage in the line of business, it follows that it may not FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of Cavite for
acquire an certificate of public convenience to operate a taxicab service, such registration of a parcel of land which it claimed to have acquired by virtue of
as the one in question, because such acquisition would be without purpose a Deed of Absolute Sale from Aquelina de la Cruz, alleging that the applicant
and would have no necessary connection with petitioner's legitimate and its predecessors-in-interest have been in actual, continuous, public,
business. peaceful and adverse possession and occupation of the said land for more
than 30 years, which was opposed by the Government as represented by the
GOVERNMENT VS. EL HOGAR FILIPINO (supra) – the directors of El Director of Lands. The CFI and the CA ruled in favor of INC.
Hogar Filipino erected a modern reinforced concrete office building at the site
of its old building. The acquisition of the lot and the construction of the new ISSUE: WON the corporation may acquire the land in question?
office building thereon is not the subject of the second cause of action for
being ultra vires on the part of the corporation. HELD Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may have been
ISSUE: WON the erection of the building was reasonable? quite adverse to private respondent. For the rule then prevailing under the
case of Manila Electric Company v. Castro-Bartolome et al., 114 SCRA 799,
HELD: Yes. With this contention we are unable to agree. Under the reiterated in Republic v. Villanueva, 114 SCRA 875 as well as the other
Corporation Law, every corporation has the power to purchase, hold and subsequent cases involving private respondent adverted to above', is that a
lease such real property as the transaction of the lawful business of the juridical person, private respondent in particular, is disqualified under the
corporation may reasonably and necessarily require. When this property was 1973 Constitution from applying for registration in its name alienable public
acquired in 1916, the business of El Hogar Filipino had developed to such an land, as such land ceases to be public land "only upon the issuance of title to
extent, and its prospects for the future were such as to justify its directors in any Filipino citizen claiming it under section 48[b]" of Commonwealth Act No.
acquiring a lot in the financial district of the City of Manila and in constructing 141, as amended. These are precisely the cases cited by petitioner in support
thereon a suitable building as the site of its offices; and it cannot be fairly of its theory of disqualification.
said that the area of the lot — 1,413 square meters — was in excess of its
reasonable requirements. The law expressly declares that corporations may Since then, however, this Court had occasion to re-examine the rulings in
acquire such real estate as is reasonably necessary to enable them to carry these cases vis-a-vis the earlier cases of Carino v. Insular Government, 41
out the purposes for which they were created; and we are of the opinion that Phil. 935, Susi v. Razon, 48 Phil. 424 and Herico v. Dar, 95 SCRA 437, among
the owning of a business lot upon which to construct and maintain its offices others. Thus, in the recent case of Director of Lands v. Intermediate
is reasonably necessary to a building and loan association such as the Appellate Court, 146 SCRA 509, We categorically stated that the majority
respondent was at the time this property was acquired. A different ruling on ruling in Meralco is "no longer deemed to be binding precedent", and that
this point would compel important enterprises to conduct their business "[T]he correct rule, ... is that alienable public land held by a possessor,
exclusively in leased offices — a result which could serve no useful end but personally or through his predecessors-in-interest, openly, continuously and
would retard industrial growth and be inimical to the best interests of society. exclusively for the prescribed statutory period [30 years under the Public
Land Act, as amended] is converted to private property by mere lapse or
We are furthermore of the opinion that, inasmuch as the lot referred to was completion of said period, ipso jure." We further reiterated therein the
lawfully acquired by the respondent, it is entitled to the full beneficial use timehonored principle of non-impairment of vested rights.
thereof. No legitimate principle can discovered which would deny to one
owner the right to enjoy his (or its) property to the same extent that is The crucial factor to be determined therefore is the length of time private
conceded to any other owner; and an intention to discriminate between respondent and its predecessors-in-interest had been in possession of the
owners in this respect is not lightly to be imputed to the Legislature. The land in question prior to the institution of the instant registration proceedings.
point here involved has been the subject of consideration in many decisions The land under consideration was acquired by private respondent from
of American courts under statutes even more restrictive than that which Aquelina de la Cruz in 1947, who, in turn, acquired by same by purchase
prevails in this jurisdiction; and the conclusion has uniformly been that a from the Ramos brothers and sisters, namely: Eusebia, Eulalia, Mercedes,
corporations whose business may properly be conducted in a populous center Santos and Agapito, in 1936. Under section 48[b] of Commonwealth Act No.
may acquire an appropriate lot and construct thereon an edifice with facilities 141, as amended, "those who by themselves or through their predecessors-
in excess of its own immediate requirements in-interest have been in open, continuous, exclusive and notorious possession
The completion by private respondent of this statutory 30-year period has The resolution covers a subject which concerns the benefit, convenience and
dual significance in the light of Section 48[b] of Commonwealth Act No. 141, welfare of the company’s employees and their families. There are certain
as amended and prevailing jurisprudence: [1] at this point, the land in corporate acts that may be performed outside of the scope of the powers
question ceased by operation of law to be part of the public domain; and [2] expressly conferred if they are necessary to promote the interest or welfare
private respondent could have its title thereto confirmed through the of the corporation. Thus, it has been held that ―although not expressly
appropriate proceedings as under the Constitution then in force, private authorized to do so a corporation may become a surety where the particular
corporations or associations were not prohibited from acquiring public lands, transaction is reasonably necessary or proper to the conduct of its business‖,
but merely prohibited from acquiring, holding or leasing such type of land in and here it is undisputed that the establishment of the local post office is a
excess of 1,024 hectares. vital improvement in the living condition of its employees and laborers who
came to settle in it mining camp which is far removed from the postal
If in 1966, the land in question was converted ipso jure into private land, it facilities or means of communication accorded to people living in a city or
remained so in 1974 when the registration proceedings were commenced. municipality.
This being the case, the prohibition under the 1973 Constitution would have
no application. Otherwise construed, if in 1966, private respondent could IMPLIED POWERS
have its title to the land confirmed, then it had acquired a vested right
thereto, which the 1973 Constitution can neither impair nor defeat. Sec. 36. Xxx
H. POWER TO ENTER INTO MERGER OR CONSOLIDATION 11. 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
This is an express power granted by the law under the Code, particularly Title
IX thereof. It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one
I. POWER TO MAKE REASONABLE DONATIONS which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
Ordinarily, a pure gift of funds or property by a corporation not created for contributes to the promotion of those ends in a substantial and not
charitable purpose is not authorized and would constitute a violation of the in a remote and fanciful sense, it may be fairly considered within
rights of its stockholders unless it is empowered by statute. There are the corporation‘s charter powers (Montelibano vs. Bacolod-Murcia Milling
circumstances, however, under which a donation by a corporation may be to Co., Inc. as cited in NPC vs. VERA)
it benefit as a means of increasing its business or promoting patronage.
I. POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL OR
Thus, Sec. 36 (9) expressly authorizes a corporation to make donations, NECESSARY TO CARRY OUT ITS PURPOSES
subject to the following limitations:
1. The donation must be reasonable; TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA 198;
2. It must be for public welfare, or for hospital, charitable, scientific, Sept. 25, 1967) – Respondent Filipinas Cement Corporation filed an
cultural or similar purpose; and application with herein respondent PSC for a certificate of public convenience
3. It shall not be in aid of political party or candidate, or for purposes of to install, maintain and operate an electric plant in Teresa, Rizal for the
partisan political aactivity. purpose of supplying electric power and light to its cement factory and its
employees living within its compound. Herein petitioner, operating an electric
J. POWER TO ESTABLISH PENSION, RETIREMENT AND OTHER plant in Teresa Rizal filed an opposition claiming that Filipinas is not
PLANS authorized to operate the proposed electric plant under its articles of
incorporation. PSC decided in favor of Filipinas.
It is now generally recognized in almost all jurisdiction to empower a
corporation to establish pension plans, pension trust, profit sharing plans, ISSUE: WON under its articles of incorporation, Filipinas is authorized to
stock bonus or stock option plans and other incentive plans to directors, operate and maintain an electric plant?
officers and employees. In fact, the power may include any act to promote
convenience, welfare and benefit of the employees or officers. HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for authority to
secure from any governmental, state, municipality, or provincial, city or other
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361; Feb. 28, authority, and to utilize and dispose of in any lawful manner, rights, powers,
1963) - A post office branch was opened in herein respondent’s mining camp privileges, franchises and concessions – obviously necessary or at least
at Sta. Cruz Zambales, at its request, where Hilario M. Sanchez, an employee related to the operation of its cement factory. Moreover, said AOI also
of such company, was the postmaster. Prior to the opening the company, at provide that the corporation may generally perform any and all acts
the request of the Bureau of Posts, adopted a resolution that the former connected with the business of manufacturing portland cement or arising
would assume full responsibility for all cash received by the postmaster. On therefrom or incidental thereto.
May 11, 1954, the postmaster went on a three day leave but never returned.
As a result, an action was brought by the government to recover P13,867.24, It cannot be denied that the operation of an electric light, heat and power
the amount of shortage in the accounts of the postmaster, from the plant is necessarily connected with the business of manufacturing cement. If
company. in the modern world where we live today electricity is virtually a necessity for
our daily needs, it is more so in the case of industries like the manufacture of
FACTS: 14 plaintiffs, all associate members of the International School, Inc. Sec. 38. Power to increase or decrease capital stock; incur, create or
brought an action for injunction against 10 members of the Board of increase bonded indebtedness. - No corporation shall increase or
Trustees, after a letter of Donal Marshall, president of the board, was sent decrease its capital stock or incur, create or increase any bonded
stating that the school would be collecting a ―development fee‖ of P2,625 per indebtedness unless approved by a majority vote of the board of directors
enrollee for the purpose of constructing new buildings and remodel existing and, at a stockholder's meeting duly called for the purpose, two-thirds (2/3)
ones to accommodate the increasing enrollment in the school which would of the outstanding capital stock shall favor the increase or diminution of the
need P35M. The CFI of Manila dismissed the complaint. capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the
ISSUE: WON the imposition of the development fee is within the powers of capital stock or of the incurring, creating, or increasing of any bonded
the school? 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
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to the sch0ol, increasing of any bonded indebtedness is to be considered, must be
expressly authorized the Board of Trustees ―upon consultation with the addressed to each stockholder at his place of residence as shown on the
Secretary of Education and Culture‖ to determine the amount of fees and books of the corporation and deposited to the addressee in the post office
assessments which may be reasonably imposed upon its students, to with postage prepaid, or served personally.
maintain or conform to the school’s standard of education. Such consultation
complied with and the Secretary expressed his conformity with the A certificate in duplicate must be signed by a majority of the directors of the
reasonableness of the assessment. The lower court observed that: corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
Xxx the expansion of the school facilities, which is to be done by improving
old buildings and/or constructing new ones, is an ordinary business (1) That the requirements of this section have been complied with;
transaction well within the competence of the Board of Trustees to act upon. (2) The amount of the increase or diminution of the capital stock;
Xxx Being directly related to the purpose of elevating and maintaining the (3) If an increase of the capital stock, the amount of capital stock or number
school’s standard of instruction, which is ordained in fact by PD 732, the of shares of no-par stock thereof actually subscribed, the names, nationalities
expansion cannot result in any radical or fundamental change in the kind of and residences of the persons subscribing, the amount of capital stock or
activity being conducted by the school that might require the consent of the number of no-par stock subscribed by each, and the amount paid by each on
members composing it. his subscription in cash or property, or the amount of capital stock or number
The following requirements or procedure should be complied with: ISSUE: WON the reduction is valid and proper?
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of the HELD: No. A corporation has no power to release an original subscriber to its
outstanding capital stock (including non-voting shares) or 2/3 of the capital stock from the obligation of paying for his shares, without a valuable
members in case of non-stock corporations at a meeting duly called for consideration for such release; and as against creditors a reduction of the
that purpose; capital stock can take place only in the manner and under the conditions
3. Prior written notice of the proposal to extend or shorten the corporate prescribed by the statute or the charter or the AOI. Moreover, strict
term must be made stating the time and place of meeting addressed to compliance with the statutory regulations is necessary. In the case before us,
each stockholder or member at his place of residence, either by mail or the resolution releasing the shareholders from their obligation to pay 50% of
personal service; their respective subscriptions was an attempted withdrawals of so much
4. A certificaate in duplicate must be signed by a majority of the directors capital from the fund upon which the company’s creditors were entitled
of the corporation, countersigned by the chairman and the secretary of ultimately to rely and, having been effected without compliance with the
the stockholders meeting, setting forth the matters contained in statutory requirements, was wholly ineffectual.
subsection 1 to 7 of Sec. 38;
5. In case of increase in capital stock, 25% of such increased capital must MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30, 1987) -
be subscribed and that at least 25% of the amount subscribed must be The Madrigal Central Office Employees Union sought for the renewal of its
paid either in cash or property; CBA, proposing a P200 wage increase and an allowance of P100 a month.
6. In case of decrease of capital stock, the same must not prejudice the Petitioner company requested for the deferment of its negotiation.
right of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and Meanwhile, the company effected two reductions of its capital stock by
8. Approval thereof by the SEC. issuing marketable securities owned by petitioner in exchange for
shareholders’ shares.
METHODS OF INCREASING CAPITAL STOCK:
1. Increase the par value of the existing number of shares without After the petitioner’s failure to sit down with the respondent union, the latter
increasing the number of shares; commenced a case with the NLRC for unfair labor practice. In due time,
2. Increase the number of existing shares without increasing the par value petitioner filed its position paper, alleging operating losses.
thereof;
3. Increasing the number of shares and at the same time increasing the The Labor Arbiter rendered a decision in favor of respondent Union.
par value of the shares
ISSUE: WON the decrease in capital stock is valid and binding?
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion; HELD: No. What clearly emerges from the recorded facts is that the
BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent Jamiatul A sale or other disposition shall be deemed to cover substantially all
Philippines – Al Islamia, Inc. was incorporated with P2,000,000 authorized the corporate property and assets if thereby the corporation would
capital stock divided into 20,000 shares, of which 460 belong to herein be rendered incapable of continuing the business or accomplishing
petitioner. In a stockholders meeting, an increase of the authorized capital the purpose for which it was incorporated.
stock to P1,000,000 was approved, where the previously unissued shares
were all issued. After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
Petitioner Datu Tagoranao Benito filed a petition with herein respondent SEC such sale, lease, exchange, mortgage, pledge or other disposition of property
alleging that the additional issue of previously unissued shares was made in and assets, subject to the rights of third parties under any contract relating
violation of his pre-emptive right and that the increase of capital stock was thereto, without further action or approval by the stockholders or members.
illegal considering that the stockholders on record were not notified, and that
such issuance be cancelled. Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the exchange, mortgage, pledge or otherwise dispose of any of its property and
P. POWER TO DECLARE DIVIDENDS WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said that the
right of the stockholders to be paid dividends vest as soon as they have been
DIVIDENDS are corporate profits set aside, declared and ordered by the lawfully and finally declared by the BOD. It is not revocable unless: (1) it has
BOD to be paid to the stockholders. It is a fruit of investment, the recurrent not been officially communicated to the stockholders; or (2) it is in the form
return, analogous to interest and rent upon other forms of invested capital. of stock dividends which is revocable any time prior to distribution because
this does not result in the distribution of assets but merely the division of
Sec. 43. Power to declare dividends. - The board of directors of a stock existing shares of a stockholder into smaller units or integers.
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on TRANSFER OF SHARES: The dividends already declared belong to the
the basis of outstanding stock held by them: Provided, That any cash owner at the time of declaration. Usually, however, the dividends are payable
AFTER INCPORPORATION: Must be submitted one month after the LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
issuance of the certificate of incorporation and must be approved by a INC., petitioner,
majority of the outstanding capital stock or members and signed by such vs.
stockholders or members voting for them. Failure to file within 1 month may HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
result to suspenion or revocation of corporate franchise. CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
respondents.
THIRD PERSONS: are generally not bound, affected or prejudiced the by- (GR No. 117188; Aug. 7, 1997)
laws, it being merely internal rules of the corporation, EXCEPT: if they have
knowledge of its existence and contents. FACTS: Petitioner Association was organized on Feb. 8, 1983, but for some
reason failed to file its corporate by-laws. Victorio Soliven, himslef the owner
CONTENTS: and developer of the subdivision was the first president of the Association.
Later on, asking on the status of petitioner, Soliven discovered that the said
Sec. 47. Contents of by-laws. - Subject to the provisions of the association was already dissolved (according to the head of the legal
Constitution, this Code, other special laws, and the articles of incorporation, a department of HIGC), and accordingly caused the registration of HIGC as the
private corporation may provide in its by-laws for: association covering Phases West I, East I and East II of the subdivision.
1. The time, place and manner of calling and conducting regular or special ISSUE: WON the Association can be considered dissolved for non-adoption
meetings of the directors or trustees; of by-laws?
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members; HELD: Yes. As correctly postulated by the petitioner, interpretation of this
3. The required quorum in meetings of stockholders or members and the provision of Sec. 46 begins with the determination of the meaning and import
manner of voting therein; of the word "must" in this section. Ordinarily, the word "must" connotes an
4. The form for proxies of stockholders and members and the manner of imperative act or operates to impose a duty which may be enforced. It is
voting them; synonymous with "ought" which connotes compulsion or mandatoriness.
5. The qualifications, duties and compensation of directors or trustees, However, the word "must" in a statute, like "shall," is not always imperative.
officers and employees; It may be consistent with an exercise of discretion. In this jurisdiction, the
6. The time for holding the annual election of directors of trustees and tendency has been to interpret "shall" as the context or a reasonable
the mode or manner of giving notice thereof; construction of the statute in which it is used demands or requires. This is
7. The manner of election or appointment and the term of office of all equally true as regards the word "must." Thus, if the languages of a statute
officers other than directors or trustees; considered as a whole and with due regard to its nature and object reveals
8. The penalties for violation of the by-laws; that the legislature intended to use the words "shall" and "must" to be
9. In the case of stock corporations, the manner of issuing stock directory, they should be given that meaning.
certificates; and
10. Such other matters as may be necessary for the proper or convenient In this respect, the following portions of the deliberations of the Batasang
transaction of its corporate business and affairs. Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
AMENDMENT: On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by within one month after the issuance? In other words, would this be
a majority vote thereof, and the owners of at least a majority of the mandatory or directory in character?
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, MR. MENDOZA. This is mandatory.
may amend or repeal any by-laws or adopt new by-laws. The owners of two-
thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
members in a non-stock corporation may delegate to the board of directors effect of the failure of the corporation to file these by-laws within one
or trustees the power to amend or repeal any by-laws or adopt new by-laws: month?
Provided, That any power delegated to the board of directors or trustees to
amend or repeal any by-laws or adopt new by-laws shall be considered as
On the other hand, it is equally well settled that by-laws of a corporation GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action. — It
must be reasonable and for a corporate purpose, and always within the appears that among the by-laws of the association there is an article (No. 10)
charter limits. They must always be strictly subordinate to the constitution which reads as follows:
and the general laws of the land. They must not infringe the policy of the
state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not ―The board of directors of the association, by the vote of an absolute
disturb vested rights or impair the obligation of a contract, take away or majority of its members, is empowered to cancel shares and to return to
abridge the substantial rights of stockholder or member, affect rights of the owner thereof the balance resulting from the liquidation thereof
property or create obligations unknown to the law. (People's Home Savings whenever, by reason of their conduct, or for any other motive, the
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. continuation as members of the owners of such shares is not desirable.‖
Globe Milling Co., 79 Am. St. Rep., 769.)
ISSUE: WON the above provision is valid?
The validity of the by-law of a corporation is purely a question of law. (South
Florida Railroad Co. vs. Rhodes, 25 Fla., 40.) HELD: No. This by-law is of course a patent nullity, since it is in
direct conflict with the latter part of section 187 of the Corporation
―The power to enact by-laws restraining the sale and transfer of stock Law, which expressly declares that the board of directors shall not
must be found in the governing statute or the charter. Restrictions upon have the power to force the surrender and withdrawal of unmatured
the traffic in stock must have their source in legislative enactment, as the stock except in case of liquidation of the corporation or of forfeiture
corporation itself cannot create such impediments. By-laws are intended of the stock for delinquency. It is agreed that this provision of the by-
merely for the protection of the corporation, and prescribe regulation and laws has never been enforced, and in fact no attempt has ever been made by
not restriction; they are always subject to the charter of the corporation. the board of directors to make use of the power therein conferred. In
The corporation, in the absence of such a power, cannot ordinarily November, 1923, the Acting Insular Treasurer addressed a letter to El Hogar
inquire into or pass upon the legality of the transaction by which Filipino, calling attention to article 10 of its by-laws and expressing the view
its stock passes from one person to another, nor can it question that said article was invalid. It was therefore suggested that the article in
the consideration upon which a sale is based. A by-law cannot question should be eliminated from the by-laws. At the next meeting of the
take away or abridge the substantial rights of stockholder. Under a board of directors the matter was called to their attention and it was resolved
statute authorizing by- laws for the transfer of stock, a corporation can do to recommend to the shareholders that in their next annual meeting the
no more than prescribe a general mode of transfer on the corporate books article in question be abrogated. It appears, however, that no annual meeting
and cannot justify an unreasonable restriction upon the right of sale. (4 of the shareholders called since that date has been attended by a sufficient
Thompson on Corporations, sec. 4137, p. 674. number of shareholders to constitute a quorum, with the result that the
provision referred to has not been eliminated from the by-laws, and it still
The jus disponendi, being an incident of the ownership of property, the stands among the by-laws of the association, notwithstanding its patent
general rule (subject to exceptions hereafter pointed out and discussed) is conflict with the law.
that every owner of corporate shares has the same uncontrollable right to
alien them which attaches to the ownership of any other species of
It result that the practice of the directorate of filling vacancies by the action The doctrine of "corporate opportunity" is precisely a recognition by the
of the directors themselves is valid. Nor can any exception be taken to then courts that the fiduciary standards could not be upheld where the fiduciary
personality of the individuals chosen by the directors to fill vacancies in the was acting for two entities with competing interests. This doctrine rests
body. Certainly it is no fair criticism to say that they have chosen competent fundamentally on the unfairness, in particular circumstances, of an officer or
businessmen of financial responsibility instead of electing poor persons to so director taking advantage of an opportunity for his own personal profit when
responsible a position. The possession of means does not disqualify a man the interest of the corporation justly calls for protection.
for filling positions of responsibility in corporate affairs.
It is not denied that a member of the Board of Directors of the San Miguel
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6) Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
GOKONGWEI VS. SEC (supra) - As additional causes of action, it was and diversification; (c) research and development; and (d) sources of
alleged that corporations have no inherent power to disqualify a stockholder funding, availability of personnel, proposals of mergers or tie-ups with other
from being elected as a director and, therefore, the questioned act is ultra firms.
vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a It is obviously to prevent the creation of an opportunity for an officer or
management contract) with respondent corporation, which was allowed director of San Miguel Corporation, who is also the officer or owner of a
because the questioned amendment gave the Board itself the prerogative of competing corporation, from taking advantage of the information which he
determining whether they or other persons are engaged in competitive or acquires as director to promote his individual or corporate interests to the
antagonistic business; that the portion of the amended bylaws which states prejudice of San Miguel Corporation and its stockholders, that the questioned
that in determining whether or not a person is engaged in competitive amendment of the by-laws was made. Certainly, where two corporations are
business, the Board may consider such factors as business and family competitive in a substantial sense, it would seem improbable, if not
relationship, is unreasonable and oppressive and, therefore, void; and that impossible, for the director, if he were to discharge effectively his duty, to
the portion of the amended by-laws which requires that "all nominations for satisfy his loyalty to both corporations and place the performance of his
election of directors ... shall be submitted in writing to the Board of Directors corporation duties above his personal concerns.
at least five (5) working days before the date of the Annual Meeting" is
likewise unreasonable and oppressive. Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require
ISSUE: WON the amended by-laws of SMC disqualifying a competitor from that he disclose this information to a competitive arrival. These dangers are
HELD2: Yes. Private respondents contend that the disputed amended by A. STOCKHOLDERS‘ MEETING
laws were adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and present Sec. 50. Regular and special meetings of stockholders or members. -
danger that the election of a business competitor to the Board may cause Regular meetings of stockholders or members shall be held annually on a
upon the corporation and the other stockholders inseparable prejudice. date fixed in the by-laws, or if not so fixed, on any date in April of every year
Submitted for resolution, therefore, is the issue — whether or not respondent as determined by the board of directors or trustees: Provided, That written
San Miguel Corporation could, as a measure of self- protection, disqualify a notice of regular meetings shall be sent to all stockholders or members of
competitor from nomination and election to its Board of Directors. record at least two (2) weeks prior to the meeting, unless a different period
is required by the by-laws.
It is recognized by an authorities that 'every corporation has the inherent
power to adopt by-laws 'for its internal government, and to regulate the Special meetings of stockholders or members shall be held at any time
conduct and prescribe the rights and duties of its members towards itself and deemed necessary or as provided in the by-laws: Provided, however, That at
among themselves in reference to the management of its affairs. At common least one (1) week written notice shall be sent to all stockholders or
law, the rule was "that the power to make and adopt by-laws was inherent in members, unless otherwise provided in the by-laws.
every corporation as one of its necessary and inseparable legal incidents. And
it is settled throughout the United States that in the absence of positive Notice of any meeting may be waived, expressly or impliedly, by any
legislative provisions limiting it, every private corporation has this inherent stockholder or member.
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 Whenever, for any cause, there is no person authorized to call a meeting, the
self-government being essential to enable the corporation to accomplish the Securities and Exchange Commission, upon petition of a stockholder or
purposes of its creation. member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
In this jurisdiction, under section 21 of the Corporation Law, a corporation corporation by giving proper notice required by this Code or by the by-laws.
may prescribe in its by-laws "the qualifications, duties and compensation of The petitioning stockholder or member shall preside thereat until at least a
directors, officers and employees ... " This must necessarily refer to a majority of the stockholders or members present have been chosen one of
qualification in addition to that specified by section 30 of the Corporation their number as presiding officer.
Law, which provides 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 ... The stockholders have no power to act as or for the corporation except at a
" In Government v. El Hogar, the Court sustained the validity of a provision in corporate meeting called and conducted according to law. This rule arises
the corporate by-law requiring that persons elected to the Board of Directors from the need to protect the stockholder by providing them with notice of
must be holders of shares of the paid up value of P5,000.00, which shall be meeting and giving them opportunity to attend the meeting, discuss the
held as security for their action, on the ground that section 21 of the issues and vote (an exception would be an ordinary amendment where
Corporation Law expressly gives the power to the corporation to provide in its ―written asset‖ is acceptable).
by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
fixed, on any date of April of very year as the BOD/T may determine. April,
ISSUE3: WON stockholders have the vested right to be elected a director? because this is the time the Audited Financial Statements are already
available.
HELD: No. Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the stockholders DATE OF SPECIAL MEETING: At any time deemed necessary or as
and that he impliedly contracts that the will of the majority shall govern in all provided for in the by-laws.
matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law." To this extent, therefore, the stockholder REQUIREMENTS FOR A VALID STOCKHOLDERS‘ MEETING:
EXCEPTIONS: (a) If the by-laws provide for a different period for While there is no law allowing a STOCK corporation to hold a meeting outside
sending out notice for regular or special meetings (failure to comply the city or municipality where the principal office is located, NON-STOCK
would render the resolutions adopted at the option of the stockholder corporations are allowed to provide a provision in its by-laws any place of
who was not notified); (b) Waiver, either express or implied. members’ meeting provided there is proper notice (Sec. 93)
The Notice must contain the agenda or business matter/s that may be 4. It Must Be Called by the Proper Party
taken up before the meeting otherwise it may become voidable at the
instance of any objecting stockholder or member. DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
vs.
THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of
SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL., Manila, Branch I, and POTENCIANO GAPOL, respondents
petitioners, (GR No. L-5883; Nov. 28, 1953)
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents. FACTS: It was agreed by the stockholders of Daguhoy Enterprises at a
(GR No. L-12282; March 31, 1959) stockholder’s meeting that the said corporation shall be voluntarily dissolved,
and was placed under the receivership of Gapol, the largest stockholder. A
FACTS: A meeting electing the BOD of herein petitioner was declared null petition for voluntary dissolution was drafted and signed by Ponce, which was
and void by the Court in a suit filed by John Castillo, et. al. to be filed with the appropriate authorities. It was found out that instead of
filing the petition, Gapol filed a complaint in the CFI for the accounting of the
In compliance with the order, another election was scheduled on March 28 at funds and assets of the corporation, and to reimburse it the amounts
5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the expended for the purchase of a parcel of land, a loan extended to the wife of
meeting is composed of the same people that had conducted and supervised Ponce, and an amount spent by Ponce in a trip to the US. Gapol contends
the previously nullified meeting; that the election to be conducted did not that such amount, taken from the corporation, was misapplied,
comply with the 5 day notice requirement required by the by-laws and the misappropriated and misspent by Ponce to his own use and benefit, thus he
constitution of the association, since the notice was posted and sent out only prayed for the removal of Ponce as a member of the board of directors. Such
on March 26 and the election was to be held on March 28. removal was rejected by the court, but Gapol’s petition for the calling of a
stockholders’ meeting, was granted. At said meeting, a new set of board of
ISSUE: WON the notice requirement is complied with? directors was elected. Ponce filed a petition in the lower court seeking to set
aside its order, but the same was denied. Thus, they filed for an appeal to
HELD: No. Section 3, article III, of the constitution and by-laws the the SC.
association provides:
ISSUE: WON the Court may issue such order directing a stockholder to call a
―Notice of the time and place of holding of any annual meeting, or any meeting of the stockholders of a corporation?
special meeting, the members, shall be given either by posting the same in
a postage prepaid envelope, addressed to each member on the record at HELD: Yes. The corporation law provides that ―whenever, from any cause,
the address left by such member with the Secretary of the Association, or there is no person authorized to call a meeting, or when the officer
at his known post-office address or by delivering the same person at least authorized to do so refuses, fails or neglects to call a meeting, any judge of a
(5) days before the date set for such meeting. . . . In lieu of addressing or CFI on the showing of a good cause therefore, may issue an order to any
serving personal notices to the members, notice of the members, notice of stockholder or member of a corporation, directing him to call a meeting of
a regular annual meeting or of a special meeting of the members may be the corporation by giving the proper notice required‖. Thus, on the showing
given by posting copies of said notice at the different departments and of good cause therefore, the court may authorize a stockholder to
plants of the San Miguel Brewery Inc., not less than five (5) days prior to call a meeting and to preside thereat until the majority stockholders
the date of the meeting. (Annex K.)‖ representing a majority of the stock present and permitted to be
voted shall have chosen one among them to preside. This showing
Notice of a special meeting of the members should be given at least five days of good cause exists when the court is apprised of the fact that the
before the date of the meeting. Therefore, the five days previous notice by-laws of the corporation require the calling of a general meeting
required would not be complied with. of the stockholders to elect the board of directors but the call of the
meeting has not been done. There is no need to issue a notice of hearing,
nor is there any necessity to hold a hearing, upon the board of directors. The
3. It Must Be Held at the Proper Place court here found good cause in calling the meeting for the election of a new
board, because the chairman of the board of directors who is so authorized
Sec. 51. Place and time of meetings of stockholders or members. - to call such meeting, failed, neglected or refused to perform his duty. Having
Stockholders' or members' meetings, whether regular or special, shall be held the authority to grant such relief, the lower court did not exceed its
in the city or municipality where the principal office of the corporation is jurisdiction nor did it abuse its discretion in granting it.
located, and if practicable in the principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this section, be considered a city or NOTE: In a case decided by the SEC, it rules that under the present state of
municipality. law, the Ponce case will apply ONLY ―where there is no person authorized to
call the meeting:, thus an ex-parte proceeding may be allowed as obviously
Notice of meetings shall be in writing, and the time and place thereof stated there is no person to summon and no person whose right to due process will
Sec. 58. Proxies. - Stockholders and members may vote in person or by Any other stockholder may transfer his shares to the same trustee or trustees
proxy in all meetings of stockholders or members. Proxies shall be in writing, upon the terms and conditions stated in the voting trust agreement, and
signed by the stockholder or member and filed before the scheduled meeting thereupon shall be bound by all the provisions of said agreement.
with the corporate secretary. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is intended. No proxy shall be valid No voting trust agreement shall be entered into for the purpose of
and effective for a period longer than five (5) years at any one time. circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
PROXY VOTING: is a right granted by law to all stockholders entitled to
vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a Unless expressly renewed, all rights granted in a voting trust agreement shall
non-stock corporation with by-laws providing for a prohibition on the use of automatically expire at the end of the agreed period, and the voting trust
proxies (Sec. 89). certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed canceled and new certificates of stock shall
REQUIREMENTS: In the absence of a by-law provision regulating the form be reissued in the name of the transferors.
and execution of proxy, Sec. 58 requires:
1. The proxy must be in writing; The voting trustee or trustees may vote by proxy unless the agreement
2. It is signed by the stockholder or member or his duly authorized provides otherwise.
representative; and
3. It is filed on or before the schedule meeting with the corporate VOTING TRUSTS DISTINGUISHED FROM PROXY
secretary.
VOTING TRUST PROXY
It is to be noted, however, that publicly listed companies are requreid to The beneficial owner of the shares Legal title to the shares remain with
observe and comply with SEC Memorandum Circular No. 5 -1996, ceased to be stockholder of record of the beneficial owner
the corporation since the shares are
TYPES OF PROXIES: transferred to the trustee
1. General – gives a general discretionary power of attorney to vote for Trustee votes as owner of the shares Proxy votes merely as an agent
directors and all ordinary matters that my properly come before a The beneficial owner is disqualified The owner of the shares may be
meeting. It is not an authority, however, to vote for fundamental to be a director elected as such since legal title
changes in the corporate charter or for other unusual transactions, thereof remains with him
unless so specified; Purpose is to acquire voting control Generally used to secure voting an
2. Special – restricts the authority to vote on specified matters only and of the corporation quorum requirements or merely for
may direct the manner in which the vote will be cast. the purpose of representing an
absent stockholder
DURATION: May be fixed by the proxy’s own terms but it cannot exceed 5 Irrevocable Revocable anytime unless coupled
years and for not more than 5 years for each renewal. Otherwise, it expires with an interest
after the meeting for which it was given. The trustee can act and vote at any Proxy can generally act as such only
meeting during the duration of the at a particular meeting
VOTING TRUST: is one created by an agreement between a group of VTA
stockholders of a corporation and a trustee, or a group of identical Trustee may vote in person or by Proxy holder must vote in person
agreements between individual stockholders and a common trustee, whereby
proxy
it is provided that for a term of years, or for a period contingent upon a
Duration may exceed five years Proxy is of a shorter duration and
certain event, or until the agreement is terminated, control over the stock
may not exceed 5 years
owned by such stockholders, shall be lodged in the trustee, either with or
VTA to be valid and effective, must Unless required by the by-laws,
without reservation to the owners or persons designated by them the power
be notarized and filed with the SEC proxies need not be notarized nor is
to direct how such control shall be issued.
it required to be filed with the SEC.
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation
READ AGAIN: LEE VS. CA
may create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the shares for a
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION,
period not exceeding five (5) years at any time: Provided, That in the case of
EUSEBIO VILLATUYA MARIO Y. CONSING and ROBERTO S. BENEDICTO,
a voting trust specifically required as a condition in a loan agreement, said
petitioners,
voting trust may be for a period exceeding five (5) years but shall
vs.
automatically expire upon full payment of the loan. A voting trust agreement
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of
must be in writing and notarized, and shall specify the terms and conditions
Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO
thereof. A certified copy of such agreement shall be filed with the corporation
A. GARCIA and MARCELINO CALINAWAN JR., respondents.
and with the Securities and Exchange Commission; otherwise, said
(G.R. No. L-34192 June 30, 1988)
agreement is ineffective and unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be cancelled and new ones
PHILIPPINE NATIONAL BANK, petitioner,
shall be issued in the name of the trustee or trustees stating that they are
vs.
issued pursuant to said agreement. In the books of the corporation, it shall
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the
be noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement.
In addition, PNB claims that Batjak has no cause of action and prays that the A ―subscription‖, properly speaking, is the mutual agreement of the
petition for mandamus be dismissed. A careful reading of the Voting Trust subscribers to take and pay for the stocks of the corporation. A ―subscription
Agreement shows that PNB was really not a party thereto. Hence, mandamus contract‖, on the other hand is specifically defined in Sec. 60:
will not lie against PNB.
Sec. 60. Subscription contract. - Any contract for the acquisition of
Batjak has no clear right to be entitled to the writ prayed for. What unissued stock in an existing corporation or a corporation still to be formed
Batjak seeks to recover is title to, or possession of, real property shall be deemed a subscription within the meaning of this Title,
(the three (3) oil mills which really made up the assets of Batjak) notwithstanding the fact that the parties refer to it as a purchase or some
but which the records show already belong to NIDC. It is not disputed other contract.
that the mortgages on the three (3) oil mills were foreclosed by PNB and
NIDC and acquired by them as the highest bidder in the appropriate SUBSCRIPTION VS. PURCHASE: In the latter, the buyer becomes a
foreclosure sales. Ownership thereto was subsequently consolidated by PNB shareholder only upon full payment of the price. UNISSUE shares cannot be
and NIDC, after Batjak failed to exercise its right of redemption. The three the subject of a ―purchase‖.
(3) oil mills are now titled in the name of NIDC. From the foregoing, it is
evident that Batjak had no clear right to be entitled to the writ prayed for. In ―We may add that the law in force in this jurisdiction makes no distinction, in
Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. respect to the liability of the subscriber, between shares subscribed before
The Board of Pharmacy, 20 Phil. 367, the Court said that the writ of incorporation is effected and shares subscribed thereafter. All like are bound
mandamus will not issue to give to the applicant anything to which he is not to pay full value in cash or its equivalent, and any attempt to discriminate in
entitled by law. favor of one subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course primarily to
Batjak premises its right to the possession of the three (3) off mills on the subscriptions to shares that have not been previously issued. It is conceivable
Voting Trust Agreement, claiming that under said agreement, NIDC was that the power of the corporation to make terms with the purchaser would be
constituted as trustee of the assets, management and operations of Batjak, greater where the shares which are the subject of the transaction have been
that due to the expiration of the Voting Trust Agreement, on 26 October acquired by the corporation in course of commerce, after they have already
1970, NIDC should tum over the assets of the three (3) oil mills to Batjak been once issued. But the shares with which are here concerned are not of
From the foregoing provisions, it is clear that what was assigned to NIDC was this sort.‖ (National Exchange Co., Inc. vs. Dexter)
the power to vote the shares of stock of the stockholders of Batjak,
representing 60% of Batjak's outstanding shares, and who are the signatories EXAMPLE: If X corporation had P1M authorized capital divided into 1M
to the agreement. The power entrusted to NIDC also included the authority shares with a par value of P1. 500,000 has already been subscribed:
to execute any agreement or document that may be necessary to express the 1. Z ―purchased‖ 100,000 of the UNISSUED shares paying 50% down
consent or assent to any matter, by the stockholders. Nowhere in the said payment and the balance payable after 6 months, with a condition that
provisions or in any other part of the Voting Trust Agreement is mention he will not be considered a shareholder until full payment. – He is still
made of any transfer or assignment to NIDC of Batjak's assets, operations, liable for the balance because this will be considered a subscription no
and management. NIDC was constituted as trustee only of the voting rights matter how the parties refer to it and accordingly, Z is liable as a
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable: GOOD FAITH RULE: is based on the proposition that the value of the
1. For a period of at least 6 months from the date of subscription unless property or services is a matter about which there can be an honest
(a) all the subscribers consent to the revocation; or (b) the incorporation difference of opinion. Therefore, if the parties have acted in good faith
fails to materialize within said period or within a longer period as may without fraud or intentional over-valuation, the transaction cannot be
stipulated in the contract of subscription; and overturned even if it later becomes evident that the property or services were
2. After submission of the AOI to the SEC. in fact worth much less than the value fixed on them initially.
Stock issuance is generally the initial and primary source of corporate capital. STOCK DIVIDENDS: Sec. 62(5) which states that ―amounts transferred
Other sources may include corporate borrowings, loans and advances from from unrestricted retained earnings to stated capital‖ refer to stock dividends
creditors or stockholders. Corporate earnings may also be a source of where corporate earnings are capitalized rather than being distributed as
corporate funds if it is reinvested or ploughed back to the company. cash dividend. It merely converts income into capital, the consideration being
the retained earnings itself which would have accrued to the stockholders in
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a proportion to their respective stockholdings.
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the NO CONSIDERATION: stocks may not be issued without consideration for
following: the following reasons: (1) it is discriminatory against other stockholders; and
(2) it prejudices the rights of creditors under the Trust Fund Doctrine.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and RECLASSIFICATION: Sec. 62(6) which provides that ―outstanding shares
necessary or convenient for its use and lawful purposes at a fair valuation exchanged for stocks in the event of reclassification or conversion‖ speaks of
equal to the par or issued value of the stock issued; shares of stock surrendered to the corporation in exchange for new or
3. Labor performed for or services actually rendered to the corporation; different type of shares. Example: Found Shares which, after 5 years, may be
4. Previously incurred indebtedness of the corporation; converted to common stocks.
5. Amounts transferred from unrestricted retained earnings to stated capital;
and PROHIBITED CONSIDERATIONS: Shares of stock may not be issued in
6. Outstanding shares exchanged for stocks in the event of reclassification or exchange for (1) promissory notes; or (2) future services – as their
conversion. realization are not certain.
Where the consideration is other than actual cash, or consists of intangible THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
property such as patents of copyrights, the valuation thereof shall initially be vs.
determined by the incorporators or the board of directors, subject to approval I. B. DEXTER, defendant-appellant
by the Securities and Exchange Commission. (GR No. L-27872; Feb. 25, 1928)
Shares of stock shall not be issued in exchange for promissory notes or FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written
future service. subscription to the corporate stock of C. S. Salmon & Co. in the following
form:
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation. I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the first dividends declared on any
The issued price of no-par value shares may be fixed in the articles of and all shares of said company owned by me at the time dividends are
incorporation or by the board of directors pursuant to authority conferred declared, until the full amount of this subscription has been paid
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 Upon subscription, defendant Dexter paid P15,000 from the dividends
outstanding capital stock at a meeting duly called for the purpose. declared by the company and supplemented by money supplied personally be
the subscriber. No other payment was made.
―ISSUE‖: is generally employed to indicate the making of a share contract or
contract of subscription, that is, transaction by which a person becomes the ISSUE: WON the subscription to be paid out of the dividends declared on the
owner of shares and by which new share contracts are created. It is often shares has the effect of relieving the subscriber from personal liability in an
associated with the execution and delivery of a share certificate but the action to recover the value of the shares?
issuance of the shares is not dependent on the delivery of a certificate of
stock. HELD: No. Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the Organic Act
―PAR‖ or ―ISSUED PRICE‖: while it may not reflect the true value of the of July 1, 1902, which, in the part here material, is substantially reproduced
shares which constantly fluctuates, merely indicates the amount which the in section 28 of the Autonomy Act of August 29, 1916. In the Organic Act it is
original subscribers are supposed to contribute to the corporate capital as the among other things, declared: "That all franchises, privileges, or concessions
basis of the privilege of profit sharing with limited liability. granted under this Act shall forbid the issue of stock or bonds except in
exchange for actual cash or for property at a fair valuation equal to the par
PROPERTY: If shares are issued in exchange for property, the value of such value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
should at least be equal to the par or issued value of the stocks. Such value, sec. 74.)
may be determined with reference to
a. REAL PROPERTY - (1) independent appraiser’s appraisal report; (2) BIR Pursuant to this provision we find that the Philippine Commission inserted in
Zonal Valuation; or (3) Market Value indicated in the Real Estate Tax the Corporation Law, enacted March 1, 1906, the following provision: ". . .
Declaration. no corporation shall issue stock or bonds except in exchange for
b. INTANGIBLE PROPERTY – as determined by the incorporators or the actual cash paid to the corporation or for property actually received
BOD subject to the approval of the SEC. by it at a fair valuation equal to the par value of the stock or bonds
so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
Share of Stock: may rightfully be described as a profit sharing contract, a REGISTRATION: is necessary to:
series of units of interest and participation in a corporation in consideration of 1. Enable the corporation to know who its stockholders are;
a proportionate right to participate in dividend and other distributions. They 2. Enable the transferee to exercise his rights as a stockholder;
are personal properties and the owners thereof have the unbridled right to 3. Afford the corporation an opportunity to object or refuse registration of
transfer the same to anyone they please subject only to reasonable charter the transfer in cases allowed by law (as when it has unpaid claims on
provisions. the shares transferred);
4. Avoid fictitious and fraudulent transfers; and
Certificate of Stock: is the piece of paper or document which evidences 5. Protect creditors who have the right to look upon stockholders, in case
the ownership of shares and a convenient instrument in the transfer of the of non-payment or watered shares, for the satisfaction of their claims.
title.
MANDAMUS: If the corporate secretary refuses to registered or record the
Sec. 63. Certificate of stock and transfer of shares. - The capital stock transfer, mandamus will lie to compel the registration. This is because such
of stock corporations shall be divided into shares for which certificates signed duty is ministerial. HOWEVER, he cannot be compelled to do so when the
TWO MODES OF TRANSFERRING STOCKS: Monserrat claims ownership over the shares and the lower court rendered
1. Endorsement and delivery of certificate of stock; judgment in his favor, holding that the mortgage on the shares was null and
2. Notarized deed. void, but the mortgage on the usufruct is valid.
The SEC has, however, ruled that when a corporation has already issued ISSUE: WON it is necessary to enter upon the books of the corporation a
stock certificates, any transfer of the shares can only be effectively made by mortgage constituted on shares of stock in order that such mortgage may be
endorsement and delivery of the stock certificate. A deed of transfer, sale or valid and may have force and effect as against third persons?
assignment alone would not suffice (as affirmed by the SC in Rural Bank of
Lipa City, Inc. vs. CA) for to rule otherwise would open the door to fraudulent HELD: No. Section 35 of the Corporation Law provides the following:
or fictitious transfer which the SEC seeks to avoid. In effect, while a formal
contract of sale in a notarized document is equivalent to actual delivery of the SEC. 35. The capital stock of stock corporations shall be divided into
certificate itself, this mode of transfer is available only if no certificate of shares for which certificates signed by the president or the vice-president,
stock has been issued. counter signed by the secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws. Shares of
RIGHT TO TRANSFER SHARES OF STOCK: may not be unreasonably stock so issued are personal property and may be transferred by delivery
restricted prohibited. Thus, in Padgett vs. Bobcock & Templeton and Fleischer of the certificate indorsed by the owner or his attorney in fact or other
vs. Botica Nolasco, the SC held that every owner of corporate shares has the person legally authorized to make the transfer. No transfer, however, shall
same uncontrollable right to alienate them and is under no obligation from be valid, except as between the parties, until the transfer is entered and
selling them at his sacrifice and for the welfare and benefit of the corporation noted upon the books of the corporation so as to show the names of the
and other stockholders. But while unreasonable restrictions may not be parties to the transaction, the date of the transfer the number of the
allowed, the right to transfer may be ―regulated‖ to give the corporation certificate, and the number of shares transferred.
protection against colorable or fraudulent transfer or to enable it to know
who its stockholders are. Also, as a matter of policy, the SEC allows the grant No share of stock against which the corporation hold, any unpaid claim
of ―preferential rights‖ to existing stockholders and/or the corporation, giving shall be transferable on the books of the corporation.
them the first option to purchase the shares of a selling stockholder within a
reasonable period not exceeding thirty days provided that the same is The legal provision just quoted does not require any entry except of transfers
contained in the AOI and in all the stock certificates to be issued. This is of shares of stock in order that such transfers may be valid as against third
considered ―reasonable‖ since it merely suspends the right to transfer within persons. Now, what did the Legislature mean in using the word "transfer"?
the period specified.
Inasmuch as it does not appear from the text of the Corporation Law that an
OTHER RESTRICTIONS: attempt was made to give a special signification to the word "transfer", we
1. It is not valid, except as between the parties, until recorded in the books shall construe it according to its accepted meaning in ordinary parlance.
of the corporation;
2. Shares of stock against which the corporation holds any unpaid claim The word "transferencia" (transfer) is defined by the "Diccionario de la
shall not be transferrable in the books of the corporation. Unpaid claims, Academia de la Lengua Castellana" as "accion y efecto de transferir" (the act
refer to claims arising from unpaid subscription and not to any and effect of transferring); and the verb "transferir", as "ceder o renunciar en
indebtedness which a stockholder may owe the corporation such as otro el derecho o dominio que se tiene sobre una cosa, haciendole dueno de
monthly dues; ella" (to assign or waive the right in, or absolute ownership of, a thing in
3. Restrictions required to be indicated in the AOI, bylaws and stock favor of another, making him the owner thereof).
certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public Service Act In the Law Dictionary of "Words and Phrases", third series, volume 7, p. 589,
requiring the approval of the government agency concerned if it will vest the word "transfer" is defined as follows:
unto the transferee 40% of the capital of the public service company;
5. Sale to aliens in violation of maximum ownership of shares under the "Transfer" means any act by which property of one person is vested in
Nationalization Laws; and another, and "transfer of shares", as used in Uniform Stock Transfer Act
6. Those covered by reasonable agreement of the parties. (Comp. St. Supp., 690), implies any means whereby one may be divested
of and another acquire ownership of stock. (Wallach vs. Stein [N.J.], 136
TRANSFER: as used in the Corporation Code, refers to absolute and A., 209, 210.)"
unconditional transfer to warrant registration in the books of the corporation
in order to bind the latter and other third persons. In view of the definitions cited above, the question arises as to whether or
not a mortgage constituted on certain shares of stock in accordance with Act
ENRIQUE MONSERRAT, plaintiff-appellee, No. 1508, as amended by Act No. 2496, is a transfer of such shares in the
vs. abovementioned sense.
CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents Section 3 of the aforesaid Act No. 1508, as amended by Act No. 2496,
(G.R. No. 37078; September 27, 1933) defines the phrase "hipoteca mobiliaria" (chattel mortgage) as follows:
FACTS: Enrique Monserrat, president and manager of the Manila Yellow SEC. 3. A chattel mortgage is a conditional sale of personal property as
Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the usufruct of his security for the payment of a debt, or the performance of some other
1,200 shares in consideration of the interest shown and the financial aid obligation specified therein, the condition being that the sale shall be
extended him (Monserrat) in the organization of the corporation. This avoided upon the seller paying to the purchaser a sum of money or doing
assignment allowed Ceron to derive the right to enjoy the profits (during his some other act named. If the condition is performed according to its terms
lifetim) that may be derived from the shares but prohibited him from acts of the mortgage and sale immediately become void, and the mortgage is
absolute ownership, such acts and the right to vote, reserved to Monserrat hereby divested of his title.
and his heirs. Such assignment was recorded in the books of the corporation
and the corresponding shares certificate was issued to Ceron. According to the legal provision just quoted, although a chattel mortgage,
accompanied by delivery of the mortgaged thing, transfers the title and
Later on, Ceron mortgaged the shares to herein defendant Eduardo Matute, ownership thereof to the mortgage creditor, such transfer is not absolute but
the latter without knowledge of the existence of the assignment. Due to non- constitutes a mere security for the payment of the mortgage debt, the
payment, Matute foreclosed the mortgage and the shares were sold at a
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco mortgage his By analogy with the foregoing and considering the ownership of shares in a
shares to Chua Chiu, such assignment recorded in the Office of the Register corporation as property distinct from the certificates which are merely the
of Deeds and the books of the corporation. For non-payment, the mortgage evidence of such ownership, it seems to us a reasonable construction of
was foreclosed and the shares were sold at a public auction with plaintiff section 4 of Act No. 1508 to hold that the property in the shares may be
Chua Guan as the highest bidder. 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
The Company refused to cancel the certificates of stock and issue new ones province of the owner's domicile, a single registration sufficient. If
to herein plaintiff alleging that prior to the date of plaintiff’s demand, nine not, the chattel mortgage should be registered both at the owner's
attachments had been issued and served and noted on the books of the domicile and in the province where the corporation has its principal
corporation. Thus, a prayer for a writ of mandamus. 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 validity of the assignments and the mortgage is not in question. the assets of the corporation.
ISSUE: WON the registration of the mortgage in the registry of chattel In view of the premises, the attaching creditors are entitled to priority over
mortgage in the office of the register of deeds give constructive notice to the the defectively registered mortgage of the appellant and the judgment
said attaching creditors and thus gave preference to the mortgage over the appealed from must be affirmed without special pronouncement as to costs
other debts? in this instance.
HELD: No. In passing, let it be noted that the registration of the said chattel TORIBIA USON, plaintiff-appellee,
mortgage in the office of the corporation was not necessary and had no legal vs.
effect. (Monserrat vs. Ceron, 58 Phil., 469.) The long mooted question as to VICENTE DIOSOMITO, ET AL., defendants.
ISSUE: WON a bona fide transfer of the shares of a corporation, not ISSUE: WON the restriction imposed on the right to transfer the shares is
registered or noted on the books of the corporation, is valid as against a valid?
subsequent lawful attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer or not? HELD: No. The opinion seems to be unanimous that a restriction imposed
upon a certificate of shares, similar to the ones under consideration,
HELD: Section 35 of the Corporation Law is as follows: is null and void on the ground that it constitutes and unreasonable
limitation of the right of ownership and is in restraint of trade.
SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president, Shares of corporate stock being regarded as property, the owner of such
countersigned by the secretary or clerk and sealed with the by-laws. shares may, as a general rule, dispose of them as he sees fit, unless the
Shares of stock so issued are personal property and may be transferred by corporation has been dissolved, or unless the right to do so is properly
delivery of the certificate indorsed by the owner or his attorney in fact or restricted, or the owner's privilege of disposing of his shares has been
other person legally authorized to make the transfer. No transfer, however, hampered by his own action. (14 C. J., sec. 1033, pp. 663, 664.)
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 Any restriction on a stockholder's right to dispose of his shares must be
the parties to the transaction, the date of the transfer, the number of the construed strictly; and any attempt to restrain a transfer of shares is
certificate, and the number of shares transferred regarded as being in restraint of trade, in the absence of a valid lien upon
its shares, and except to the extent that valid restrictive regulations and
We prefer to adopt the line followed by the Supreme Courts of Massachusetts agreements exist and are applicable. Subject only to such restrictions, a
and of Wisconsin. (See Clews vs. Friedman, 182 Mass., 555; 66 N.E. 201, and stockholder cannot be controlled in or restrained from exercising his right
In re Murphy, 51 Wis., 519; 8 N.W., 419.) In this case the court had under to transfer by the corporation or its officers or by other stockholders, even
consideration a statute identical with our own section 35, supra, and the though the sale is to a competitor of the company, or to an insolvent
court said: person, or even though a controlling interest is sold to one purchaser.
(Ibid., sec. 1035, pp. 665, 666.)
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 In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we have
entered, as here required, on the books of the corporation. And it is discussed the validity of a clause in the by-laws of the defendant corporation,
equally clear to us that all transfers of shares not so entered are which provided that, under the same conditions, the owner of a share of
invalid as to attaching or execution creditors of the assignors, as stock could not sell it to another person except to the defendant corporation.
well as to the corporation and to subsequent purchasers in good In deciding the legality and validity of said restriction, we held:
faith, and indeed, as to all persons interested, except the parties
to such transfers. All transfers not so entered on the books of the The only restraint imposed by the Corporation Law upon transfer
corporation are absolutely void; not because they are without of shares is found in section 35 of Act No. 1459. This restriction is
notice or fraudulent in law or fact, but because they are made so necessary in order that the officers of the corporation may know
void by statute. who are the stockholders, which is essential in conducting
elections of officers, in calling meetings of stockholders, and for
To us the language of the legislature is plain to the effect that the right of other purposes. But any restriction of the nature of that imposed
the owner of the shares of stock of a Philippine corporation to in the by-law now in question, is ultra vires, violative of the
transfer the same by delivery of the certificate, whether it be property rights of shareholders, and in restraint of trade. (Id., p.
regarded as statutory on common law right, is limited and restricted 592.)
by the express provision that "no transfer, however, shall be valid,
except as between the parties, until the transfer is entered and It is obvious, therefore, that the restriction consisting in the word
noted upon the books of the corporation." Therefore, the transfer of "nontransferable", appearing on the 12 certificates, Exhibits F to F-11, is
the 75 shares in the North Electric Company, Inc., made by the illegal and should be eliminated.
defendant Diosomito to the defendant Barcelon was not valid as to
the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date ISSUE2: WON the corporation may be compelled to buy the shares of a
on which she obtained her attachment lien on said shares of stock selling stockholder?
which still stood in the name of Diosomito on the books of the
corporation. HELD: No. There is no existing law nor authority in support of the plaintiff's
claim to the effect that the defendants are obliged to buy his shares of stock
value at par value, plus the interest demanded thereon. In this respect, we
CYRUS PADGETT, plaintiff-appellee, hold that there has been no such contract, either express or implied, between
vs. the plaintiff and the defendants. In the absence of a similar contractual
BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendants- obligation and of a legal provision applicable thereto, it is logical to conclude
appellants that it would be unjust and unreasonable to compel the said defendants to
(G.R. No. L-38684; December 21, 1933) comply with a non-existent or imaginary obligation. Whereupon, we are
LEON J. LAMBERT, plaintiff-appellant, Effective control and management of the piggery at Embassy Farms, Inc. was
vs. transferred by Evangelista to Asuncion pursuant to clause 8 of the MOA. In
T. J. FOX, defendant-appellee accordance with clause 15, Evangelista served as President and Chief
(G.R. No. L-7991; January 29, 1914) Executive of Embassy Farms.
FACTS: Defendant and plaintiff, became two of the largest shareholders of Evangelista also endorsed in blank all his shares of stock including that of his
John R. Edgar & Co., Inc. was incorporated. They were former creditors who wife and three nominees with minor holdings but retained possession of said
agreed to aid the financially distressed predecessor John R. Edgar & Co.. shares and opted to deliver to Asuncion only upon full compliance of the
They entered into an agreement a few days after incorporation as follows: latter of his obligations under the MOA.
Whereas the undersigned are, respectively, owners of large amounts of For failure to comply with his obligations, Evangelista intimated the institution
stock in John R. Edgar and Co, Inc; and, of the appropriate legal action. But Asuncion eventually filed for the
rescission of the MOA.
Whereas it is recognized that the success of said corporation depends, now
and for at least one year next following, in the larger stockholders ISSUE: WON Evangelista has a better right to the shares and control of the
retaining their respective interests in the business of said corporation: corporate affairs?
Therefore, the undersigned mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of any part of their present holdings of stock HELD: Yes. From the pleadings submitted by the parties it is clear that
in said John R. Edgar & Co. Inc., till after one year from the date hereof. although Evangelista has indorsed in blank the shares outstanding in his
Either party violating this agreement shall pay to the other the sum of one name he has not delivered the certificate of stocks to Asuncion because the
thousand (P1,000) pesos as liquidated damages, unless previous consent latter has not fully complied with his obligations under the MOA. There
in writing to such sale, transfer, or other disposition be obtained. being no delivery of the indorsed shares of stock Asuncion cannot
therefore effectively transfer to other person or his nominees the
Notwithstanding this contract the defendant Fox on October 19, 1911, sold undelivered shares of stock. For an effective transfer of shares of stock
his stock in the said corporation to E. C. McCullough of the firm of E. C. the mode and manner of transfer as prescribed by law must be followed
McCullough & Co. of Manila, a strong competitor of the said John R. Edgar & (Navea v. Peers Marketing Corp., 74 SCRA 65). As provided under Section 3
Co., Inc. of Batas Pambansa Bilang 68, otherwise known as the Corporation Code of
the Philippines, shares of stock may be transferred by delivery to the
A complaint was filed and the trial court decided in favor of defendant. transferree of the certificate properly indorsed. Title may be vested
in the transferree by the delivery of the duly indorsed certificate of
ISSUE: WON the stipulation in the contract is valid? stock (18 C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However,
no transfer shall be valid, except as between the parties until the transfer is
HELD: Yes. It is urged by the appellee in this case that the stipulation in the properly recorded in the books of the corporation (Sec. 63, Corporation Code
contract suspending the power to sell the stock referred to therein is an of the Philippines).
illegal stipulation, is in restraint of trade and, therefore, offends public policy.
We do not so regard it. The suspension of the power to sell has a In the case at bar the indorsed certificate of stock was not actually delivered
beneficial purpose, results in the protection of the corporation as to Asuncion so that Evangelista is still the controlling stockholder of Embassy
well as of the individual parties to the contract, and is reasonable as Farms despite the execution of the memorandum of agreement and the turn-
to the length of time of the suspension. We do not here undertake to over of control and management of the Embassy Farms to Asuncion on
discuss the limitations to the power to suspend the right of alienation of August 2, 1984.
stock, limiting ourselves to the statement that the suspension in this
particular case is legal and valid. When Asuncion filed on April 10, 1986 an action for the rescission of
contracts with damages, the Pasig Court merely restored and established the
EMBASSY FARMS, INC., petitioner, status quo prior to the execution of the MOA by the issuance of a restraining
vs. order on July 10, 1987 and the writ of preliminary injunction on July 30,
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT), HON. 1987. It would be unjust and unfair to allow Asuncion and his nominees to
ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court, Branch CLVIII, control and manage the Embassy Farms despite the fact that Asuncion, who
(158), Pasig, Metro Manila, VOLTAIRE B. CRUZ, Deputy Sheriff, Branch is the source of their supposed shares of stock in the corporation, is not
CLVIII, Regional Trial Court, Pasig, Metro Manila and EDUARDO B. asking for the delivery of the indorsed certificate of stock but for the
EVANGELISTA, respondents rescission of the MOA. Rescission would result in mutual restitution
(G.R. No. 80682 August 13, 1990) (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but proper to allow
Evangelista to manage the farm. Compared to Asuncion or his nominees
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista entered into a Evangelista would be more interested in the preservation of the assets,
Memorandum of Agreement (MOA) with the following obligations: equipment and facilities of Embassy Farms during the pendency of the main
case.
EVANGELISTA:
1. To transfer to Asuncion 19 parcels of agricultural land registered in ENRIQUE RAZON, petitioner,
his name, together with the stocks, equipment and facilities of vs.
Embassy Farms, Inc. wherein 90% of the shares of stock is owned INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN, in his
by Evangelista; capacity as Administrator of the Estate of the Deceased JUAN T. CHUIDIAN,
2. To cede, transfer and convey ―in a manner absolute and respondents.
irrevocable any and all of his shares of stocks‖ in Embassy Farms, (G.R. No. 74306 March 16, 1992)
Inc. to Asuncion or his nominees ―until the total of said shares of
stock so transferred shall constitute 90% of the paid-in equity of VICENTE B. CHUIDIAN, petitioner,
said corporation‖ within a reasonable time from signing the vs.
document. INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON,
ASUNCION: INC., respondents
1. To pay Evangelista P8,630,999; (G.R. No. 74315 March 16, 1992)
2. To organize and register a new corporation with an authorized
For the petitioner Rural Bank of Salinas to refuse registration of the Like the Abejo spouses, the respondents in Rural Bank of Salinas were
transferred shares in its stock and transfer book, which duty is ministerial on already prima facie shareholders when the deeds of assignment were
its part, is to render nugatory and ineffectual the spirit and intent of Section questioned. If the said deeds were to be annulled later on, respondents
63 of the Corporation Code. Thus, respondent Court of Appeals did not err in would still be considered shareholders of the corporation from the time of the
upholding the Decision of respondent SEC affirming the Decision of its assignment until the annulment of such contracts.
Hearing Officer directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events, the ISSUE2: WON petitioner is entitled to the relief of mandamus as against the
registration is without prejudice to the proceedings in court to determine the company?
validity of the Deeds of Assignment of the shares of stock in question.
HELD: No. Petitioner prays for the issuance of a writ of mandamus, directing
LIM TAY, petitioner, the corporate secretary of respondent corporation to have the shares
vs. transferred to his name in the corporate books, to issue new certificates of
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE stock and to deliver the corresponding dividends to him.
OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998) In order that a writ of mandamus may issue, it is essential that the
person petitioning for the same has a clear legal right to the thing
FACTS: To secure their separate loans, respondent Sy Guiok and Alfonso demanded and that it is the imperative duty of the respondent to
Lim, each executed a contract of pledge covering their respective 300 shares perform the act required. It neither confers powers nor imposes
in favor of petitioner Lim Tay where they indorsed in blank and delivered duties and is never issued in doubtful cases. It is simply a command
their shares of stock to Tay. to exercise a power already possessed and to perform a duty
already imposed.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC against
Go Fay & Compny, Inc. to cancel the old certificates and issue a new one in In the present case, petitioner has failed to establish a clear legal right.
his name, which was granted by the SEC but reversed by the CA. Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have
ISSUE: WON the rulings in the Abejo case and the Rural Bank of Salinas any ownership rights at all. At the time petitioner instituted his suit at the
case will apply? SEC, his ownership claim had no prima facie leg to stand on. At best, his
contention was disputable and uncertain Mandamus will not issue to establish
HELD: No. Petitioner's reliance on the doctrines set forth in Abejo v. De la a legal right, but only to enforce one that is already clearly established.
Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced.
ISSUE3: WON by Guiok and Lim’s failure to pay, the ownership of the shares
ABEJO: the Abejo spouses sold to Telectronic Systems, Inc. shares of stock automatically passed to Lim Tay?
in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to record the transfer of the HELD: No. On appeal, petitioner claimed that ownership over the shares had
shares in the corporate books and instead asked for the annulment of the passed to him, not via the contracts of pledge, but by virtue of prescription
sale, claiming that he and his wife had a pre-emptive right over some of the and by respondents' subsequent acts which amounted to a novation of the
shares, and that his wife's shares were sold without consideration or consent. contracts of pledge. We do not agree.
FACTS: Teofilo Po was an incorporator who subscribed to 80 shares and paid That procedure cannot be followed in the instant case because, as already
25% of the subscription. No certificate of stock was issued to him. noted, the twenty shares in question are not covered by any certificate of
stock in Po's name. Moreover, the corporation has a claim on the said
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at par value of shares for the unpaid balance of Po's subscription. A stock
P100, or P2,000. Nava requested herein private respondents, officers of Peers subscription is a subsisting liability from the time the subscription is
Marketing Corporation, to register him as owner of the shares, but they made. The subscriber is as much bound to pay his subscription as he
refused, Po being delinquent in the payment of the balance due his would be to pay any other debt. The right of the corporation to
subscription. demand payment is no less incontestable. (Velasco vs. Poizat, 37 Phil.
802; Lumanlan vs. Cura, 59 Phil. 746).
Po filed an action for mandamus in the CFI of Negros but it was dismissed.
A corporation cannot release an original subscriber from paying for
Po claims that the trial court erred in applying the ruling in Fua Cun vs. his shares without a valuable consideration (Philippine National Bank
Summers and China Banking Corporation wherein it was ruled that the vs. Bitulok Sawmill, Inc., L-24177-85, June 29, 1968, 23 SCRA 1366) or
payment of one-half of the subscription does not entitle the subscriber to a without the unanimous consent of the stockholders (Lingayen Gulf
certificate for one-half of the number of shares subscribed. Electric Power Co., Inc. vs. Baltazar, 93 Phil 404).
ISSUE: WON Peers Marketing Corporation may be compelled by mandamus Under the facts of this case, there is no clear legal duty on the part of the
to enter in its stock and transfer book the sale made by Po to Nava of the 20 officers of the corporation to register the twenty shares in Nava's name,
shares forming part of Po’s subscription of 80 shares, it being admitted that Hence, there is no cause of action for mandamus
the corporation has an unpaid claim of P6,000 as the balance on said
subscription? As already stressed, in this case no stock certificate was issued to Po.
Without stock certificate, which is the evidence of ownership of
HELD: No. We hold that the transfer made by Po to Nava is not the corporate stock, the assignment of corporate shares is effective
"alienation, sale, or transfer of stock" that is supposed to be recorded in the only between the parties to the transaction (Davis vs. Wachter, 140 So.
stock and transfer book, as contemplated in section 52 of the Corporation 361).
Law.
The Villanueva spouses failed to settle their obligation on the due date, and There being no showing that any of the requisites mandated by law was
the BOD sent a demand letter for the surrender of the said shares and for the complied with, the SEC Hearing Officer did not abuse his discretion in
delivery of sufficient collateral to cover the balance of the debt, which the granting the issuance of the preliminary injunction prayed for by petitioners
Villanueva spouses ignored. Their shares were converted into Treasury in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the
shares. order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and
the Court of Appeals decision upholding the SEC en banc order, are valid and
The Villanueva spouses questioned the legality of the such conversion and in accordance with law and jurisprudence, thus warranting the denial of the
filed with the SEC a petition for annulment of the stockholders’ meeting and instant petition for review.
election of directors and officers because they were not notified of such
meeting. ALFONSO S. TAN, Petitioner,
vs.
The SEC hearing officer dismissed the application for issuance of a SECURITIES AND EXCHANGE COMMISSION, VISAYAN EDUCATIONAL
preliminary injunction, but was granted on reconsideration. The decision was SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL S. TAN and
affirmed by the SEC en banc and later by the CA. PATRICIA AGUILAR, Respondents
(G.R. No. 95696; March 3, 1992)
ISSUE: WON the transfer of the shares is ineffective for non-indorsement
and non-delivery of the certificate of stocks? FACTS: With the withdrawal of two of the original incorporators, petitioner
Alfonso Tan assigned 50 of his 400 shares (covered by Stock Certificate No.
HELD: Yes. The Corporation Code specifically provides: 2) to his brother Angel S. Tan, private respondent.
SECTION 63. Certificate of stock and transfer of shares. — The capital Petitioner’s stock certificate was cancelled by the corporate secretary, Patricia
stock of stock corporations shall be divided into shares for which Aguilar, by virtue of Resolution No. 1981(b), while petitioner was still the
certificates signed by the president or vice president, countersigned by the president and member of the board.
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of With the cancellation of Certificate of stock No. 2 and the subsequent
stocks so issued are personal property and may be transferred by delivery issuance of Stock Certificate No. 6 in the name of Angel S. Tan and for the
of the certificate or certificates indorsed by the owner or his attorney-in- remaining 350 shares, Stock Certificate No. 8 was issued in the name of
fact or other person legally authorized to make the transfer. No transfer, petitioner Alfonso S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29),
however, shall be valid, except as between the parties, until the transfer is alleging that:
recorded in 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 9. That in view of his having taken 33 1/3 interest, I was personally
certificate or certificates and the number of shares transferred. requested by Mr. Tan Su Ching to request Mr. Alfonso Tan to make proper
endorsement in the cancelled Certificate of Stock No. 2 and Certificate No.
No shares of stock against which the corporation holds any unpaid claim 8, but he did not endorse, instead he kept the cancelled (1981) Certificate
shall be transferable in the books of the corporation. (Emphasis ours) of Stock No. 2 and returned only to me Certificate of Stock No. 8, which I
delivered to Tan Su Ching.
Petitioners argue that by virtue of the Deed of Assignment, private
respondents had relinquished to them any and all rights they may have had 10. That the cancellation of his stock (Stock No. 2) was known by him in
as stockholders of the Bank. While it may be true that there was an 1981; that it was Stock No. 8 that was delivered in March 1983 for his
assignment of private respondents' shares to the petitioners, said endorsement and cancellation.
assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the Petitioner filed with the SEC a case questioning the cancellation of the
owners, their attorneys-in-fact or any other person legally aforesaid Stock Nos. 2 and 8.
authorized to make the transfer. Moreover, petitioners admit that the
assignment of shares was not coupled with delivery, the absence of which is ISSUE: WON the cancellation and transfer of stock certificate no. 2 was
But delivery is not essential where it appears that the persons ISSUE: WON plaintiff was bound to present and register the certificate
sought to be held as stockholders are officers of the corporation, assigned to him within any definite or fixed period?
and have the custody of the stock book . . . (67 Phi. 36).
HELD: No. The defendant has not made herein any pretense to that effect;
Furthermore, there is a necessity to delineate the function of the stock itself but it contends that from the moment the certificate was assigned to the
from the actual delivery or endorsement of the certificate of stock itself as is plaintiff, the latter's right to have the assignment registered commenced to
the question in the instant case. A certificate of stock is not necessary to exist. This contention is correct, but it would not follow that said right
render one a stockholder in corporation. should be exercised immediately or within a definite period. The
existence of a right is one thing, and the duration of said right is
Nevertheless, a certificate of stock is the paper representative or another.
tangible evidence of the stock itself and of the various interests
therein. The certificate is not stock in the corporation but is merely On the other hand, it is stated in the appealed order of dismissal that the
evidence of the holder's interest and status in the corporation, his plaintiff sought to register the assignment on April 13, 1955; whereas in
ownership of the share represented thereby, but is not in law the plaintiff's brief it is alleged that it was only in February, 1955, when the
equivalent of such ownership. It expresses the contract between defendant refused to recognize the plaintiff. If, as already observed, there is
the corporation and the stockholder, but is not essential to the no fixed period for registering an assignment, how can the complaint
existence of a share in stock or the nation of the relation of be considered as already barred by the Statute of Limitations when it was
shareholder to the corporation. (13 Am. Jur. 2d, 769) filed on April 26, 1955, or barely a few days (according to the lower court)
and two months (according to the plaintiff), after the demand for registration
Under the instant case, the fact of the matter is, the new holder, Angel S. and its denial by the defendant. Plaintiff's right was violated only sometime in
Tan has already exercised his rights and prerogatives as stockholder and was 1955, and it could not accordingly have asserted any cause of action against
even elected as member of the board of directors in the respondent the defendant before that.
corporation with the full knowledge and acquiescence of petitioner. Due to
the transfer of fifty (50) shares, Angel S. Tan was clothed with rights and The defendant seems to believe that the plaintiff was compelled immediately
responsibilities in the board of the respondent corporation when he was to register his assignment. Any such compulsion is obviously for the benefit
elected as officer thereof. of the plaintiff, because it is only after registration that the transfer would be
Besides, in Philippine jurisprudence, a certificate of stock is not a binding against the defendant. But we are not here concerned with a
negotiable instrument. "Although it is sometime regarded as quasi- situation where the plaintiff claims anything against the defendant allegedly
negotiable, in the sense that it may be transferred by endorsement, accruing under the outstanding certificate in question between the date of
coupled with delivery, it is well-settled that it is non-negotiable, the assignment to the plaintiff and the date of the latter’s demand for
because the holder thereof takes it without prejudice to such rights registration and issuance of a new certificate.
or defenses as the registered owner/s or transferror's creditor may
Defendant Attorney General of the US contends that the shares were bought E. FORGED AND UNAUTHORIZED TRANSFERS
by Vicente Madrigal, in trust and for the benefit, of the Mistsui Bussan,
abranch office of a Japanese company; and that Madrigal endorsed in blank FORGED AND UNAUTHORIZED TRANSFERS VS. UNAUTHORIZED
and delivered the shares to Mistsui for safe keeping; that Mitsui never sold or ISSUANCE OF STOCK CERTIFICATE: In the former, what is forged or
otherwise disposed of the said shares; and that the stock certificates must unauthorized is the transfer of the certificate from the true and lawful owner
have been stolen or looted during the emergency from the liberation. to another person. While the latter refers to the act of the corporation in
issuing the certificate, either fraudulently or by mistake.
ISSUE: WON plaintiffs are the rightful owners of the shares?
In forged or unauthorized transfer:
HELD: No. Even, however, if Juan Campos and Carl Hess had sold the shares 1. The purchaser or purchasers, no matter how innocent they may have
of stock in question, as testified to by De los Santos, the result, insofar as been, will acquire no title as against the lawful owner by virtue of the
plaintiffs are concerned, would be the same. It is not disputed that said doctrine of non-negotiability of certificates of stock;
shares of stock were registered, in the records of the Lepanto, in the name of 2. The purchaser will have no right or remedy against the corporation
Vicente Madrigal. Neither is it denied that the latter was, as regards said because he took the shares not by virtue of a misrepresentation made
shares of stock, a mere trustee for the benefit of the Mitsuis. The record by the corporation but on the faith of a forged endorsement or
shows — and there is no evidence to the contrary — that Madrigal had never unauthorized transfer;
disposed of said shares of stock in any manner whatsoever, except by turning 3. The corporation incurs no liability to the person in whose favor the
over the corresponding stock certificates, late in 1941, to the Mitsuis, the certificate is endorsed or issued.
beneficial and true owners thereof. It has, moreover, been established, by 4. If the old certificate is cancelled and new one is issued by the
the uncontradicted testimony of Kitajima and Miwa, the managers of the corporation, the holder thereof may be required to return the same for
Mitsuis in the Philippines, from 1941 to 1945, that the Mitsuis had neither its cancellation;
sold, conveyed, or alienated said shares of stock, nor delivered the 5. However, if new certificates are issued and passes into the hands of a
aforementioned stock certificates, to anybody during said period. Section 35 subsequent bona fide purchaser, the latter may rightfully acquire title
of the Corporation Law reads: thereto since the corporation will be estopped to deny the validity
thereof;
The capital stock corporations shall be divided into shares for which 6. The subsequent purchaser in good faith took the shares, not by virtue of
certificates signed by the president or the vice-president, countersigned by a forged or unauthorized transfer but on reliance to the genuineness of
the secretary or clerk and sealed with the seal of the corporation, shall be the certificate issued by the corporation or by virtue of the
issued in accordance with the by-laws. Shares of stock so issued are representation made by the corporation that the same is valid and
personal property and may be transferred by delivery of the certificate therefore, compel the corporation to recognize him as a stockholder or
endorsed by the owner or his attorney in fact or other person legally claim reimbursement and damages against the latter.
authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is entered and Example: A owns 100 shares of X Co., B stole the stock certificate and forged
noted upon the books of the corporation so as to show the names of A’s signature:
the parties to the transaction, the date of the transfer, the number of the a. If B indorsed and sold it to C:
certificate, and the number of shares transferred. 1. C will not acquire title to the shares whether he is innocent or not;
2. C cannot compel the corporation to register him as stockholder;
Pursuant to this provision, a share of stock may be transferred by 3. X Co. does not incur any liability in favor of C
endorsement of the corresponding stock certificate, coupled with its b. If X Co. cancelled the certificate and issued a new one to C:
delivery. However, the transfer shall "not be valid, except as 1. If A later on finds out that his certificate was stolen, C may still be
between the parties," until it is "entered and noted upon the books required to return the new certificate;
of the corporation." no such entry in the name of the plaintiffs herein 2. If C sold it to D, an innocent purchaser, D may rightfully acquire
having been made, it follows that the transfer allegedly effected by Juan thereto since X Co. is estopped to deny the validity of the
Campos and Carl Hess in their favor is "not valid, except as between" certificate;
themselves. It does not bind either Madrigal or the Mitsuis, who are not 3. If A later on finds out that his certificate was stole, X Co. may be
As we have already stated, the court erred in holding the plaintiff as the
FUA CUN (alias Tua Cun), plaintiff-appellee, owner of two hundred and fifty shares of stock; "the plaintiff's rights consist
vs. in an equity in five hundred shares and upon payment of the unpaid portion
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of of the subscription price he becomes entitled to the issuance of certificate for
Manila, and the CHINA BANKING CORPORATION, defendants-appellants said five hundred shares in his favor."
(G.R. No. L-19441; March 27, 1923)
The judgment appealed from is modified accordingly, and in all other
FACTS: Chua Soco subscribed to 500 shares of defendant Bank paying 50% respects it is affirmed, with the costs against the appellants Banking
of the subscription price and a corresponding receipt being issued therefor. Corporation. So ordered.
Such shares were mortgaged to plaintiff Fua Cun to secure a loan evidenced
by a promissory note, together with the receipt, which was endorsed and F. WATERED STOCKS
delivered to plaintiff mortgagee. Plaintiff informed the manager of the Bank
about the transaction but was told to await action by the BOD. DEFINITION: Watered stocks may be defined as one which is issued by the
ACTION BY THE CORPORATION: De Silva filed a complaint in the CFI of Cebu, contending among others that
the resolution adopted was violative of Art. 46 of the by-laws stating that all
Notwithstanding the provisions of Sec. 67 to 69, the corporation may enforce shares subscribed and were not paid at the time of the incorporation shall be
payment of unpaid subscriptions by court action. paid out of the 70% of the profit obtained until such shares are paid in full.
De Silva contends that such article provides for the operative method of
Sec. 70. Court action to recover unpaid subscription. - Nothing in this payment of the shares, and by declaring the unpaid subscription to have
Code shall prevent the corporation from collecting by action in a court of become due and payable on May 31st and in publishing the notice declaring
proper jurisdiction the amount due on any unpaid subscription, with accrued his shares to be delinquent, the company has exceeded its executive
interest, costs and expenses. authority.
CALL: Consistent with Art. 1169 of the Civil Code, a ―call‖ is a condition ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or
precedent before the right of action to institute a recovery suit accrues. This enforce payment of the same despite the provision of the by-laws?
is because a demand is required before a debtor may incur a delay in the
performance of his obligation. As earlier said however, a call is not necessary HELD: Yes. It is discretionary on the part of the board of directors to do
if the contract of subscription provides for a date or dates when payment is whatever is provided in the said article relative to the application of a part of
due, or when the corporation has become insolvent. the 70 percent of the profit distributable in equal parts on the payment of the
shares subscribed to and not fully paid.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co.
(Ltd.), plaintiff-appellant, If the board of directors does not wish to make, or does not make, use of
vs. said authority it has two other remedies for accomplishing the same purpose.
JEAN M. POIZAT, defendant-appellee As was said by this court in the case of Velasco vs. Poizat (37 Phil., 802):
(G.R. No. L-11528; March 15, 1918)
―The first and most special remedy given by the statute consists in
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock of The permitting the corporation to put the unpaid stock for sale and dispose of
Philippine Chemical Product Co., of which 5 were paid. In an action instituted it for the account of the delinquent subscriber. In this case the provisions
by Miguel Velasco as assignee of the company, he seeks to recover the of sections 38 to 48, inclusive, of the Corporation Law are applicable and
balance of the subscription. The CFI rendered a judgment dismissing the must be followed. The other remedy is by action in court.‖
complaint. Hence, this appeal.
Admitting that the provision of article 46 of the said by-laws maybe regarded
ISSUE: WON defendant is liable for the balance? as a contract between the defendant corporation and its stockholders , yet as
it is only to the board of directors of the corporation that said articles gives
HELD: Yes. We think that Poizat is liable upon this subscription. A stock the authority or right to apply on the payment of unpaid subscriptions such
subscription is a contract between the corporation on one side, and the amount of the 70 percent of the profit distributable among the shareholders
subscriber on the other, and courts will enforce it for or against either. It is a in equal parts as may be deemed fit, it cannot be maintained that the said
rule, accepted by the Supreme Court of the United States, that a article has prescribe an operative method for the payment of said
subscription for shares of stock does not require an express promise subscription continuously until their full amortization.
to pay the amount subscribed, as the law implies a promise to pay
on the part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 In the instant case, the defendant corporation, through its board of directors,
of the Corporation Law clearly recognizes that a stock subscription is made use of its discretionary power, taking advantage of the first of the two
subsisting liability from the time the subscription is made, since it requires remedies provided by the aforesaid law. On the other hand, the plaintiff has
the subscriber to pay interest quarterly from that date unless he is relieved no right whatsoever under the provision of the above cited article 46 of the
from such liability by the by-laws of the corporation. The subscriber is as said by-laws to prevent the board of directors from following, for that
much bound to pay the amount of the share subscribed by him as he purpose, any other method than that mentioned in the said article, for the
would be to pay any other debt, and the right of the company to very reason that the same does not give the stockholders any right in
demand payment is no less incontestable. connection with the determination of the question whether or not there
should be deducted from the 70 percent of the profit distributable among the
The provisions of the Corporation Law (Act No. 1459) has given recognition stockholders such amount as may be deemed fit for the payment of
of two remedies for the enforcement of stock subscriptions. The first and subscriptions due and unpaid. Therefore, it is evident that the defendant
most special remedy given by the statute consists in permitting the corporation has not violated, nor disregarded any right of the plaintiff
corporation to put up the unpaid stock for sale and dispose of it for recognized by the said by-laws, nor exceeded its authority in the discharge of
the account of the delinquent subscriber. In this case the provisions of its executive functions, nor abused its discretion when it performed the acts
section 38 to 48, inclusive of the Corporation Law are applicable and must be mentioned in the complaint as grounds thereof, and, consequently, the facts
followed. The other remedy is by action in court, concerning which we therein alleged do not constitute a cause of action.
find in section 49 the following provision:
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-
―Nothing in this Act shall prevent the directors from collecting, by action appellant,
in any court of proper jurisdiction, the amount due on any unpaid vs.
IRINEO BALTAZAR, defendant-appellee.
FACTS: Herein defendant Irineo Baltazar subscribed to 600 shares, at In the present case, the release claimed by defendant and appellant does not
P100.000 par value per share, of the plaintiff corporation paying P15,000 and fall under the exception above referred to, because it was not given pursuant
making further payments leaving a balance of P18,500. to a bona fide compromise, or to set off a debt due from the corporation, and
there was no consideration for it.
On July 23, 1946, the stockholders, including herein defendant, approved
Resolution No. 17 agreeing: (1) to ―call‖ of the balance of the unpaid In conclusion we hold that under the Corporation Law, notice of call for
subscription to be paid: 50% within 60 days beginning Aug. 1, 1946; the payment for unpaid subscribed stock must be published, except
remaining 50% 60 days beginning October 1, 1946; (2) that all unpaid when the corporation is insolvent, in which case, payment is
unpaid subscriptions after the due dates of both calls to be subject to 12% immediately demandable. We also rule that release from such
interest per annum; (3) that after the expiration of a grace period of 60 days, payment must be made by all the stockholders.
all unpaid subscribed shares would revert to the corporation.
ERNESTO M. APODACA, petitioner,
A demand was made against defendant, but was ignored. Hence this action. vs.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and
ISSUE: WON Baltazar is liable to pay the unpaid portion of his subscription INTRANS PHILS., INC., respondents
(G.R. No. 80039; April 18, 1989)
HELD: No. We agree with the lower court that the law requires that
notice of any call for the payment of unpaid subscription should be FACTS: Petitioner, an employee of respondent company, subscribed to 1,500
made not only personally but also by publication. This is clear from the shares at P100 per share. He paid an initial payment P37,500. On Sept. 1,
provisions of section 40 of the Corporation Law, Act No. 1459, as amended. 1975, he was appointed President and General Manager of the company but
on Jan. 2, 1986, he resigned.
It will be noted that section 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the He filed a complaint with the NLRC claiming unpaid wages, cost of living
mandatory provision is not only to assure notice to all subscribers, but also to allowance, the balance of his gasoline and representation expenses and his
assure equality and uniformity in the assessment on stockholders. (14 C.J. bonus compensation for 1986. Respondent admitted that petitioner was
639). entitled to P17,060.07 but the same was already set-off against his unpaid
subscription. Petitioner questioned such set-off claiming that no call or notice
We find the citation of authorities made by the plaintiff and appellant was made.
inapplicable. In the case of Velasco vs. Poizat (37 Phil. 805), the corporation
involved was insolvent, in which case all unpaid stock subscriptions become The Labor Arbiter decided in favor of petitioner. On appeal, such decision was
payable on demand and are immediately recoverable in an action instituted reversed by the NLRC.
by the assignee. Said the court in that case:
ISSUE: WON the set-off was properly made?
―. . . . it is now quite well settled that when the corporation becomes
insolvent, with proceedings instituted by creditors to wind up and HELD: No. Firstly, the NLRC has no jurisdiction to determine such intra-
distribute its assets, no call or assessment is necessary before the corporate dispute between the stockholder and the corporation as in the
institution of suits to collect unpaid balance on subscription.‖ matter of unpaid subscriptions. This controversy is within the exclusive
jurisdiction of the Securities and Exchange Commission.
But when the corporation is a solvent concern, the rule is:
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over
―It is again insisted that plaintiffs cannot recover because the suit was the said subject matter under the circumstances of this case, the unpaid
not proceeded by a call or assessment against the defendant as a subscriptions are not due and payable until a call is made by the
subscriber, and that until this is done no right of action accrues. In a corporation for payment. Private respondents have not presented a
suit by a solvent going corporation to collect a subscription, and in certain resolution of the board of directors of respondent corporation calling for the
suits provided by statute this would be true;. . . . . (Id.)‖ payment of the unpaid subscriptions. It does not even appear that a notice of
such call has been sent to petitioner by the respondent corporation.
ISSUE 2: WON the Baltazar is correct in claiming that Resolution No. 17 of
1946 of the BOD released him from the obligation to pay for his unpaid What the records show is that the respondent corporation deducted the
subscription? amount due to petitioner from the amount receivable from him for the unpaid
subscriptions. No doubt such set-off was without lawful basis, if not
HELD: No. There must be unanimous consent of the stockholders of the premature. As there was no notice or call for the payment of unpaid
corporation. We quote some authorities: subscriptions, the same is not yet due and payable.
Subject to certain exceptions, considered in subdivision (3) of this section, BONIFACIO LUMANLAN, plaintiff-appellee,
the general rule is that a valid and binding subscription for stock of vs.
a corporation cannot be cancelled so as to release the subscriber JACINTO R. CURA, ET AL., defendants.
from liability thereon without the consent of all the stockholders or DIZON & CO., INC., ETC., appellant.
subscribers. Furthermore, a subscription cannot be cancelled by the (G.R. No. L-39861; March 21, 1934)
company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the FACTS: Lumanlan subscribed to 300 shares of stock of appellant company at
subscription, as against persons who subsequently subscribed or a par value of P50.
purchased without notice of such agreement. (18 C.J.S. 874).
Layag was appointed the receiver of said company, at the instance of its
―(3) Exceptions. creditors Julio Valenzuela, Pedro Santos and Francisco Escoto, to collect the
unpaid subscriptions, there appearing that the company had no assets except
It is established doctrine that subscriptions to the capital of a EDWARD A. KELLER & CO., LTD., petitioner-appellant,
corporation constitute a fund to which the creditors have a right vs.
to look for satisfaction of their claims and that the assignee in COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
insolvency can maintain an action upon any unpaid stock CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C.
subscription in order to realize assets for the payment of its ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C.
debts. (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470.) LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees.
PHILIPPINE NATIONAL BANK, plaintiff-appellee, (G.R. No. L-68097; January 16, 1986)
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE FACTS: Petitioner-appellant appointed defendant COB Group Marketing, Inc.
LUMBER CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC., as exclusive distributor of its household products in Panay and Negros. Under
GONZALO PUYAT, TOMAS B. MORATO, FINDLAY MILLAR LUMBER CO., INC., its sales agreement, Keller sold on credit its products to COB Group
ET AL., INSULAR LUMBER CO., ANAKAN LUMBER CO., AND CANTILAN Marketing.
LUMBER CO., INC., defendants-appellees.
(G.R. Nos. L-24177-85; June 29, 1968) The BOD of COB Group Marketing were apprised by Jose E. Bax that the firm
owed Keller about P179,000.
FACTS: In various suits decided jointly, PNB as creditor, and therefore the
real party in interest, was allowed by the lower court to substitute the Keller sued COB Marketing and its stockholders.
receiver of the Philippine Lumber Distributing Agency in these respective
actions for the recovery from the defendant lumber producers the balance of ISSUE: WON Keller can collect the unpaid subscriptions of the stockholders?
their stock subscriptions.
HELD: Yes. It is settled that a stockholder is personally liable for the
The defendant lumber producers were convinced by the late President financial obligations of a corporation to the extent of his unpaid
Manuel Roxas to form a cooperative and ensure the stable supply of lumber subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs
in the country and to eliminate alien middlemen. To induce them, the 1311-2).
president promised and agreed to invest P9.00 for every P1.00 that the
members would invest therein. GERARDO GARCIA, plaintiff-appellee,
vs.
There was no appropriation made by congress for the P9.00 investment. The ANGEL SUAREZ, defendant-appellant
President then instructed Hon. Emilio Abello, then Executive Secretary and (G.R. No. L-45493; April 21, 1939)
On Oct. 10, 1935, a similar action was instituted which was granted by the NON-STOCK CORPORATIONS: The rules on delinquent shareholders
CFI holding defendant liable for the balance of his unpaid subscription and applies to non-stock corporations, such as when members are delinquent in
interest. On appeal, the defendant raises the issue of prescription. paying membership dues.
ISSUE: WON defendant Suarez is liable? RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK CERTIFICATE:
HELD: Yes. The premise of the argument is wrong because it confuses two Sec. 73. Lost or destroyed certificates. - The following procedure shall
distinct obligations: the obligation to pay interest and that to pay the amount be followed for the issuance by a corporation of new certificates of stock in
of the subscription. The said section 37 of the Corporation Law provides lieu of those which have been lost, stolen or destroyed:
when the obligation to pay interest arises and when payment should be
made, but it is absolutely silent as to when the subscription to a stock should 1. The registered owner of a certificate of stock in a corporation or his legal
be paid. Of course, the obligation to pay arises from the date of the representative shall file with the corporation (A) an affidavit in triplicate
subscription, but the coming into being of an obligation should not setting forth, if possible, (1) the circumstances as to how the certificate
be confused with the time when it becomes demandable. In a loan was lost, stolen or destroyed, (2) the number of shares represented by
for example, the obligation to pay arises from the time the loan is taken; but such certificate, (3) the serial number of the certificate and (4) the
the maturity of that obligation, the date when the debtor can be compelled to name of the corporation which issued the same. He shall also submit such
pay, is not the date itself of the loan, because this would be absurd. The date (B) other information and evidence which he may deem necessary;
when payment can be demanded is necessarily distinct from and subsequent
to that the obligation is contracted. 2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in a
By the same token, the subscription to the capital stock of the newspaper of general circulation published in the place where the corporation
corporation, unless otherwise stipulation, is not payable at the has its principal office, once a week for three (3) consecutive weeks at the
moment of the subscription but on a subsequent date which may be expense of the registered owner of the certificate of stock which has been
fixed by the corporation. Hence, section 38 of the Corporation Law, lost, stolen or destroyed. The notice shall state (1) the name of said
amended by Act No. 3518, provides that: corporation, (2) the name of the registered owner and (3) the serial
number of said certificate, and (4) the number of shares represented by
―The board of directors or trustees of any stock corporation formed, such certificate, and that after the expiration of one (1) year from the date of
organized, or existing under this Act may at any time declare due and the last publication, if no contest has been presented to said corporation
payable to the corporation unpaid subscriptions to the capital stock . . . .‖ regarding said certificate of stock, the right to make such contest shall be
barred and said corporation shall cancel in its books the certificate of stock
The board of directors of the Compañia Hispano-Filipino, Inc., not having which has been lost, stolen or destroyed and issue in lieu thereof new
declared due and payable the stock subscribed by the appellant, the certificate of stock, unless the registered owner files a bond or other security
prescriptive period of the action for the collection thereof only commenced to in lieu thereof as may be required, effective for a period of one (1) year, for
run from June 18, 1931 when the plaintiff, in his capacity as receiver and in such amount and in such form and with such sureties as may be satisfactory
the exercise of the power conferred upon him by the said section 38 of the to the board of directors, in which case a new certificate may be issued even
Corporation Law, demanded of the appellant to pay the balance of his before the expiration of the one (1) year period provided herein: Provided,
subscription. The present action having been filed on October 10, 1935, the That if a contest has been presented to said corporation or if an action is
defense of prescription is entirely without basis. pending in court regarding the ownership of said certificate of stock which
has been lost, stolen or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the final decision by the court
DELINQUENT: Shares of stock become delinquent when no payment is regarding the ownership of said certificate of stock which has been lost,
made on the balance of all or any portion of the subscription on the date or stolen or destroyed.
dates fixed in the contract of subscription without need of call, or on the date
specified by the BOD pursuant to a call made by it in accordance with the Except in case of fraud, bad faith, or negligence on the part of the
provisions of Sec. 67. corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those lost,
EFFECT OF DELINQUENCY: The stockholder thereof immediately loses the stolen or destroyed pursuant to the procedure above-described.
right to vote and be voted upon or represented in any stockholders meeting
as well as all the rights pertaining to a stockholder except the right to receive RATIONALE:
dividends in accordance with the Code. 1. To avoid duplication of certificates of stock;
2. To avoid fictitious and fraudulent transfers; and
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be 3. To protect the corporation against damage from whatever source arising
entitled to vote or to representation at any stockholder's meeting, nor shall from the issuance of the duplicate certificate inluding liability to the
the holder thereof be entitled to any of the rights of a stockholder except the holder of the original certificate or to innocent holders of certificate
right to dividends in accordance with the provisions of this Code, until and based on the duplicate.
unless he pays the amount due on his subscription with accrued interest, and
the costs and expenses of advertisement, if any. Thus, the BOD has the authority to decide the amount and the kind of surety
bond that may be required for the issuance of a certificate of stock, in liey of
RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that ―any cash the lost or destroyed one, if the same is to be issued prior to the expiration of
dividend due on delinquent stockholders shall first be applied to the unpaid the 1 year period provided by Sec. 73.
balance on his subscription plus cost and expenses, while stock dividends
shall be withheld until his unpaid subscription is paid in full‖ ISSUANCE OF NEW CERTIFICATES:
INSPECTION BY AGENT: while the right is founded on stock ownership, This conclusion is supported by the undoubted weight of authority in the
thus personal in nature, it may be made by the stockholder’s agent or United States, where it is generally held that the provisions of law conceding
representative since it may be unavailing in many instances. the right of inspection to stockholders of corporations are to be liberally
construed and that said right may be exercised through any other properly
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a stockholder or authorized person. As was said in Foster vs. White (86 Ala., 467), "The right
member, the right of a director or trustee to inspect and examine corporate may be regarded as personal, in the sense that only a stockholder
books and records is considered absolute and unqualified and without regard may enjoy it; but the inspection and examination may be made by
to motive. This is because a director supervises, directs and manages another. Otherwise it would be unavailing in many instances." An
corporate business and it is necessary that he be equipped with all observation to the same effect is contained in Martin vs. Bienville Oil Works
the information and data with regard to the affairs of the company Co. (28 La., 204), where it is said: "The possession of the right in question
in order that he may manage and direct its operations intelligently would be futile if the possessor of it, through lack of knowledge necessary to
and according to this best judgment in the interest of all the exercise it, were debarred the right of procuring in his behalf the services of
stockholders he represents. Thus, while stockholders and mmebers are one who could exercise it." In Deadreck vs. Wilson (8 Baxt. [Tenn.], 108),
entitled to inspect and examine the books and records as provided in Sec. 74 the court said: "That stockholders have the right to inspect the books
and 75 they may not gain access to highly sensitive and confidential of the corporation, taking minutes from the same, at all reasonable
information. In the case of directors, ―it is not denied‖ that they have such times, and may be aided in this by experts and counsel, so as to
access. This would include, among others, (a) marketing strategies and make the inspection valuable to them, is a principle too well settled to
pricing structure; (b) budget for expansion and diversification; (c) need discussion." Authorities on this point could be accumulated in great
research and development; and (d) sources of funding, availability abundance, but as they may be found cited in any legal encyclopedia or
of personnel, proposals for mergers or tie-ups with other firms. treaties devoted to the subject of corporations, it is unnecessary here to refer
to other cases announcing the same rule.
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED THE
RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC) The demurrer is overruled; and it is ordered that the writ of mandamus shall
1. Mandamus. In such event, the corporate secretary shall be included as issue as prayed, unless within 5 days from notification hereof the
a party respondent since he is customarily charged with the custody of respondents answer to the merits.
FACTS: Petitioner Antonio Pardo seeks to obtain a writ of mandamus to The above puts in statutory form the general principles of Corporation Law.
compel respondent company to permit petitioner and his duly authorized Directors of a corporation have the unqualified right to inspect the books and
agent and representative to examine the records and business transactions of records of the corporation at all reasonable times. Pretexts may not be put
said company. forward by officers of corporations to keep a director or shareholder from
inspecting the books and minutes of the corporation, and the right of
Respondents raised the defense that under Art. 10 of the by-laws, it is inspection is not to be denied on the ground that the director or shareholder
declared that ―every shareholder may examine the books of the company and is on unfriendly terms with the officers of the corporation whose records are
other documents pertaining to the same upon the days which the board of sought to be inspected. A director or stockholder cannot of course make
directors’ shall annually fix‖. And thus was set from 15 th to 25th of March by copies, abstracts, and memoranda of documents, books, and papers as an
virtue of a board resolution. incident to the right of inspection, but cannot, without an order of a court, be
permitted to take books from the office of the corporation. We do not
ISSUE: WON the BOD may choose specific performance and particular dates conceive, however, that a director or stockholder has any absolute
when the right of inspection may be exercised? right to secure certified copies of the minutes of the corporation
until these minutes have been written up and approved by the
HELD: No. The general right given by the statute may not be lawfully directors. (See Fisher's Philippine Law of Stock Corporations, sec. 153, and
abridged to the extent attempted in this resolution. It may be Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.)
admitted that the officials in charge of a corporation may deny inspection
when sought at unusual hours or under other improper conditions; but Combining the facts and the law, we do not think that anything improper
neither the executive officers nor the board of directors have the occurred when the secretary declined to furnish certified copies of minutes
power to deprive a stockholder of the right altogether. A by-law which had not been approved by the board of directors, and that while so
unduly restricting the right of inspection is undoubtedly invalid. Authorities to much of the last resolution of the board of directors as provides for prior
this effect are too numerous and direct to require extended comment. (14 approval of the president of the corporation before the books of the
C.J., 859; 7 R.C.L., 325; 4 Thompson on Corporations, 2nd ed., sec. 4517; corporation can be inspected puts an illegal obstacle in the way of a
Harkness vs. Guthrie, 27 Utah, 248; 107 Am., St. Rep., 664. 681.) stockholder or director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone. In addition, it should be said that this is
The demurrer is, therefore, sustained; and the writ of mandamus will issue as a family dispute, the petitioner and the individual respondents belonging to
prayed, with the costs against the respondent. the same family; that a test case between the petitioner and the respondents
has not been begun in the Court of First Instance of Occidental Negros
EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar involving hundreds of thousands of pesos, and that the appellate court
Company, Inc., petitioner, should not intrude its views to give an advantage to either party. We rule
vs. that the petitioner has not made out a case for relief by mandamus.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and
AGUSTIN B. MONTILLA, Secretary of the same corporation, respondents. GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) – ISSUE: WON
(G.R. No. L-37064; October 4, 1932) petitioner may be properly denied examination of the books and records of
San Miguel International, Inc., a fully owned subsidiary of SMC?
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and absolute writ
of mandamus to be issued to each and all of the respondents to, among HELD: No. Pursuant to the second paragraph of section 51 of the
others, place at his disposal at reasonable hours the minutes, documents and Corporation Law, "(t)he record of all business transactions of the corporation
books of Isabela Sugar Company, Inc. (which he is a director and and minutes of any meeting shall be open to the inspection of any director,
stockholder) for his inspection and to issue immediately, upon payment of member or stockholder of the corporation at reasonable hours."
the fees, certified copies of any documentation in connection with said
minutes, documents and the books of the aforesaid corporation. The stockholder's right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It
Director Veraguth telegraphed the secretary of the company, asking the latter is, therefore, an incident of ownership of the corporate property, whether this
to forward in the shortest possible time a certified copy of the resolution of ownership or interest be termed an equitable ownership, a beneficial
the board of directors concerning the payment of attorney's fees in the case ownership, or a ownership. This right is predicated upon the necessity of self-
against the Isabela Sugar Company and others. To this the secretary made protection. It is generally held by majority of the courts that where the right
answer by letter stating that, since the minutes of the meeting in question is granted by statute to the stockholder, it is given to him as such and must
had not been signed by the directors present, a certified copy could not be be exercised by him with respect to his interest as a stockholder and for
furnished and that as to other proceedings of the stockholders a request some purpose germane thereto or in the interest of the corporation. In
should be made to the president of the Isabela Sugar Company, Inc. It other words, the inspection has to be germane to the petitioner's
further appears that the board of directors adopted a resolution providing for interest as a stockholder, and has to be proper and lawful in
inspection of the books and the taking of copies "by authority of the character and not inimical to the interest of the corporation. In Grey
President of the corporation previously obtained in each case." v. Insular Lumber, this Court held that "the right to examine the books
of the corporation must be exercised in good faith, for specific and
ISSUE: WON the corporate secretary is justified in refusing to furnish copies honest purpose, and not to gratify curiosity, or for specific and
of the minutes of the meeting of the BOD? honest purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to be, that on
HELD: Yes. The Corporation Law, section 51, provides that: application for mandamus to enforce the right, it is proper for the court to
inquire into and consider the stockholder's good faith and his purpose and
―All business corporations shall keep and carefully preserve a record of all motives in seeking inspection. Thus, it was held that "the right given by
business transactions, and a minute of all meetings of directors, members, statute is not absolute and may be refused when the information is
or stockholders, in which shall be set forth in detail the time and place of not sought in good faith or is used to the detriment of the
holding the meeting was regular or special, if special its object, those corporation." But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take
Some state courts recognize the right under certain conditions, while others Petitioner maintains that the above-quoted provision does not justify the
do not. Thus, it has been held that where a corporation owns approximately qualification made by the lower court that the inspection of corporate records
no property except the shares of stock of subsidiary corporations which are may be denied on the ground that it is intended for an improper motive or
merely agents or instrumentalities of the holding company, the legal fiction of purpose, the law having granted such right to a stockholder in clear and
distinct corporate entities may be disregarded and the books, papers and unconditional terms. He further argues that, assuming that a proper motive
documents of all the corporations may be required to be produced for or purpose for the desired examination is necessary for its exercise, there is
examination, and that a writ of mandamus, may be granted, as the records nothing improper in his purpose for asking for the examination and inspection
of the subsidiary were, to all incontents and purposes, the records of the herein involved.
parent even though subsidiary was not named as a party. Mandamus was
likewise held proper to inspect both the subsidiary's and the parent
corporation's books upon proof of sufficient control or dominion by the parent ISSUE: WON Petitioner is correct in saying that he has an unqualified right
showing the relation of principal or agent or something similar thereto. to inspect the books as provided under Sec. 51 of the Corporation Law?
On the other hand, mandamus at the suit of a stockholder was refused where HELD: No. Petitioner may no longer insist on his interpretation of Section 51
the subsidiary corporation is a separate and distinct corporation domiciled of Act No. 1459, as amended, regarding the right of a stockholder to inspect
and with its books and records in another jurisdiction, and is not legally and examine the books and records of a corporation. The former Corporation
subject to the control of the parent company, although it owned a vast Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg.
majority of the stock of the subsidiary. Likewise, inspection of the books of 68, otherwise known as the "Corporation Code of the Philippines."
an allied corporation by stockholder of the parent company which owns all
the stock of the subsidiary has been refused on the ground that the The right of inspection granted to a stockholder under Section 51 of Act No.
stockholder was not within the class of "persons having an interest." 1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
In the Nash case, The Supreme Court of New York held that the contractual
right of former stockholders to inspect books and records of the corporation ―The records of all business transactions of the corporation and the
included the right to inspect corporation's subsidiaries' books and records minutes of any meeting shall be open to inspection by any director,
which were in corporation's possession and control in its office in New York." trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from
In the Bailey case, stockholders of a corporation were held entitled to inspect said records or minutes, at his expense.
the records of a controlled subsidiary corporation which used the same
offices and had identical officers and directors. Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine and
In the case at bar, considering that the foreign subsidiary is wholly owned by copy excerpts from its records or minutes, in accordance with the
respondent San Miguel Corporation and, therefore, under its control, it would provisions of this Code, shall be liable to such director, trustee, stockholder
be more in accord with equity, good faith and fair dealing to construe the or member for damages, and in addition, shall be guilty of an offense
statutory right of petitioner as stockholder to inspect the books and which shall be punishable under Section 144 of this Code: Provided, That if
records of the corporation as extending to books and records of such refusal is made pursuant to a resolution or order of the board of
such wholly-owned subsidiary which are in respondent directors or trustees, the liability under this section for such action shall be
corporation's possession and control. imposed upon the directors or trustees who voted for such refusal; and
Provided, further, That it shall be a defense to any action under this
The Court voted unanimously to grant the petition insofar as it prays that section that the person demanding to examine and copy excerpts from the
petitioner be allowed to examine the books and records of San Miguel corporation's records and minutes has improperly used any information
International, Inc., as specified by him. secured through any prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting in good faith or
RAMON A. GONZALES, petitioner, for a legitimate purpose in making his demand.‖
vs.
THE PHILIPPINE NATIONAL BANK, respondent. As may be noted from the above-quoted provisions, among the changes
(G.R. No. L-33320; May 30, 1983) introduced in the new Code with respect to the right of inspection
granted to a stockholder are the following (1) the records must be
FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of Manila a special kept at the principal office of the corporation; (2) the inspection
civil action for mandamus against the herein respondent PNB praying that the must be made on business days; (3) the stockholder may demand a
latter be ordered to allow him to look into the books and records of PNB to copy of the excerpts of the records or minutes; (4) and the refusal
satisfy himself as to the truth of the published report that (1) the respondent to allow such inspection shall subject the erring officer or agent of
has guaranteed the obligation of South Negros Development Corporation in the corporation to civil and criminal liabilities.
the purchase of a US$ 23M sugar-mill to be financed by Japanese suppliers
and financiers; that the respondent; (2) the respondent is financing the However, while seemingly enlarging the right of inspection, the new Code
construction of the P21M Cebu-Mactan Bridge to be constructed by VC Ponce, has prescribed limitations to the same. It is now expressly required as a
3. The surviving or the consolidated corporation shall possess all the rights, REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR
privileges, immunities and powers and shall be subject to all the duties and CONSOLIDATION:
liabilities of a corporation organized under this Code; 1. The BOD/T of each constituent corporations shall approve a plan or
merger or consolidation setting for the matters required in Sec. 76;
4. The surviving or the consolidated corporation shall thereupon and 2. Approval of the plan by the stockholders representing 2/3 outstanding
thereafter possess all the rights, privileges, immunities and franchises of each capital stock or 2/3 of the member in non-stock corporations of each of
of the constituent corporations; and all property, real or personal, and all such corporations at separate corporate meetings called for the
receivables due on whatever account, including subscriptions to shares and purpose;
other choses in action, and all and every other interest of, or belonging to, or 3. Prior notice of such meeting, with a copy or summary of the plan of
due to each constituent corporation, shall be deemed transferred to and merger or consolidation shall be given to all stockholders or members at
vested in such surviving or consolidated corporation without further act or least 2 weeks prior to the scheduled meeting, either personally or by
deed; and registered mail stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each constituent
5. The surviving or consolidated corporation shall be responsible and liable corporations to be signed by the president or vice-president and
for all the liabilities and obligations of each of the constituent corporations in certified by the corporate secretary or assistant secretary setting forth
the same manner as if such surviving or consolidated corporation had itself the matters required in Sec. 78;
incurred such liabilities or obligations; and any pending claim, action or 5. Submission of the articles of merger or consolidation in quadruplicate to
proceeding brought by or against any of such constituent corporations may the SEC subject to the requirement of Sec. 79 that if it involve
be prosecuted by or against the surviving or consolidated corporation. The corporations under direct supervision of any other government agency
rights of creditors or liens upon the property of any of such constituent or governed by special laws the favorable recommendation of the
corporations shall not be impaired by such merger or consolidation. government agency concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the SEC at
REASON FOR REORGANIZATION: The reasons inducing a reorganization which time the merger or consolidation shall be effective. If the plan,
are not in every case the same, but for the most part, they are to be found in however, is believed to be contrary to law, the SEC shall set a hearing to
the weak financial or insolvent condition of the particular corporations. The give the corporations concerned an opportunity to be heard upon notice
LIQUIDATION: There would be no need to liquidate or wind-up the affairs The records do not show when the SEC approved the merger. Private
of the corporation because (1) there are no assets to distribute; (2) no debts respondent's theory is that it took effect on the date of the execution of the
and liabilities to pay – since all these are transferred to the surviving or agreement itself, which was September 16, 1975. Private respondent
consolidated corporation. contends that, since he issued the promissory note to CBTC on September 7,
1977 — two years after the merger agreement had been executed — CBTC
ASSOCIATED BANK, petitioner, could not have conveyed or transferred to petitioner its interest in the said
vs. note, which was not yet in existence at the time of the merger. Therefore,
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents. petitioner, the surviving bank, has no right to enforce the promissory note on
(G.R. No. 123793; June 29, 1998) private respondent; such right properly pertains only to CBTC.
FACTS: Associated Banking Corporation and Citizens Bank and Trust Assuming that the effectivity date of the merger was the date of its
Company merged to form Associated Citizens Bank which subsequently execution, we still cannot agree that petitioner no longer has any interest in
changed its corporate name to Associate Bank. the promissory note. A closer perusal of the merger agreement leads to a
different conclusion. The provision quoted earlier has this other clause:
The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor of
Associated Bank for P2.5M of which P2.25M remains unpaid. Despite Upon the effective date of the [m]erger, all references to [CBTC] in any
repeated demands, the defendant failed to pay the sum due. deed, documents, or other papers of whatever kind or nature and
wherever found shall be deemed for all intents and purposes, references to
Defendant denied all pertinent allegations in the complaint and alleged as [ABC], the SURVIVING BANK, as if such references were direct references
affirmative and/or special defense that Associated Bank is not the real party to [ABC]. . . .
in interest because the promissory note was executed in favor of Citizens
Bank and Trust Company. Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner.
Defendant was declared in default for not appearing in the Pre-Trial The agreement itself clearly provides that all contracts —
Conference and the plaintiff was allowed to present evidence ex-parte, the irrespective of the date of execution — entered into in the name of
Motion to Life Order of Default and or Reconsideration of the Order being CBTC shall be understood as pertaining to the surviving bank,
dismissed. The trial court ruled in favor of Associated Bank. On appeal, the herein petitioner. Since, in contrast to the earlier aforequoted provision,
CA reversed the trial court. the latter clause no longer specifically refers only to contracts existing at the
time of the merger, no distinction should be made. The clause must have
ISSUE: WON Associated Bank, the surviving corporation, may enforce the been deliberately included in the agreement in order to protect the interests
promissory note made by Sarmiento in favor of CBTC, the absorbed company of the combining banks; specifically, to avoid giving the merger agreement a
after the effectivity of the merger? farcical interpretation aimed at evading fulfillment of a due obligation.
HELD: Yes. Ordinarily, in the merger of two or more existing Thus, although the subject promissory note names CBTC as the payee, the
corporations, one of the combining corporations survives and reference to CBTC in the note shall be construed, under the very provisions
continues the combined business, while the rest are dissolved and of the merger agreement, as a reference to petitioner bank, "as if such
all their rights, properties and liabilities are acquired by the reference [was a] direct reference to" the latter "for all intents and
surviving corporation. Although there is a dissolution of the purposes."
absorbed corporations, there is no winding up of their affairs or
liquidation of their assets, because the surviving corporation No other construction can be given to the unequivocal stipulation. Being
automatically acquires all their rights, privileges and powers, as clear, plain and free of ambiguity, the provision must be given its literal
well as their liabilities. meaning and applied without a convoluted interpretation. Verba lelegis non
est recedendum.
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be In light of the foregoing, the Court holds that petitioner has a valid cause of
followed is prescribed under the Corporation Code. Section 79 of said Code action against private respondent. Clearly, the failure of private respondent to
requires the approval by the Securities and Exchange Commission (SEC) of honor his obligation under the promissory note constitutes a violation of
the articles of merger which, in turn, must have been duly approved by a petitioner's right to collect the proceeds of the loan it extended to the former.
majority of the respective stockholders of the constituent corporations. The
same provision further states that the merger shall be effective only BANK OF THE PHILIPPINE ISLANDS, Petitioner,
upon the issuance by the SEC of a certificate of merger. The
This Court believes that it is contrary to public policy to declare the former Justice Brion takes the position that because the surviving corporation
FEBTC employees as forming part of the assets or liabilities of FEBTC that continues the personality of the dissolved corporation and acquires all the
were transferred and absorbed by BPI in the Articles of Merger. Assets and latter’s rights and obligations, it is duty-bound to absorb the dissolved
liabilities, in this instance, should be deemed to refer only to property rights corporation’s employees, even in the absence of a stipulation in the plan of
and obligations of FEBTC and do not include the employment contracts of its merger. He proposes that this interpretation would provide the necessary
personnel. A corporation cannot unilaterally transfer its employees to another protection to labor as it spares workers from being "left in legal limbo."
employer like chattel. Certainly, if BPI as an employer had the right to choose
who to retain among FEBTC’s employees, FEBTC employees had the However, there are instances where an employer can validly discontinue or
concomitant right to choose not to be absorbed by BPI. Even though FEBTC terminate the employment of an employee without violating his right to
employees had no choice or control over the merger of their employer with security of tenure. Among others, in case of redundancy, for example,
BPI, they had a choice whether or not they would allow themselves to be superfluous employees may be terminated and such termination would be
absorbed by BPI. Certainly nothing prevented the FEBTC’s employees from authorized under Article 283 of the Labor Code.
resigning or retiring and seeking employment elsewhere instead of going
along with the proposed absorption. The lack of a provision in the plan of merger regarding the transfer of
employment contracts to the surviving corporation could have very well been
Employment is a personal consensual contract and absorption by BPI of a deliberated on the part of the parties to the merger, in order to grant the
former FEBTC employee without the consent of the employee is in violation surviving corporation the freedom to choose who among the dissolved
of an individual’s freedom to contract. It would have been a different matter corporation’s employees to retain, in accordance with the surviving
if there was an express provision in the articles of merger that as a condition corporation’s business needs. If terminations, for instance due to redundancy
for the merger, BPI was being required to assume all the employment or labor-saving devices or to prevent losses, are done in good faith, they
contracts of all existing FEBTC employees with the conformity of the would be valid. The surviving corporation too is duty-bound to protect the
employees. In the absence of such a provision in the articles of merger, then rights of its own employees who may be affected by the merger in terms of
BPI clearly had the business management decision as to whether or not seniority and other conditions of their employment due to the merger. Thus,
employ FEBTC’s employees. FEBTC employees likewise retained the we are not convinced that in the absence of a stipulation in the merger plan
prerogative to allow themselves to be absorbed or not; otherwise, that would the surviving corporation was compelled, or may be judicially compelled, to
be tantamount to involuntary servitude. absorb all employees under the same terms and conditions obtaining in the
dissolved corporation as the surviving corporation should also take into
As the Union likewise pointed out in its pleadings, there were benefits C. REQUIREMENTS AND PROCEDURE
under the CBA that the former FEBTC employees did not enjoy with
their previous employer. As BPI employees, they will enjoy all these CBA Sec. 82. How right is exercised. – The appraisal right may be exercised
benefits upon their "absorption." Thus, although in a sense BPI is continuing by any stockholder who shall have voted against the proposed corporate
FEBTC’s employment of these absorbed employees, BPI’s employment of action, by making a written demand on the corporation within thirty (30)
these absorbed employees was not under exactly the same terms and days after the date on which the vote was taken for payment of the fair value
conditions as stated in the latter’s employment contracts with FEBTC. This of his shares: Provided, That failure to make the demand within such period
further strengthens the view that BPI and the former FEBTC employees shall be deemed a waiver of the appraisal right. If the proposed corporate
voluntarily contracted with each other for their employment in the surviving action is implemented or affected, the corporation shall pay to such
corporation. stockholder, upon surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of the day prior to the date
on which the vote was taken, excluding any appreciation or depreciation in
CHAPTER 13: APPRAISAL RIGHT anticipation of such corporate action.
A. DEFINITION If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the
Appraisal Right is the method of paying a shareholder for the taking of his corporation cannot agree on the fair value of the shares, it shall be
property. It is a statutory means whereby a stockholder can avoid the determined and appraised by three (3) disinterested persons, one of whom
conversion of this property into another property not of his own choosing and shall be named by the stockholder, another by the corporation, and the third
is given to a shareholder as compensation for the abrogation of the common- by the two thus chosen. The findings of the majority of the appraisers shall
law rule that a single stockholder could block a certain corporate act such as be final, and their award shall be paid by the corporation within thirty (30)
merger. days after such award is made: Provided, That no payment shall be made to
any dissenting stockholder unless the corporation has unrestricted retained
PURPOSE: is to protect the property rights of dissenting stockholders from earnings in its books to cover such payment: and Provided, further, That
actions by the majority shareholders which alters the nature and character of upon payment by the corporation of the agreed or awarded price, the
their investment. In effect, it is a right granted to dissenting stockholders on stockholder shall forthwith transfer his shares to the corporation.
certain corporate or business decisions to demand payment of the fair market
value of their shares. REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF
THIS RIGHT ARE:
Compliance with provisions of charter, constitution or by-laws. —In order After trial, the RTC rendered its Decision dated February 14, 2001 in favor of
that membership may be acquired in a non-stock corporation and valid by- respondent.
laws must be complied with, except in so far as they may be and are
waived. *** But provisions in the by-laws as to formal steps to be taken to On appeal by petitioners, the Court of Appeals, in its Decision dated January
acquire membership may be waived by the corporation, or it may be 31, 2003, affirmed the trial court’s Decision and denied the Motion for
estopped to assert that they have not been taken. [12A Fletcher Reconsideration subsequently filed.
Cyclopedia Corporations, Perm. ed., pp. 583-585; emphasis supplied.]
Hence, the present petition.
Finally, the appealed decision did not give due importance to the undisputed
fact therein stated that "at the board meeting of the association held on ISSUE: WON in disapproving respondent’s application for proprietary
December 7, 1965, a list of 174 applications for membership, old and new, membership with CCCI, petitioners are liable to respondent for damages?
was submitted to the board and approved by the latter, over the objection of
the petitioner [therein private respondent] who was present at said meeting." HELD: Yes. Petitioners contend, inter alia, that the Court of Appeals erred in
Such action of the petitioner association's board of directors approving the awarding exorbitant damages to respondent despite the lack of evidence that
174 membership applications of old and new members constituting its active they acted in bad faith in disapproving the latter’s application; and in
membership as duly processed and screened by the authorized committee disregarding their defense of damnum absque injuria.
As shown by the records, the Board adopted a secret balloting known as the The exercise of a right, though legal by itself, must nonetheless be in
"black ball system" of voting wherein each member will drop a ball in the accordance with the proper norm. When the right is exercised arbitrarily,
ballot box. A white ball represents conformity to the admission of an unjustly or excessively and results in damage to another, a legal wrong is
applicant, while a black ball means disapproval. Pursuant to Section 3(c), as committed for which the wrongdoer must be held responsible. It bears
amended, cited above, a unanimous vote of the directors is required. When reiterating that the trial court and the Court of Appeals held that petitioners’
respondent’s application for proprietary membership was voted upon during disapproval of respondent’s application is characterized by bad faith.
the Board meeting on July 30, 1997, the ballot box contained one (1) black
ball. Thus, for lack of unanimity, his application was disapproved. As to petitioners’ reliance on the principle of damnum absque injuria or
damage without injury, suffice it to state that the same is misplaced. In
Obviously, the CCCI Board of Directors, under its Articles of Incorporation, Amonoy v. Gutierrez, we held that this principle does not apply when there
has the right to approve or disapprove an application for proprietary is an abuse of a person‘s right, as in this case.
membership. But such right should not be exercised arbitrarily. Articles 19
and 21 of the Civil Code on the Chapter on Human Relations provide As to the appellate court’s award to respondent of moral damages, we find
restrictions. the same in order. Under Article 2219 of the New Civil Code, moral damages
may be recovered, among others, in acts and actions referred to in Article 21.
In GF Equity, Inc. v. Valenzona, we expounded Article 19 and correlated it We believe respondent’s testimony that he suffered mental anguish, social
with Article 21, thus: humiliation and wounded feelings as a result of the arbitrary denial of his
application.
―This article, known to contain what is commonly referred to as the
principle of abuse of rights, sets certain standards which must be observed ISSUE2: WON the liability is solidary considering that only one voted for
not only in the exercise of one's rights but also in the performance of one's disapproval?
duties. These standards are the following: to act with justice; to give
everyone his due; and to observe honesty and good faith. The law, HELD: Yes. Section 31 of the Corporation Code provides:
therefore, recognizes a primordial limitation on all rights; that in their
exercise, the norms of human conduct set forth in Article 19 must be SEC. 31. Liability of directors, trustees or officers. — Directors or trustees
observed. A right, though by itself legal because recognized or who willfully and knowingly vote for or assent to patently unlawful acts of
granted by law as such, may nevertheless become the source of the corporation or who are guilty of gross negligence or bad faith in
some illegality. When a right is exercised in a manner which does directing the affairs of the corporation or acquire any personal or pecuniary
not conform with the norms enshrined in Article 19 and results in interest in conflict with their duty as such directors, or trustees shall be
damage to another, a legal wrong is thereby committed for which liable jointly and severally for all damages resulting therefrom suffered
the wrongdoer must be held responsible. But while Article 19 lays by the corporation, its stockholders or members and other persons.
down a rule of conduct for the government of human relations and for the (Emphasis ours)
maintenance of social order, it does not provide a remedy for its violation.
D. TRUSTEES AND OFFICERS FACTS: Vicente Josefa and James L. So entered into an agreement whereby
So would withdraw his candidacy for the post of Governor of District 301-A of
The word ―trustees‖ as used in Sec. 92 makes reference to the governing herein petitioner Lions Club International. Such withdrawal was accepted by
board or body in a non-stock corporation. Governor Huang, however news items were published conveying the idea
that So had not withdrawn from the gubernatorial race.
Sec. 92. Election and term of trustees. - Unless otherwise provided in
the articles of incorporation or the by-laws, the board of trustees of non- Josefa filed a complaint before the CFI for quo warranto, injunction or at
stock corporations, which may be more than fifteen (15) in number as may least a temporary restraining order alleging irregularities in the election; that
be fixed in their articles of incorporation or by-laws, shall, as soon as although at the old site of the election, Josefa won, the Lions Club
organized, so classify themselves that the term of office of one-third (1/3) of Internation unlawfully recognized So as the winner.
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 The trial court issued the TRO which was later on lifted and on appeal, the
trustees so elected shall have a term of three (3) years. Trustees thereafter CA issued a new TRO.
elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period. ISSUE: WON the dispute between petitioners and Josefa is a justiciable issue
cognizable by the courts?
No person shall be elected as trustee unless he is a member of the
corporation. HELD: No. We adopt the general rule that "... the courts will not
Unless otherwise provided in the articles of incorporation or the by-laws, interfere with the internal affairs of an unincorporated association
officers of a non-stock corporation may be directly elected by the members. so as to settle disputes between the members, or questions of
policy, discipline, or internal government, so long as the
QUALIFICATIONS OF TRUSTEES: government of the society is fairly and honestly administered in
1. He is a member of the association; conformity with its laws and the law of the land, and no property or
2. Majority thereof must be residents of the Philippines; and civil rights are invaded. Under such circumstances, the decision of the
3. Other qualifications as may be provided for in the by-laws. governing body or established private tribunal of the association is binding
and conclusive and not subject to review or collateral attack in the courts. "
DISQUALIFICATIONS and REMOVAL: Sec. 27 as to disqualifications, and (7 C.J.S. pp. 38- 39).
Sec. 29 and 30 as to removal also apply to Trustees.
The general rule of non-interference in the internal affairs of associations is,
NUMBER OF TRUSTEES: may exceed 15 as may be fixed in the AOI or by- however, subject to exceptions, but the power of review is extremely
laws, contrary to a stock corporation whose BOD must not exceed 15 limited. Accordingly, the courts have and will exercise power to
members. interfere in the internal affairs of an association where (1) law and
justice so require, and (2) the proceedings of the association are
TERM: Sec. 92 allows the AOI or by-laws to provide a desired term of office subject to judicial review where there is fraud, oppression, or bad
and may vary depending on the needs of a specific corporation. By analogy faith, or (3) where the action complained of is capricious, arbitrary,
of the provisions of Sec. 7, however, a term in excess of 5 years is not or unjustly discriminatory. Also, the courts will usually entertain
allowed as it would unduly deprive other members to take active part in jurisdiction to grant relief (4) in case property or civil rights are
corporate management. invaded, although it has also been held that the involvement of property
rights does not necessarily authorize judicial intervention, in the absence of
STAGGERED TERM: The term of office may also be staggered unless the arbitrariness, fraud or collusion. Moreover, the courts will intervene (5)
AOI or by-laws otherwise provide. If such be the case, the board shall classify where the proceedings in question are violative of the laws of the
themselves in order that 1/3 of their number shall expire every year and society, or the law of the land, as by depriving a person of due
subsequent elections of trustees comprising 1/3 shall be held annually. The process of law. Similarly, judicial intervention is warranted (6) where
trustees so elected to fill up any vacancy occurring before the expiration of a there is a lack of jurisdiction on the part of the tribunal conducting
particular term shall hold office only for the unexpired portion of his the proceedings, where the organization exceeds its powers, or
predecessor. where the proceedings are otherwise illegal. (7 C.J.S., pp. 39-41).
GOVERNING BOARDS: While the Code speaks of the BOT as the governing In accordance with the general rules as to judicial interference cited above,
board or body in a non-stock corporation the same law allows a non-stock the decision of an unincorporated association on the question of an election
corporation or any other special corporation to designate their governing to office is a matter peculiarly and exclusively to be determined by the
board by any other name other than BOD/T. The Rotary Club for instance, association, and, in the absence of fraud, is final and binding on the courts.
designates it as Board of Governors while the Evangelica Independence (7 C.J.S., p. 44).
Metodista En Las Islas Filipinas calls it as the Consistory of Elders.
The instant controversy between petitioner So and respondent Josefa falls
ELECTION BY MEMBERS OF OFFICERS: One of the significant features of squarely within the ambit of the rule of judicial non-intervention or non-
a non-stock corporation is that it allows the AOI or by-laws to provide that interference. The elections in dispute, the manner by which it was conducted
the officers thereof shall be directly elected by the members. Unlike in a stock and the results thereof, is strictly the internal affair that concerns only the
corporation where corporate officers are elected by the BOD. Lions association and/or its members, and We find from the records that the
same was resolved within the organization of Lions Clubs International in
Section 138. Designation of governing boards. - The provisions of specific accordance with the Constitution and By-Laws which are not immoral,
provisions of this Code to the contrary notwithstanding, non-stock or unreasonable, contrary to public policy, or in contravention of the laws of the
special corporations may, through their articles of incorporation or land
their by-laws, designate their governing boards by any name other
than as board of trustees.
1. All liabilities and obligations of the corporation shall be paid, satisfied and The provisions of this Title shall primarily govern close corporations:
discharged, or adequate provision shall be made therefore; Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
2. Assets held by the corporation upon a condition requiring return, transfer
or conveyance, and which condition occurs by reason of the dissolution, shall The ultimate effect of the special provisions of the law on close corporations
be returned, transferred or conveyed in accordance with such requirements; is to furnish another form of business organization – a ―de facto corporation
with a corporate shell‖. It is referred to sometimes as a hybrid of both the
3. Assets received and held by the corporation subject to limitations corporate and partnership forms, an ―incorporated partnership‖ or
permitting their use only for charitable, religious, benevolent, educational or ―corporation de jure but a de facto partnership‖.
similar purposes, but not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be transferred or conveyed to This is because a close corporation may partake the nature of a partnership
one or more corporations, societies or organizations engaged in activities in in that the stockholders thereof take an active role in the management of the
the Philippines substantially similar to those of the dissolving corporation corporate affairs either as directors, officers or even perhaps as partners in
according to a plan of distribution adopted pursuant to this Chapter; management which is akin to the partnership form of business. This, in fact,
is the main distinction between a close corporation and the ordinary stock
4. Assets other than those mentioned in the preceding paragraphs, if any, corporation where, in the latter, the stockholders have hardly a voice in
shall be distributed in accordance with the provisions of the articles of management except perhaps to elect the directors.
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 Despite this, the stockholders who are active in management still enjoy
classes of members, or provide for distribution; and limited liability to the extent of their subscription in so far as corporate
obligations are concerned. It will be noted, however, that under no. 5 of Sec.
5. In any other case, assets may be distributed to such persons, societies, 100 of the Code, they are made personally liable for corporate torts unless
organizations or corporations, whether or not organized for profit, as may be they have obtained a reasonably adequate insurance liability.
specified in a plan of distribution adopted pursuant to this Chapter.
5. The provisions of subsection (4) shall not applicable if the transfer of VOTING AGREEMENTS or rights or the manner of exercising voting rights
stock, though contrary to subsections (1), (2) of (3), has been consented under par. 2 may be the subject of agreement of stockholders, such as to
to by all the stockholders of the close corporation, or if the close vote for a specific person or group or to maintain a certain stockholder as
corporation has amended its articles of incorporation in accordance their president or chairman.
with this Title.
CONDUCT OF CORPORATE AFFAIRS under par. 3 and 4, may be the
6. The term "transfer", as used in this section, is not limited to a transfer for subject of an agreement, in writing, and will be effective and binding despite
value. the fact that it may make them partners among themselves. Agreements may
also be entered into by and between the stockholders of a close corporation
7. The provisions of this section shall not impair any right which the which relates to the management of the corporate affairs which would not
transferee may have to rescind the transfer or to recover under any otherwise be valid and binding in other corporations. This is because
applicable warranty, express or implied. stockholders’ agreement in the latter cannot limit or restrict the discretion
and powers of the BOD to manage the corporate affairs.
SALE OF SHARES: Apparently, a selling stockholder may not be able to
transfer his shares if to do so would violate the qualifying conditions indicated E. WHEN BOARD MEETINGS NOT NECESSARY:
in the AOI unless of course, all the stockholder consents to the transfer or
the AOI is amended (no. 5 above). As a rule, directors in ordinary stock corporations must act as a body at a
duly constituted meeting to have a valid corporate transaction. In a close
STOCKHOLDER: concerned is not, however, left without any recourse as he corporation, directors may validly act even without a meeting subject only to
may compel the close corporation to purchase his shares at their fair value the conditions laid down in the Code under Sec. 101:
for any reason subject only to the condition laid down in Sec. 105.
Sec. 101. When board meeting is unnecessary or improperly held. -
TRANSFEREE: may rescind the transaction or to recover from the transferor Unless the by-laws provide otherwise, any action by the directors of a close
under any applicable warranty, express or implied. corporation without a meeting shall nevertheless be deemed valid if:
D. STOCKHOLDERS‘ AGREEMENT 1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
Sec. 100. Agreements by stockholders. –
2. All the stockholders have actual or implied knowledge of the action and
1. Agreements by and among stockholders executed before the formation make no prompt objection thereto in writing; or
and organization of a close corporation, signed by all stockholders, shall
survive the incorporation of such corporation and shall continue to be valid 3. The directors are accustomed to take informal action with the express or
and binding between and among such stockholders, if such be their intent, implied acquiescence of all the stockholders; or
to the extent that such agreements are not inconsistent with the articles
of incorporation, irrespective of where the provisions of such agreements 4. All the directors have express or implied knowledge of the action in
are contained, except those required by this Title to be embodied in said question and none of them makes prompt objection thereto in writing.
articles of incorporation.
If a director's meeting is held without proper call or notice, an action taken
2. An agreement between two or more stockholders, if in writing and signed therein within the corporate powers is deemed ratified by a director who
by the parties thereto, may provide that in exercising any voting rights, the failed to attend, unless he promptly files his written objection with the
shares held by them shall be voted as therein provided, or as they may secretary of the corporation after having knowledge thereof.
agree, or as determined in accordance with a procedure agreed upon by
them. F. PRE-EMPTIVE RIGHTS
3. No provision in any written agreement signed by the stockholders, relating Sec. 102. Pre-emptive right in close corporations. - The pre-emptive
to any phase of the corporate affairs, shall be invalidated as between the right of stockholders in close corporations shall extend to all stock to be
parties on the ground that its effect is to make them partners among issued, including reissuance of treasury shares, whether for money, property
themselves. or personal services, or in payment of corporate debts, unless the articles of
incorporation provide otherwise.
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 G. AMENDMENTS TO ARTICLES OF INCORPORATION
Private respondents and Torres later on filed an action against spouses Consequently, petitioner corporation is liable for the act of Manuel Dulay and
Florentino Manalastas, a tenant of Dulay Apartment with petitioner the sale of the subject property to private respondents by Manuel Dulay is
corporation for ejectment. valid and binding. As stated by the trial court:
The MTC decided in favor of respondents which was affirmed by the RTC and . . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses
later by the CA. Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of
the former and not a personal transaction of Manuel R. Dulay. This is so
ISSUE: WON the sale of the subject property between private respondents because Manuel R. Dulay was not only president and treasurer but also the
spouses Veloso and Manuel Dulay has no binding effect on petitioner general manager of the corporation. The corporation was a closed family
corporation as Board Resolution No. 18 which authorized the sale of the corporation and the only non-relative in the board of directors was Atty.
subject property was resolved without the approval of all the members of the Plaridel C. Jose who appeared on paper as the secretary. There is no
board of directors and said Board Resolution was prepared by a person not denying the fact, however, that Maria Socorro R. Dulay at times acted as
designated by the corporation to be its secretary? secretary. . . ., the Court can not lose sight of the fact that the Manuel R.
Dulay Enterprises, Inc. is a closed family corporation where the
HELD: No. Section 101 of the Corporation Code of the Philippines provides: incorporators and directors belong to one single family. It cannot be
concealed that Manuel R. Dulay as president, treasurer and general
Sec. 101. When board meeting is unnecessary or improperly held. Unless manager almost had absolute control over the business and affairs of the
the by-laws provide otherwise, any action by the directors of a close corporation.
corporation without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by SERGIO F. NAGUIAT, doing business under the name and style SERGIO F.
all the directors, or NAGUIAT ENT., INC., & CLARK FIELD TAXI, INC., petitioners,
2. All the stockholders have actual or implied knowledge of the action and vs.
make no prompt objection thereto in writing; or NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION),
FACTS: Private respondents were employed as taxi drivers of Clark Field Sergio F. Naguiat, admittedly, was the president of CFTI who actively
Taxi, Inc. which held a concessionaire’s contract with Army Air Force managed the business. Thus, applying the ruling in A.C. Ransom, he falls
Exchange Services (AAFES) for the operation of taxi services within the Clark within the meaning of an "employer" as contemplated by the Labor Code,
Air Base. who may be held jointly and severally liable for the obligations of the
corporation to its dismissed employees.
Due to the phase-out of the US Military Bases in the Philippines, which Clark
Air Base was not spared, the AAFES was dissolved and the services of Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises
individual respondents were officially terminated. were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
The AAFES Taxi Drivers’ Association (drivers union) and CFTI agreed on a states:
separation pay of P500 per year of service to which private respondents did
not agree. (5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
Private respondents filed a complaint against Sergio Naguiat, president of corporation, the stockholders shall be held to strict fiduciary duties to
CFTI, doing business under the name and style of Sergio F. Naguiat each other and among themselves. Said stockholders shall be personally
Enterprises, Inc., AAFES and the drivers’ union for separation pay which was liable for corporate torts unless the corporation has obtained reasonably
granted by the Labor Arbiter at P1,200 per year of service for humanitarian adequate liability insurance. (emphasis supplied)
considerations.
Nothing in the records show whether CFTI obtained "reasonably adequate
On appeal, the NLRC granted separation pay to private respondents. liability insurance;" thus, what remains is to determine whether there was
corporate tort.
ISSUE: WON Sergio F. Naguiat Enterprises, Inc., may be held solidarily liable
with CFTI? Our jurisprudence is wanting as to the definite scope of "corporate tort."
Essentially, "tort" consists in the violation of a right given or the omission of a
HELD: No. From the evidence proffered by both parties, there is no duty imposed by law. Simply stated, tort is a breach of a legal duty. Article
substantial basis to hold that Naguiat Enterprises is an indirect employer of 283 of the Labor Code mandates the employer to grant separation pay to
individual respondents much less a labor only contractor. On the contrary, employees in case of closure or cessation of operations of establishment or
petitioners submitted documents such as the drivers' applications for undertaking not due to serious business losses or financial reverses, which is
employment with CFTI, and social security remittances and payroll of Naguiat the condition obtaining at bar. CFTI failed to comply with this law-imposed
Enterprises showing that none of the individual respondents were its duty or obligation. Consequently, its stockholder who was actively engaged in
employees. Moreover, in the contract between CFTI and AAFES, the former, the management or operation of the business should be held personally
as concessionaire, agreed to purchase from AAFES for a certain amount liable.
within a specified period a fleet of vehicles to be "ke(pt) on the road" by
CFTI, pursuant to their concessionaire's contract. This indicates that CFTI As pointed out earlier, the fifth paragraph of Section 100 of the Corporation
became the owner of the taxicabs which became the principal investment Code specifically imposes personal liability upon the stockholder actively
and asset of the company. managing or operating the business and affairs of the close corporation.
Private respondents failed to substantiate their claim that Naguiat Enterprises The Court here finds no application to the rule that a corporate officer cannot
managed, supervised and controlled their employment. It appears that they be held solidarily liable with a corporation in the absence of evidence that he
were confused on the personalities of Sergio F. Naguiat as an individual who had acted in bad faith or with malice. In the present case, Sergio Naguiat is
was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a held solidarily liable for corporate tort because he had actively engaged in the
separate corporate entity with a separate business. They presumed that management and operation of CFTI, a close corporation.
Sergio F. Naguiat, who was at the same time a stockholder and director of
Sergio F. Naguiat Enterprises, Inc., was managing and controlling the taxi Antolin T. Naguiat was the vice president of the CFTI. Although he carried
business on behalf of the latter. A closer scrutiny and analysis of the records, the title of "general manager" as well, it had not been shown that he had
however, evince the truth of the matter: that Sergio F. Naguiat, in acted in such capacity. Furthermore, no evidence on the extent of his
supervising the taxi drivers and determining their employment terms, was participation in the management or operation of the business was proferred.
rather carrying out his responsibilities as president of CFTI. Hence, Naguiat In this light, he cannot be held solidarily liable for the obligations of CFTI and
Enterprises as a separate corporation does not appear to be involved at all in Sergio Naguiat to the private respondents.
the taxi business.
CHAPTER 16: SPECIAL CORPORATIONS (TITLE XIII)
And, although the witness insisted that Naguiat Enterprises was his employer,
he could not deny that he received his salary from the office of CFTI inside A. CHAPTER I – EDUCATIONAL INSTITUTIONS
the base.
Sec. 106. Incorporation. - Educational corporations shall be governed by
Another driver-claimant admitted, upon the prodding of counsel for the special laws and by the general provisions of this Code.
corporations, that Naguiat Enterprises was in the trading business while CFTI
was in taxi services. EDUCATIONAL INSTITUTIONS are those that provide facilities for
teaching or instruction. It includes both public and private schools or colleges
In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which, and universities and are subject to the provisions of special laws and by the
admittedly, was the union of individual respondents while still working at general provisions of the Code.
Clark Air Base, states that members thereof are the employees of CFTI and
"(f)or collective bargaining purposes, the definite employer is the Clark Field PUBLIC SCHOOLS or those created by the government are, however,
Taxi Inc." subject to the law of their creation. UP for instance has its own special
charter and would thus be governed by the special law creating it. Insofar as
ISSUE2: WON Sergio F. Naguiat and his son Antolin Naguiat, officers of CFTI they may be applicable however, the provisions of any special law or the
may be solidarily liable with CFTI? Corporation Code supplement the law of their creation.
Unless otherwise provided in the articles of incorporation or the by-laws, the Sec. 111. Articles of incorporation. - In order to become a corporation
board of trustees of incorporated schools, colleges, or other institutions of sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of
learning shall, as soon as organized, so classify themselves that the term of any religious denomination, sect or church must file with the Securities and
office of one-fifth (1/5) of their number shall expire every year. Trustees Exchange Commission articles of incorporation setting forth the following:
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees 1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding
elected thereafter to fill vacancies caused by expiration of term shall hold elder of his religious denomination, sect or church and that he desires to
office for five (5) years. A majority of the trustees shall constitute a quorum become a corporation sole;
for the transaction of business. The powers and authority of trustees shall be 2. That the rules, regulations and discipline of his religious denomination,
defined in the by-laws. sect or church are not inconsistent with his becoming a corporation sole and
do not forbid it;
For institutions organized as stock corporations, the number and term of 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding
directors shall be governed by the provisions on stock corporations. elder, he is charged with the administration of the temporalities and the
management of the affairs, estate and properties of his religious
CONSTITUTIONAL PROVISION ON FILIPINO OWNERSHIP: par. 2, denomination, sect or church within his territorial jurisdiction, describing such
Sec. 4 of Article XIV (Education, Science and Technology, Arts, Culture and territorial jurisdiction;
Sports) 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
Educational institutions, other than those established by religious groups and filled, according to the rules, regulations or discipline of the religious
mission boards, shall be owned solely by citizens of the Philippines or denomination, sect or church to which he belongs; and
corporations or associations at least sixty per centum of the capital of which 5. The place where the principal office of the corporation sole is to be
is owned by such citizens. The Congress may, however, require increased established and located, which place must be within the Philippines.
Filipino equity participation in all educational institutions. The control and
administration of educational institutions shall be vested in citizens of the The articles of incorporation may include any other provision not contrary to
Philippines. law for the regulation of the affairs of the corporation.
No educational institution shall be established exclusively for aliens and no PROCEDURE FOR THE ORGANIZATION:
group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this sub section shall not apply to schools Sec. 112. Submission of the articles of incorporation. - The articles of
established for foreign diplomatic personnel and their dependents and, unless incorporation must be verified, before filing, by affidavit or affirmation of the
otherwise provided by law, for other foreign temporary residents. 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
Culled from this is that while foreigners may own a maximum of 40% of the or letter of appointment of such chief archbishop, bishop, priest, minister,
capital stock of an educational corporation, not one of them may sit as a rabbi or presiding elder, duly certified to be correct by any notary public.
FACTS: The ROMAN CATHOLIC BISHOP of Lucena, represented by Msgr. In Roman Catholic Apostolic Administration of Davao, Inc. vs. Land
Jose T. Sanchez, filed an application for confirmation of title to 4 parcels of Registration Commission, et al. (L-8451, December 20,1957,102 Phil. 596).
land which were said to have been obtained either by purchase or donation We articulated:
dating as far back as 1928, which was granted by the CFI.
In solving the problem thus submitted to our consideration, We can say
Against this decision, the Solicitor General filed a Motion for reconsideration the following: A corporation sole is a special form of corporation usually
on the following grounds: associated with the clergy. Conceived and introduced into the common law
by sheer necessity, this legal creation which was referred to as "that
1. Article XIV, Section 11 of the New Constitution(1973) disqualifies a private unhappy freak of English Law" was designed to facilitate the exercise of
corporation from acquiring alienable lands for the public domain; the functions of ownership carried on by the clerics for and on behalf of
the church which was regarded as the property owner (See 1 Bouvier's
2. In the case at bar the application was filed after the effectivity on the New Law Dictionary, p. 682-683).
Constitution on January 17, 1973;
A corporation sole consists of one person only, and his successors (who
which was denied by the lower court for lack of merit. will always be one at a time), in some particular station, who are
incorporated by law in order to give them some legal capacities and
Still insisting of the alleged unconstitutionality of the registration (a point advantages, particulary that of perpetuity, which in their natural persons
which, incidentally, the appellant never raised in the lower court prior to its they could not have had.
Motion for Reconsideration), the Republic elevated this appeal, and the IAC
affirmed the lower court’s decision. There is no doubt that a corporation sole by the nature of its Incorporation is
vested with the right to purchase and hold real estate and personal property.
ISSUE: WON private respondent, corporation sole, is entitled to confirmation It need not therefore be treated as an ordinary private corporation because
of its title to the 4 parcels of land? whether or not it be so treated as such, the Constitutional provision involved
will, nevertheless, be not applicable.
HELD: The parties herein do not dispute that since the acquisition of the four
(4) lots by the applicant, it has been in continuous possession and enjoyment In the light of the facts obtaining in this case and the ruling of this Court in
thereof, and such possession, together with its predecessors-in-interest, Director of Lands vs. IAC, (supra, 513), the lands subject of this petition were
covering a period of more than 52 years (at least from the date of survey in already private property at the time the application for confirmation of title
1928) with respect to lots 1 and 2, about 62 years with respect to lot 3, all of was filed in 1979. There is therefore no cogent reason to disturb the findings
plan PSU-65686; and more than 39 years with respect to the fourth parcel of the appellate court.
described in plan PSU-11 2592 (at least from the date of the survey in 1940)
have been open, public, continuous, peaceful, adverse against the whole
world, and in the concept of owner. VACANCY: in the office of the ―head‖ of the corporation, the person
authorized by the rules, regulations or discipline of the denomination shall
Petitioner argues that considering such constitutional prohibition, private exercise all the powers and authority of the corporation sole during such
respondent is disqualified to own and register its title to the lots in question. vacancy and until such vacancy has been filled-up. The manner in which the
Further, it argues that since the application for registration was filed only on vacancy is to be filled in clearly spelled out in Sec. 114 of the Code:
February 2, 1979, long after the 1973 Constitution took effect on January 17,
1973, the application for registration and confirmation of title is ineffectual Sec. 114. Filling of vacancies. - The successors in office of any chief
because at the time it was filed, private corporation had been declared archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
ineligible to acquire alienable lands of the public domain pursuant to Art. XIV, sole shall become the corporation sole on their accession to office and shall
Sec. 11 of the said constitution. (Rollo, p. 41) 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,
The questioned posed before this Court has been settled in the case of or letters of appointment, duly certified by any notary public.
DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA 509
[1986]) which reversed the ruling first enunciated in the 1982 case of Manila During any vacancy in the office of chief archbishop, bishop, priest, minister,
Electric Co. vs. CASTRO BARTOLOME, (114 SCRA 789 [1982]) imposing the rabbi or presiding elder of any religious denomination, sect or church
constitutional ban on public land acquisition by private corporations which incorporated as a corporation sole, the person or persons authorized and
ruling was declared emphatically as res judicata on January 7, 1986 in empowered by the rules, regulations or discipline of the religious
Director of Lands vs. Hermanos y Hermanas de Sta. Cruz de Mayo, Inc., (141 denomination, sect or church represented by the corporation sole to
SCRA 21 [1986]). In said case, (Director of Lands v. IAC, supra), this Court administer the temporalities and manage the affairs, estate and properties of
stated that a determination of the character of the lands at the time the corporation sole during the vacancy shall exercise all the powers and
of institution of the registration proceedings must be made. If they authority of the corporation sole during such vacancy.
were then still part of the public domain, it must be answered in the
negative. Under the above-provision, it is required that the successor, in order to be
permitted to transact business as a corporation sole, must file with the SEC a
If, on the other hand, they were already private lands, the constitutional copy of his commission, certificate of election, or letter of appointment, duly
prohibition against their acquisition by private corporation or association certified by a notary public.
obviously does not apply. In affirming the Decision of the Intermediate
Appellate Court in said case, this Court adopted the vigorous dissent of the DISSOLUTION:
Under Philippine Law, a religious society, order, diocese, synod or district B. METHODS OF DISSOLUTION
organization of any religious denomination, sect or church may incorporate
for the administration of its temporalities or for the management of its affairs, THREE WAYS OF DISSOLUTION:
properties and estate in accordance with the Code: 1. Expiration of its corporate term;
2. Voluntary surrender of its primary franchise (voluntary dissolution); and
Sec. 116. Religious societies. - Any religious society or religious order, or 3. The revocation of its corporate franchise (involuntary dissolution)
any diocese, synod, or district organization of any religious denomination,
sect or church, unless forbidden by the constitution, rules, regulations, or Sec. 117, however, mentions only two methods:
discipline of the religious denomination, sect or church of which it is a part, or
by competent authority, may, upon written consent and/or by an affirmative Sec. 117. Methods of dissolution. - A corporation formed or organized
vote at a meeting called for the purpose of at least two-thirds (2/3) of its under the provisions of this Code may be dissolved voluntarily or
membership, incorporate for the administration of its temporalities or for the involuntarily.
management of its affairs, properties and estate by filing with the Securities
and Exchange Commission, articles of incorporation verified by the affidavit This is rightfully so, because the expiration of corporate term can be
of the presiding elder, secretary, or clerk or other member of such religious considered voluntary dissolution t being the intention of the stockholders that
society or religious order, or diocese, synod, or district organization of the it shall exist only for such period.
religious denomination, sect or church, setting forth the following:
C. EXPIRATION OF CORPORATE TERM
1. That the religious society or religious order, or diocese, synod, or district
organization is a religious organization of a religious denomination, sect or A corporation registered under the Corporation Code, with the exception of
church; religious ones, is required to indicate its term of existence in the AOI. It
ceases to exist and is deemed automatically dissolved upon the expiration of
2. That at least two-thirds (2/3) of its membership have given their written the term indicated thereat without the need of any formal proceedings.
consent or have voted to incorporate, at a duly convened meeting of the
body; EXTENSION: It is to be observed, however, that the original term of
existence indicated in the AOI is subject to extension in accordance with the
3. That the incorporation of the religious society or religious order, or provisions of Sec. 11 and 37 of the Code. If such be the case, the corporation
diocese, synod, or district organization desiring to incorporate is not continues to be possessed with juridical personality and may carry out its
forbidden by competent authority or by the constitution, rules, regulations or business for the period of time granted by virtue of such extension.
discipline of the religious denomination, sect, or church of which it forms a
part; The extension should nonetheless be made before the expiration of the
original term, but not earlier than 5 years prior to such expiration, otherwise
4. That the religious society or religious order, or diocese, synod, or district the corporation is dissolved, ipso facto.
organization desires to incorporate for the administration of its affairs,
properties and estate; PHILIPPINE NATIONAL BANK, petitioner,
vs.
5. The place where the principal office of the corporation is to be established THE COURT OF FIRST INSTANCE OF RIZAL, PASIG — BRANCH XXI,
and located, which place must be within the Philippines; and PRESIDED BY JUDGE GREGORIO G. PINEDA, CHUNG SIONG PEK @
BONIFACIO CHUNG SIONG PEK AND VICTORIA CHING GENG TY @
6. The names, nationalities, and residences of the trustees elected by the VICTORIA CHENG GENG TY, and THE REGISTER OF DEEDS OF RIZAL,
religious society or religious order, or the diocese, synod, or district PASIG, METRO MANILA AND/OR HIS DEPUTIES AND AGENTS, respondents
organization to serve for the first year or such other period as may be (G.R. No. 63201; May 27, 1992)
prescribed by the laws of the religious society or religious order, or of the
FAILURE TO COMPLY: with the above requirements will have no effect on APPOINTMENT OF A RECEIVER: While the foregoing are mandatory
the legal existence of the corporation. Elsewise stated, a corporation benig a requirements, the appointment of a receiver is only permissive. As can be
creation of the law by the grant of its existence by the State, may only be gleaned from the second paragraph of Sec. 119, it uses the phrase ―and may
dissolved in the manner prescribed by the law of its creation. Since it is the appoint a receiver‖, showing the clear intent of the aw that the same is
State that grants its right to exist, it is only through the State which can allow merely discretionary on the part of the proper forum. Such language, held by
th termination of existence. Unless dissolved pursuant thereto, a corporation the High Court, ―tends to recognize that in cases of voluntary dissolution,
does not cease to have a juridical personality. there is no occasion for the appointment of a receiver except under special
circumstances and upon proper showing‖ (China Bank vs. Michellin)
A mere resolution by the stockholders or the BOD of a corporation to dissolve
the same does not affect the dissolution but that some other steps, 3. DISSOLUTION BY SHORTENING CORPORATE TERM
administrative or judicial is necessary (Daguhoy Enterprises vs. Ponce)
Sec. 120 was inserted to incorporate the long standing practice of dissolving
2. VOLUNTARY DISSOLUTION WHERE CREDITORS ARE AFFECTED a corporation by amendment of the AOI by shortening the corporate
existence.
Sec. 119. Voluntary dissolution where creditors are affected. - Where
the dissolution of a corporation may prejudice the rights of any creditor, the A corporation may exist for 50 years, but there is no law which prevents the
petition for dissolution shall be filed with the Securities and Exchange shareholders thereof to shorten that period and effect a dissolution of the
Commission. The petition shall be signed by a majority of its board of corporation.
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 PERPETUAL SUCCESSION: In fact, a corporation may be given the
shall set forth all claims and demands against it, and that its dissolution was capacity of ―perpetual succession‖ like the corporation sole and the religious
resolved upon by the affirmative vote of the stockholders representing at society. It does not mean, however, that it shall continue to exist forever. It
least two-thirds (2/3) of the outstanding capital stock or by at least two- merely means that it has the capacity of continuous existence during a
thirds (2/3) of the members at a meeting of its stockholders or members particular period or until dissolved in accordance with law.
called for that purpose.
It may thus amend its AOI and provide a term of existence or shorten it
If the petition is sufficient in form and substance, the Commission shall, by which may have the effect of a dissolution. Thus, while Sec. 115 of the Code
an order reciting the purpose of the petition, fix a date on or before which provides for the process and procedure for the dissolution of a corporation
objections thereto may be filed by any person, which date shall not be less sole, there is nothing in the law itself which would prohibit it from amending
than thirty (30) days nor more than sixty (60) days after the entry of the its AOI. It is believed, however, that authorization for the dissolution by the
order. Before such date, a copy of the order shall be published at least once particular religious denomination, sect or church, as required in sub-
a week for three (3) consecutive weeks in a newspaper of general circulation paragraph 3 of Sec. 115 would still be necessary in the case of amending the
published in the municipality or city where the principal office of the AOI to affect dissolution.
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 Sec. 120. Dissolution by shortening corporate term. - A voluntary
be posted for three (3) consecutive weeks in three (3) public places in such dissolution may be effected by amending the articles of incorporation to
municipality or city. shorten the corporate term pursuant to the provisions of this Code. A copy of
the amended articles of incorporation shall be submitted to the Securities and
Upon five (5) day's notice, given after the date on which the right to file Exchange Commission in accordance with this Code. Upon approval of the
objections as fixed in the order has expired, the Commission shall proceed to amended articles of incorporation of the expiration of the shortened term, as
hear the petition and try any issue made by the objections filed; and if no the case may be, the corporation shall be deemed dissolved without any
such objection is sufficient, and the material allegations of the petition are further proceedings, subject to the provisions of this Code on liquidation.
true, it shall render judgment dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to SPECIAL AMENDMENT: Shortening of the corporate term with the effect of
collect such assets and pay the debts of the corporation. dissolution is a special type of amendment covered and governed by the
special provisions of Sec. 37 of the Code. Thus, while the general provision
FORMAL AND PROCEDURAL REQUIREMENTS: on amendment under Sec. 16 allows ―written assent‖ in determining the
1. Affirmative vote of the stockholders representing at least 2/3 of the voting requirement for ordinary amendments, sec. 37 mandates that the vote
outstanding capital stock or at least 2/3 of the members at a meeting must be cast at a duly constituted meeting.
duly called for that purpose;
2. Petition for dissolution shall be filed with the SEC (the proper forum) Likewise, sec. 16 provides that amendment of the AOI is deemed approved if
signed by a majority of its board of directors or trustees or other officers not acted upon by the SEC within 6 months from the date of filing for a cause
having the management of its affairs, verified by the president or not attributable to the corporation. This is not applicable in case of
secretary or one of its directors or trustees, setting forth all claims and shortening the corporate term which will have the effect of dissolution in Sec.
demands against it. 120, which requires the approval of the SEC.
3. Issuance of an order by the SEC reciting the purpose of the petition
and fixing the date on or before which objections thereto may be filed E. INVOLUNTARY DISSOLUTION
by any person, which date shall not be less than thirty days nor more
than sixty days after entry of the order. Sec. 121. Involuntary dissolution. - A corporation may be dissolved by
4. Before such date, a copy of the order must be published once a week the Securities and Exchange Commission upon filing of a verified complaint
for three (3) consecutive weeks in a newspaper of general circulation and after proper notice and hearing on the grounds provided by existing
published in the city or municipality where the principal office is situated laws, rules and regulations.
or in a newspaper of general circulation in the Philippines.
5. Posting of the same order for three (3) consecutive weeks in three (3) Culled from the above provision is that this is a dissolution is by judicial
public places in such city or municipality. decree.
6. Upon five (5) days’ notice, given after the date on which the right to file
objections has expired, the SEC shall hear the petition and try any JURISDICTION OVER DISSOLUTION CASES: In a ruling laid down by
FACTS: Defendant corporation by its charter is authorized among others: In the case of State of Minnesota vs. Minnesota Thresher Manufacturing Co.
(3 L.R.A. 510) the court said (p. 518):
j) To buy shares of the Compañia de Navegacion, Ferrocarriles, Diques, y
Almacenes de Depositos, and, in this manner or otherwise, to engage in The scope of the remedy furnished by its (quo warranto) is to forfeit the
any mercantile or industrial enterprise. franchises of a corporation for misuser or nonuser. It is therefore
necessary in order to secure a judicial forfeiture of respondent's charter to
(k) With no other restrictions than those provided by law, place funds of show a misuser of its franchises justifying such a forfeiture. And as already
the corporation in hypothecary or pignorative loans, in public securities of remarked the object being to protect the public, and not to redress private
the United States, in stocks or shares issued by firms, corporations, or grievances, the misuser must be such as to work or threaten a substantial
companies that are legally organized and operated, and in rural and urban injury to the public, or such as to amount to a violation of the fundamental
property. It may also contract and guarantee all kinds of obligations, in condition of the contract by which the franchise was granted and thus
conformity with existing laws
The third specification under this cause of action relates to certain activities FACTS: The AOI of defendant corporation were registered with the SEC on
which are described in the following paragraphs contained in the agreed March 27, 1961. Based on the opinion of legal counsel of the Central Bank of
statements of facts: the Philippines, that the defendant corporation is a banking institution, the
Monetary Board promulgated Resolution No. 1095, declaring that the
El Hogar Filipino has undertaken the management of some parcels of corporation is performing banking operations without having first complied
improved real estate situated in Manila not under mortgage to it, but with the provisions of Sec. 2 and 6 of RA No. 337. Despite such resolution,
owned by shareholders, and has held itself out by advertisement as the company still continued with its operations and was able to establish 74
prepared to do so branches all over the Philippines and induced the public to open 59,643
savings deposit accounts.
For the services so rendered in the management of such properties El
Hogar Filipino receives compensation in the form of commissions upon the The Solicitor General initiated this quo warranto proceeding to dissolve said
gross receipts from such properties at rates varying from two and one-half company.
per centum to five per centum of the sums so collected, according to the
location of the property and the effort involved in its management. ISSUE: WON the company should be dissolved?
The administration of property in the manner described is more befitting to HELD: Yes. Although, admittedly, defendant corporation has not secured the
the business of a real estate agent or trust company than to the business of a requisite authority to engage in banking, defendants deny that its
building and loan association. transactions partake of the nature of banking operations. It is conceded,
however, that, in consequence of a propaganda campaign therefor, a total of
ISSUE2: WON the defendant should be dissolved on the above-ground? 59,463 savings account deposits have been made by the public with the
corporation and its 74 branches, with an aggregate deposit of P1,689,136.74,
HELD: No. It is a general rule of law that corporations possess only which has been lent out to such persons as the corporation deemed suitable
such express powers. The management and administration of the property therefor. It is clear that these transactions partake of the nature of banking,
of the shareholders of the corporation is not expressly authorized by law, and as the term is used in Section 2 of the General Banking Act.
we are unable to see that, upon any fair construction of the law, these
activities are necessary to the exercise of any of the granted powers. The Accordingly, defendant corporation has violated the law by engaging in
corporation, upon the point now under the criticism, has clearly extended banking without securing the administrative authority required in Republic
itself beyond the legitimate range of its powers. But it does not result that Act No. 337.
the dissolution of the corporation is in order, and it will merely be
enjoined from further activities of this sort. That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing misuser
of the corporate funds and franchise affects the essence of its
Fourth cause of action. — It appears that among the by-laws of the business, that it is willful and has been repeated 59,463 times, and
association there is an article (No. 10) which reads as follows: that its continuance inflicts injury upon the public, owing to the
number of persons affected thereby.
The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares Wherefore, the writ prayed for should be, as it is hereby granted and
and to return to the owner thereof the balance resulting from the defendant corporation is, accordingly, ordered dissolved.
liquidation thereof whenever, by reason of their conduct, or for
any other motive, the continuation as members of the owners of REPUBLIC OF THE PHILIPPINES, petitioner-appellee,
such shares is not desirable. vs.
BISAYA LAND TRANSPORTATION CO., INC., MIGUEL CUENCO, MANUEL
ISSUE3: WON if the above by-law is invalid, the corporation may be CUENCO, LOURDES CUENCO, JOSE P. VELEZ, JESUS P. VELEZ and FEDERICO
dissolved? A. REYES (Original Respondents); and ANTONIO V. CUENCO, CARMEN
CUENCO, DIOSCORO B. LAZARO and MANUEL V. CUENCO, JR. (New
HELD: No. This by-law is of course a patent nullity, since it is in direct Directors of respondent corporation), respondent-appellees.
conflict with the latter part of section 187 of the Corporation Law, which MIGUEL CUENCO, respondent-crossclaimant-appellant.
expressly declares that the board of directors shall not have the power to (G.R. No. L-31490; January 6, 1978)
force the surrender and withdrawal of unmatured stock except in case of
liquidation of the corporation or of forfeiture of the stock for delinquency. It FACTS: The Solicitor General initiated this quo warranto proceedings against
is agreed that this provision of the by-laws has never been enforced, and in respondent corporation on the following nine causes of action:
fact no attempt has ever been made by the board of directors to make use of
the power therein conferred. 1. To conceal its illegal transaction, respondent corporation falsely
reconstituted its articles of incorporation in July 1948 by adding new
It is supposed, in the fourth cause of action, that the existence of this cattle ranch, agriculture, and general merchandise;
article among the by-laws of the association is a misdemeanor on
PRESENT STATE OF LAW: any stockholder or member of a corporation can FACTS: In Aug. and Sept. 1957, Jaime Buenaflor filed applications before the
institute a dissolution proceeding against his own corporation before the Public Service Commission for the construction of a 5-ton ice plant and to
proper forum. This is clear from the provisions of PD 902-A, as amended, establish a cold storage and refrigeration service of about 6,000 cubic feet
when it provides that the SEC, now the Special Commercial Courts, shall hear capacity in Sabang, respectively. After being served a copy of the application
and decide cases involving ―intra-corporate dispute or partnership relations of petitioner, respondent corporation also filed the same applications on Oct.
between and among stockholders, members or associates; between any or all 1957.
of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such Counsel for Buenaflor presented a motion to dismiss on the ground that the
corporations, partnerships or association and the State insofar as it concerns corporate life of respondent already expired in Nov. 1953. Respondent
their individual franchise or right to exist as such entity‖ (Sec. 5(b) as further Corporation then registered on Oct. 1957, a new AOI and transferred all
amended by Sec. 5.2 of RA 8799). Of note, however, is that under Sec. 5(m) assets of the old corporation together with existing certificate of public
of RA 8799, the SEC appears to have concurrent jurisdiction to ―suspend or convenience to the new corporation.
revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations upon any of the The PSC provisionally approved the transfer of the assets, as well as the
grounds provided by law. certificate of public convenience to the new corporation.
It has thus been held as early as 1950 that ―even the existence of a de jure On Nov. 1957, the new corporation answered the motion to dismiss by
corporation may be determined in a private suit for its dissolution between alleging its recent incorporation.
stockholders, without the intervention of the state‖ (Hall vs. Piccio). Likewise,
in a close corporation, a petition for the dissolution of the corporation may be ISSUE: WON Buenaflor’s application should be approved?
instituted by any one individual shareholder on the ground, even by mere
dishonesty. HELD: Yes. It is admitted — and the Commission found – that the needs of
Sabang Barrio will be conveniently served with the establishment of a 5-ton
F. EFFECTS OF DISSOLUTION ice plant. But it elected to deny Buenaflor's application, even as it awarded
the privilege to the new Camarines Corporation on the ground that it (the old
Dissolution terminates its power to enter into contracts or to continue the corporation) had been serving ice in Sabang up to the time of Buenaflor's
business as a going concern. application, and was, consequently, the pioneer operator there.
The SC held that a corporation, whose corporate life expired, cannot lawfully The fact, however, is that since 1953, the old Corporation had been illegally
pursue the business for which it was organized. It cannot apply for a new plying its business of selling ice in Sabang because, under the Corporation
certificate or a secondary franchise for it is incapable of receiving a grant Law, Sec. 77, after November 1953, it could not lawfully continue the
(Buenaflor vs. Camarines Sur Industry Corp). Neither can it enforce a business for which it had been established (operate ice plant, sell ice, etc).
contract executed prior to its dissolution for the purpose of continuing the After November 1953, it could only continue to exist for three years for the
business of its organization (Cebu Ports vs. State Marine). purpose of prosecuting and defending suits by or against it, and of enabling it
gradually to settle and close its affairs, to dispose and convey its property
Debts due to or by a corporation are not extinguished. It has thus been held and to divide its capital stock. It could not, without violating the law, continue
that the termination of the life of a juridical entity does not, by itself, imply to sell ice. And yet, the Commission awarded the certificate on the basis of
the diminution or extinction of rights demandable against such juridical entity such serve and distribution of ice — applying the "prior operator" rule. In
(Gonzales vs. Sugar Regulatory Adm.) other words, the new Camarines Corporation is rewarded, precisely because
the old corporation, its predecessor, had violated the law during that period
Sec. 145. Amendment or repeal. - No right or remedy in favor of or (1953-1957). We cannot, and should not countenance such anomalous
against any corporation, its stockholders, members, directors, trustees, or result.
officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either On the other hand, when the old Camarines Corporation docketed its
by the subsequent dissolution of said corporation or by any subsequent application October 1, 1957, it had no juridical personality, it had
amendment or repeal of this Code or of any part thereof. ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even
PROPERTY RIGHTS: Thus, a lease to a corporation may, by its terms, a corporation de facto. And then, there is no application subscribed by the
terminate where the corporation cease to exist. But unless the lease so new Camarines Corporation. Far from being mere technicality, these point
provides, the rights and obligations thereunder are not extinguished by the support a conclusion which appears to be just and equitable, not only for the
corporation’s dissolution since leases affect property rights and survives the reasons already indicated, but also to compensate Buenaflor's diligence and
death of the parties. The stockholders succeed to the rights and liabilities of courage in exposing the irregular practice of a "ghost" corporation foisting its
the dissolved corporation in an unexpired leasehold state which may be services upon the unsuspecting public of Sabang and neighboring territory —
enforced by or against the receiver or liquidating trustee. enjoying a franchise without paying, perhaps, the corporate income tax and
other burdens attached to corporate existence.
CONTRACTS FOR PERSONAL SERVICE: This rule, however, may not hold
true in cases of contracts for personal services which are deemed terminated Remembering the Camarines Corporation's automatic cessation in November
by the dissolution of the corporation. In such cases, there is found an 1956 (three years after November 1953) we must decline to regard the new
―implied condition‖ that the contract shall terminate in such event. Camarines Corporation (formed October 30, 1957) as a continuation of the
old. At most, it is the transferee of the properties of the old corporation (or
PERIOD OF LIQUIDATION: Despite its dissolution, a corporation more properly, the assets of the stockholders) plus the certificate of public
nonetheless, continues to be a body corporate for a period of 3 years for convenience to operate the ice plant in Naga and Magarao. And yet, as
purposes of liquidation and winding up its affairs (Sec. 122). Upon expiration stated, the new corporation has not filed any application for certificate of
of the 3 year period to wind up its affairs, the juridical personality of the public convenience in Sabang, and has not published such application
CEBU PORT LABOR UNION, represented by this President ALEJO ISSUE: WON SRA could be made a party-respondent liable to the claim of
CABABAJAY, petitioner, the petitioners?
vs.
STATES MARINE CORPORATION, NICASIO PANSACALA, HELD: Yes. The termination of the life of a juridical entity does not by itself
ANDRESTURA, ALFONSO VILLAJAS, and PERPETUO REGIS, imply the diminution or extinction of rights demandable against such juridical
respondents entity.
(G.R. No. L-9350; May 20, 1957)
Executive Order No. 18, promulgated on 28 May 1986, abolished the
FACTS: On Sept. 12, 1953, petitioner filed a petition for ―recognition of Philsucom, created the SRA and authorized the transfer of assets from
stevedoring services and injunction‖ against respondents claiming that it was Philsucom to SRA. Section 13 of Executive Order No. 18 reads in part:
awarded a contract for the exclusive right of loading and unloading of the
cargoes of the vessel MV Bisayas formerly owned by Elizalde & CO., though Assets and records that, as determined by the Sugar Regulatory
at the time of the filing of the petition it was owned and operated by the Administration, are required in its operation are hereby transferred to the
States Marine Corporaiton. Sugar Regulatory Administration.
Respondent corporation filed a motion to dismiss on the ground that it has no Although the Philsucom is hereby abolished, it shall nevertheless continue
legal capacity to sue or be sued, it having been dissolved on Oct. 17, 1952 as a juridical entity for three years after the time when it would have been
and therefore has no personality to enter or refuse to enter into any contract, so abolished, for the purpose of prosecuting and defending suits by or
much less of threatening the petitioner as alleged in the petition. 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
Petitioner relied on Sec. 77 to include said corporation as party respondent continuing the functions for which it was established, under the
despite the fact that counsel for the other respondents called already the supervision of the Sugar Regulatory Administration.
attention of the Court that the State Marine Corporation was non-existing and
suggested that proper substitution or amendment of the petition be made. We believe, that Section 13 of Executive Order No. 18 is not to be interpreted
as authorizing respondent SRA to disable Philsucom from paying Philsucom's
ISSUE: WON State Marine Corp can be made a party respondent? demandable obligations by simply taking over Philsucom's assets and
immunizing them from legitimate claims against Philsucom. The right of those
HELD: Section 77 of the Corporation Law reads as follows: who have previously contracted with, or otherwise acquired lawful claims
against, Philsucom, to have the assets of Philsucom applied to the
SEC. 77. Every corporation whose charter expires by its own limitation or is satisfaction of those claims, is a substantive right and not merely a
annulled by forfeiture or otherwise, or whose corporate existence for other procedural remedy. Section 13 cannot be read as permitting the SRA to
purposes is terminated in any other manner, shall nevertheless be destroy that substantive right. We think that such an interpretation would
continued as a body corporate for three years after the time when it would result in Section 13 of Executive Order No. 18 colliding with the non-
have been so dissolved, for the purpose of prosecuting and defending suits impairment of contracts clause of the Constitution insofar as contractual
by or against it and of enabling it gradually to settle and close its affairs, to claims are concerned, and with the due process clause insofar as the non-
dispose of and convey its property and to divide its capital stock, but not contractual claims are concerned. To avoid such a result, we believe and so
for the purpose of continuing the business for which it was established. hold that should the assets of Philsucom remaining in Philsucom at
the time of its abolition not be adequate to pay for all lawful claims
Even a cursory reading of the above-quoted provision would convey the idea against Philsucom, respondent SRA must be held liable for such
clearly manifested in the limitation "but not for the purpose of continuing the claims against Philsucom to the extent of the fair value of assets
business for which it was established", that the 3-year period allowed by the actually taken over by the SRA from Philsucom, if any. To this
law is only for the purpose of winding up its affairs. Petitioner-appellee extent, claimants against Philsucom do have a right to follow
prayed that it be declared to have the right to stevedoring work in question Philsucom's assets in the hands of SRA or any other agency for that
"thereby respecting the contract entered into by petitioner and the Elizalde & matter.
Co. and subsequently enforced and continued by the respondent States
Marine Corporation". It appearing that the said States Marine We conclude that dismissal of petitioners' complaint against respondent SRA
Corporation was already dissolved at the time said petition was was clearly premature. Petitioners have a cause of action against SRA to the
filed, and the vessel subject of the agreement having changed extent that they are able to prove lawful claims against Philsucom, which
hands, it cannot be compelled now to respect such agreement claims Philsucom is or may be unable to satisfy, and to the extent respondent
specially considering the fact that it cannot even be made a party to SRA did, or does, in fact take over all or some of the assets of Philsucom. At
this suit (See. 1, Rule 3, of the Rules of Court. the very least, the motion to dismiss was not shown to rest upon indubitable
grounds and should, therefore, have been denied not only in respect of
Philsucom but also in respect of respondent SRA.
SPOUSES RAMON A. GONZALES and LILIA Y. GONZALES, petitioners,
vs. G. LIQUIDATION AND WINDING UP
SUGAR REGULATORY ADMINISTRATION, respondent
(G.R. No. 84606; June 28, 1989) During the course of liquidation and winding up, the assets will be collected
and realized, the rights and claims of creditors will be settled or provided for
FACTS: Petitioner spouses file a complaint seeking cancellation of a and a distribution of the remaining assets to the shareholders who are
mortgage and recovery of a sum of money for the overpayment they made, entitled thereto.
on a loan secured from RP Bank, by virtue of an alleged deduction made by
Philippine Sugar Commission (Philsucom) of the proceeds of sugar exports. Therefore, liquidation or winding up of corporate affairs therefore means the
collection of all corporate assets, the payments of all its debts and settlement
Petitioners filed an amended complaint which assailed the constitutionality of of its obligations and the ultimate distribution of corporate assets, if any of it
EO No. 18 abolishing Philsucom which in effect destroyed petitioners’ right to remains, to all stockholders in accordance with their proportionate
recover from PSC. They assert that the transfer from Philsucom to SRA are stockholdings in the corporation or in accordance with their respective
At any time during said three (3) years, the corporation is authorized and FACTS: On Nov. 3, 1953, plaintiff filed a complaint before the Municipal
empowered to convey all of its property to trustees for the benefit of Court of Tacloban, Leyte, against defendant for the recovery of advances the
stockholders, members, creditors, and other persons in interest. From and latter failed to account for, amounting to P1,213.34. The court rendered a
after any such conveyance by the corporation of its property in trust for the decision holding that defendant is liable for P272.49.
benefit of its stockholders, members, creditors and others in interest, all
interest which the corporation had in the property terminates, the legal Said court denying reconsideration, plaintiff appealed before the CFI to which
interest vests in the trustees, and the beneficial interest in the stockholders, a motion to dismiss was filed by defendant on the ground that EO No. 372
members, creditors or other persons in interest. abolished plaintiff and thus it no longer had capacity to sue.
Upon the winding up of the corporate affairs, any asset distributable to any Plaintiff objected there to on the ground that the said EO granted plaintiff to
creditor or stockholder or member who is unknown or cannot be found shall continue in existence for 3 years from Nov. 30, 1950, the effectivity date of
be escheated to the city or municipality where such assets are located. the EO, for the purpose of prosecuting and defending suits by or against it
and of enabling the Board of Liquidators to gradually settle the its affairs and
Except by decrease of capital stock and as otherwise allowed by this Code, that the case was filed on Nov. 14, 1953, or before the expiration of the 3
no corporation shall distribute any of its assets or property except upon year period.
lawful dissolution and after payment of all its debts and liabilities.
ISSUE: WON the action commenced within the 3 year period may be
LIQUIDATION MAY BE UNDERTAKEN IN EITHER OF THREE WAYS: continued after the expiration of the said period?
1. By the corporation itself through the BOD HELD: No. The rule appears to be well settled that, in the absence of
a. This is the usual method or procedure of liquidating a corporation (China statutory provision to the contrary, pending actions by or against a
Banking Corp vs. Michelin) and although there is no law authorizing it, corporation are abated upon expiration of the period allowed by law
neither is there anything that prohibits the BOD from undertaking the for the liquidation of its affairs.
same
b. If this method is resorted to, the board will only have a period of 3 years It is generally held, that where a statute continues the existence of a
to finish its task of liquidation corporation for a certain period after its dissolution for the purpose of
c. Claims for or against the corporate entity not filed within the period will prosecuting and defending suits, etc., the corporation becomes defunct
become unenforceable as there exist no corporate entity against which upon the expiration of such period, at least in the absence of a provision to
they can be enforced. the contrary, so that no action can afterwards be brought by or against it,
d. Actions pending for or against the corporation when the 3 year period and must be dismissed. Actions pending by or against the corporation
expires are abated, since after the period, the corporation ceases for all when the period allowed by the statute expires, ordinarily abate.
intents and purposes and is no longer capable of suing or being sued
(National Abaca & Other Fibers Co. vs. Pore) . . . This time limit does not apply unless the circumstances are
such as to bring the corporation within the provision of the
2. By a trustee appointed by the corporation statute. However, the wording of the statutes, in some jurisdictions
a. The corporation may opt to convey all corporate assets to a trustees authorize suits after the expiration of the time limit, where the statute
who will take charge of liquidation provides that for the purpose of any suit brought by or against the
b. If this method is used, the three year period limitation imposed by corporation shall continue beyond such period for a further named period
section 122 will not apply provided the designation of the trustee is after final judgment. (Fletcher's Cyclopedia on Corporations, Vol. 16, pp.
made within that period. 892-893.).
c. Thus, during the period of liquidation, but before the completion
thereof, a dissolved corporation is still liable for all its debts and Our Corporation Law contains no provision authorizing a corporation, after
liabilities in an action filed against it through its trustee even if the case three (3) years from the expiration of its lifetime, to continue in its corporate
is filed beyond the 3 year period of liquidation. name actions instituted by it within said period of three (3) years. In fact,
section 77 of said law provides that the corporation shall "be continued as a
3. By appointment of a receiver body corporate for three (3) years after the time when it would have been . .
a. A receiver may be appointed by the proper forum on petition or motu . dissolved, for the purpose of prosecuting and defending suits by or against
proprio upon the dissolution of the corporation (Sec. 119) it . . .", so that, thereafter, it shall no longer enjoy corporate existence for
b. The appointment of a receiver is, however, permissive rather than such purpose. For this reason, section 78 of the same law authorizes the
mandatory and the law tends to recognize that in cases of voluntary corporation, "at any time during said three years . . . to convey all of its
dissolution there is no occasion for the appointment of a receiver except property to trustees for the benefit of members, stockholders, creditors and
under special circumstances and upon proper showing (China Banking other interested", evidently for the purpose, among others, of enabling said
vs. Michelin) trustees to prosecute and defend suits by or against the corporation begun
c. If a receiver is appointed, the 3 year period fixed by law within which to before the expiration of said period. Hence, commenting on said sections,
complete the task of liquidation will not likewise apply because the Judge Fisher, in his work entitled Philippines Law on Stock Corporations
dissolved corporation is substituted by the receiver who may sue or be (1929 ed.), has the following to say:
sued even after that period (Sumera vs. Valencia).
For the foregoing considerations, we are of the opinion and so hold that
TIBURCIO SUMERA, as receiver of the corporation "Devota de when a corporation is dissolved and the liquidation of its assets is
Nuestra Señora de la Correa", plaintiff-appellant, placed in the hands of a receiver or assignee, the period of three
vs. years prescribed by section 77 of Act No. 1459 known as the
EUGENIO VALENCIA, defendant-appellee Corporation Law is not applicable, and the assignee may institute all
(G.R. No. 45485; May 3, 1939) actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.
FACTS: Devota de Nuestra Senora de la Correa filed for a voluntary
dissolution which was approved by the CFI of Bulacan on Feb. 14, 1928 Wherefore, the order appealed from is reversed and it is ordered that the
appointing Damaso Nicolas as assignee to take charge of liquidation. Nicolas case be remanded to the court of origin to the end that it may decide the
was substituted by herein appellant Sumera who filed a motion with the court same on the merits, with costs against the appellee.
asking defendant Valencia to deliver to him the P400.00 funds of the
corporation which was denied, reserving, however to said assignee the right THE BOARD OF LIQUIDATORS representing THE GOVERNMENT OF THE
to bring the proper action. Accordingly, on June 5, 1936, Sumera filed the REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
present complaint for recovery of money. vs.
HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE DECEASED
The defendant interposed the defense that the right against him had already CASIMIRO GARCIA, and LEONOR MOLL, defendants-appellees
prescribed which was found by the lower court to be tenable, the case not (G.R. No. L-18805; August 14, 1967)
being filed within the 3 year period prescribed under Sec. 77 of Act No. 1459.
FACTS: A suit was filed by the Board of Liquidators for the recovery of a sum
ISSUE: WON the 3 year period prescribed by the Corporation Law is of money from National Coconut Corporation’s (NACOCO) general manager
applicable if the liquidation is placed on the hands of a receiver or assignee? and board chairman Maximo Kalaw and other defendants as directors.
HELD: No. Passing now to discuss the question raised by plaintiff and The defendants pose that since the three year period has elapsed since its
appellant in his sole assignment of alleged error, section 77 of Act No. 1459 abolition by virtue of EO 372, the Board of Liquidators may not now continue
provides that "Every corporation whose charter expires by its own limitation with, and prosecute, the present case to its conclusion.
or is annulled by forfeiture or otherwise, or whose corporate existence for
other purposes is terminated in any other manner, shall nevertheless be ISSUE: WON the Board of Liquidators has personality to proceed as party-
continued as a body corporate for three years after the time when it would plaintiff in this case?
have been so dissolved, for the purpose of prosecuting and defending suits
by or against it and of enabling it gradually to settle and close its affairs to HELD: Yes. The executive order abolishing NACOCO and creating the Board
dispose of and convey its property and to divide its capital stock, but not for of Liquidators should be examined in context. The proviso in Section 1 of
the purpose of continuing the business for which it was established." And Executive Order 372, whereby the corporate existence of NACOCO was
section 77 of the same Act provides, "At any time during said three years said continued for a period of three years from the effectivity of the order for "the
corporation is authorized and empowered to convey all of its property to purpose of prosecuting and defending suits by or against it and of enabling
trustees for the benefit of members, stockholders, creditors, and others the Board of Liquidators gradually to settle and close its affairs, to dispose of
interested. From and after any such conveyance by the corporation of its and convey its property in the manner hereinafter provided", is to be read
property in trust for the benefit of its members, stockholders, creditors, and not as an isolated provision but in conjunction with the whole. So reading, it
others in interest, all interest which the corporation had in the property will be readily observed that no time limit has been tacked to the
terminates, the legal interest vests in the trustees, and the beneficial interest existence of the Board of Liquidators and its function of closing the
in the members, stockholders, creditors, or other persons in interest. affairs of the various government owned corporations, including
NACOCO.
Fletcher, in volume 8, page 9226, of his Encyclopedia of Private Corporations,
says:
Not that our views on the power of the Board of Liquidators to proceed to the When Insular Sawmill, Inc. was dissolved on December 31, 1960, under
final determination of the present case is without jurisprudential support. The Section 77 of the Corporation Law, it still has the right until December 31,
first judicial test before this Court is National Abaca and Other Fibers 1963 to prosecute in its name the present case. After the expiration of said
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the period, the corporation ceased to exist for all purposes and it can no longer
corporation, already dissolved, commenced suit within the three-year sue or be sued.
extended period for liquidation. That suit was for recovery of money
advanced to defendant for the purchase of hemp in behalf of the corporation. However, a corporation that has a pending action and which cannot be
She failed to account for that money. We there said that "the rule appears to terminated within the three-year period after its dissolution is authorized
be well settled that, in the absence of statutory provision to the under Section 78 to convey all its property to trustees to enable it to
contrary, pending actions by or against a corporation are abated prosecute and defend suits by or against the corporation beyond the Three-
upon expiration of the period allowed by law for the liquidation of year period. Although private respondent did not appoint any trustee,
its affairs." We there said that "[o]ur Corporation Law contains no provision yet the counsel who prosecuted and defended the interest of the
authorizing a corporation, after three (3) years from the expiration of its corporation in the instant case and who in fact appeared in behalf of
lifetime, to continue in its corporate name actions instituted by it within said the corporation may be considered a trustee of the corporation at
period of three (3) years." However, these precepts notwithstanding, least with respect to the matter in litigation only. Said counsel had
we, in effect, held in that case that the Board of Liquidators escapes been handling the case when the same was pending before the trial
from the operation thereof for the reason that "[o]bviously, the court until it was appealed before the Court of Appeals and finally to
complete loss of plaintiff's corporate existence after the expiration this Court. We therefore hold that there was a substantial
of the period of three (3) years for the settlement of its affairs is compliance with Section 78 of the Corporation Law and as such,
what impelled the President to create a Board of Liquidators, to private respondent Insular Sawmill, Inc. could still continue
continue the management of such matters as may then be pending. prosecuting the present case even beyond the period of three (3)
years from the time of its dissolution.
CARLOS GELANO and GUILLERMINA MENDOZA DE GELANO,
petitioners, The word "trustee" as sued in the corporation statute must be
vs. understood in its general concept which could include the counsel
THE HONORABLE COURT OF APPEALS and INSULAR SAWMILL, INC., to whom was entrusted in the instant case, the prosecution of the
respondents suit filed by the corporation. The purpose in the transfer of the assets of
(G.R. No. L-39050; February 24, 1981) 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
FACTS: Private respondent Insular Sawmill, Inc. lease the paraphernal advantage of the failure of the corporation to transfer its assets to a trustee,
property of petitioner-wife Guillermina Mendoza de Gelano. It was while assuming it has any to transfer which petitioner has failed to show, in the
private respondent was leasing the property that its officers and directors had first place. To sustain petitioners' contention would be to allow them to
come to know petitioner-husband Carlos Gelano who received from the enrich themselves at the expense of another, which all enlightened legal
corporation cash advances on account of rent to be paid by the corporation systems condemn.
to the land.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
Despite repeated demands by the private respondent refused to pay the cash vs.
advances. Petitioner-wife refused to pay on the ground that the cash MARSMAN DEVELOPMENT COMPANY and/or F.H. BURGESS, in his
advances was for the personal account of her husband asked for by, and capacity as Liquidator of the Marsman Development Company,
given to him, without the knowledge and consent and did not benefit the defendants-appellants.
family. (G.R. No. L-18956; April 27, 1972)
On May 29, 1959, the corporation, through its lawyer, filed a complaint for FACTS: Sometime before Oct. 15, 1953, an investigation was conducted on
collection against petitioners. the business operation and activities of defendant corporation leading to the
discovery of deficiency taxes on logs produced from its concession.
Meanwhile, the corporation amended its AOI to shorten its term of existence
up to Dec. 31, 1960 only which was approved by the SEC but the trial court The Collector of Internal Revenue demanded payment for forest charges and
was not notified of such amendment. 25% surcharge. After further investigation, another assessment was sent to
the defendant by the BIR demanding a total sum of P45, 541.66 representing
On Nov. 20, 1964, almost 4 years after the dissolution, the trial court deficiency taxes, forest charges, surcharges and penalties. Later on, another
rendered a decision in favor of private respondent. assessment was sent to defendant corporation for discharging lumber
without permit.
ISSUE: WON a corporation whose corporate life had ceased by the
expiration of its term of existence, could still continue prosecuting and Defendant contend that the present action was barred by Sec. 77 of the
defending suits after its dissolution and beyond the period of 3 years to wind Corporation Law which allows corporate existence to continue after
up its affairs, without having undertaken any step to transfer its assets to a dissolution only for a period of 3 years. That the company was extra-judicially
trustee or assignee? dissolved on April 23, 1954, the orginal complaint was filed only on Sept. 8,
1958 and the amended complaint on Aug. 26, 1956.
HELD: Yes. In American corporate law, upon which our Corporation Law was
patterned, it is well settled that, unless the statutes otherwise provide, all The trial court ruled in favor of the government holding that the amended
pending suits and actions by and against a corporation are abated by a complaint was precisely to include FH Burgess, liquidator of the company, as
dissolution of the corporation. Section 77 of the Corporation Law provides party defendant.
If, indeed, the sociedad has long become defunct, it should behoove The said phrase was inserted by framers of the law only as a condition
petitioners, or anyone else who may have any interest in the corporation, to precedent to the grant of a license to do business in the Philippines.
take appropriate measures before a proper forum for a peremptory
settlement of its affairs. We might invite attention to the various modes INCORPORATION TEST: is applied in determining whether a corporation is
provided by the Corporation Code (see Sees. 117-122) for dissolving, domestic or foreign. If it is incorporated in another state, it is a foreign
liquidating or winding up, and terminating the life of the corporation. Among corporation, while if it is registered under Philippine laws, it is deemed a
the causes for such dissolution are when the corporate term has expired or Filipino or domestic corporation irrespective of the nationality of its
when, upon a verified complaint and after notice and hearing, the Securities stockholders.
and Exchange Commission orders the dissolution of a corporation.
Thus, a corporation registered under the Foreign Investments Act of 1991
The corporation continues to be a body corporate for three (3) years after its (RA No. 7074) or the Trade Liberalization Law of 2000 (RA No. 8762) with
dissolution for purposes of prosecuting and defending suits by and against it 100% foreign equity is considered a Filipino or domestic corporation and not
and for enabling it to settle and close its affairs, culminating in the disposition foreign.
and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The CONTROL TEST: In times of war and for purposes of security of the state,
termination of the life of a juridical entity does not by itself cause however, the ―control test‖ would apply in determining the corporate
the extinction or diminution of the rights and liabilities of such nationality, i.e., the citizenship of the controlling stockholders determines the
entity (see Gonzales vs. Sugar Regulatory Administration, 174 SCRA 377) nationality of the corporation.
nor those of its owners and creditors. If the three-year extended life has
expired without a trustee or receiver having been expressly designated by the CORPORATE PERSONALITY BEYOND BORDERS:
corporation within that period, the board of directors (or trustees) itself,
following the rationale of the Supreme Court's decision in Gelano vs. Court of B. APPLICATION FOR LICENSE
Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation. Still in the absence Under Sec. 123, a foreign corporation cannot transact business in the
of a board of directors or trustees, those having any pecuniary Philippines unless it has obtained a license or permit to do so in accordance
interest in the assets, including not only the shareholders but with the laws of the country and a certificate of authority from the
likewise the creditors of the corporation, acting for and in its behalf, appropriate government agency such as the Banko Sentral ng Pilipinas for
might make proper representations with the Securities and banking institutions or the Office of the Insurance Commission for insurance
Exchange commission, which has primary and sufficiently broad companies, etc.
jurisdiction in matters of this nature, for working out a final
settlement of the corporate concerns. A certificate of authority from the Board of Investments is no longer required
under RA 7042. Said certificate of authority is only necessary for the purpose
WHEREFORE, the decision appealed from is AFFIRMED. of availing the incentives granted and allowed under the Omnibus
Investments Code.
ISSUE AS TO CLEMENTE CASE: The SC should have applied Sec. 122,
such that, in the absence of a known stockholder, member of the BOD or The manner in which a foreign corporation may obtain a license to do
creditor, the properties should have been escheated in favor of the local business in the Philippines is laid down in Sec. 125:
government. Following the rule laid down in Clemente will open the door to
fraud in a way that any person claiming interest as heir of the corporation Sec. 125. Application for a license. - A foreign corporation applying for a
5. The specific purpose or purposes which the corporation intends to pursue Sec. 126. Issuance of a license. - If the Securities and Exchange
in the transaction of its business in the Philippines: Provided, That said Commission is satisfied that the applicant has complied with all the
purpose or purposes are those specifically stated in the certificate of authority requirements of this Code and other special laws, rules and regulations, the
issued by the appropriate government agency; Commission shall issue a license to the applicant to transact business in the
Philippines for the purpose or purposes specified in such license. Upon
6. The names and addresses of the present directors and officers of the issuance of the license, such foreign corporation may commence to transact
corporation; business in the Philippines and continue to do so for as long as it retains its
authority to act as a corporation under the laws of the country or state of its
7. A statement of its authorized capital stock and the aggregate number of incorporation, unless such license is sooner surrendered, revoked, suspended
shares which the corporation has authority to issue, itemized by classes, par or annulled in accordance with this Code or other special laws.
value of shares, shares without par value, and series, if any;
Within sixty (60) days after the issuance of the license to transact business in
8. A statement of its outstanding capital stock and the aggregate number of the Philippines, the license, except foreign banking or insurance corporation,
shares which the corporation has issued, itemized by classes, par value of shall deposit with the Securities and Exchange Commission for the benefit of
shares, shares without par value, and series, if any; present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and Exchange Commission, consisting of bonds
9. A statement of the amount actually paid in; and or other evidence of indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of government-owned or
10. Such additional information as may be necessary or appropriate in order controlled corporations and entities, shares of stock in "registered
to enable the Securities and Exchange Commission to determine whether enterprises" as this term is defined in Republic Act No. 5186, shares of stock
such corporation is entitled to a license to transact business in the in domestic corporations registered in the stock exchange, or shares of stock
Philippines, and to determine and assess the fees payable. in domestic insurance companies and banks, or any combination of these
kinds of securities, with an actual market value of at least one hundred
Attached to the application for license shall be a duly executed certificate thousand (P100,000.) pesos; Provided, however, That within six (6) months
under oath by the authorized official or officials of the jurisdiction of its after each fiscal year of the licensee, the Securities and Exchange
incorporation, attesting to the fact that the laws of the country or state of the Commission shall require the licensee to deposit additional securities
applicant allow Filipino citizens and corporations to do business therein, and equivalent in actual market value to two (2%) percent of the amount by
that the applicant is an existing corporation in good standing. If such which the licensee's gross income for that fiscal year exceeds five million
certificate is in a foreign language, a translation thereof in English under oath (P5,000,000.00) pesos. The Securities and Exchange Commission shall also
of the translator shall be attached thereto. require deposit of additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%) percent of their
The application for a license to transact business in the Philippines shall actual market value at the time they were deposited. The Securities and
likewise be accompanied by a statement under oath of the president or any Exchange Commission may at its discretion release part of the additional
other person authorized by the corporation, showing to the satisfaction of the securities deposited with it if the gross income of the licensee has decreased,
Securities and Exchange Commission and other governmental agency in the or if the actual market value of the total securities on deposit has increased,
proper cases that the applicant is solvent and in sound financial condition, by more than ten (10%) percent of the actual market value of the securities
and setting forth the assets and liabilities of the corporation as of the date at the time they were deposited. The Securities and Exchange Commission
not exceeding one (1) year immediately prior to the filing of the application. may, from time to time, allow the licensee to substitute other securities for
Foreign banking, financial and insurance corporations shall, in addition to the those already on deposit as long as the licensee is solvent. Such licensee
above requirements, comply with the provisions of existing laws applicable to shall be entitled to collect the interest or dividends on the securities
them. In the case of all other foreign corporations, no application for license deposited. In the event the licensee ceases to do business in the Philippines,
to transact business in the Philippines shall be accepted by the Securities and the securities deposited as aforesaid shall be returned, upon the licensee's
Exchange Commission without previous authority from the appropriate application therefor and upon proof to the satisfaction of the Securities and
government agency, whenever required by law. Exchange Commission that the licensee has no liability to Philippine residents,
including the Government of the Republic of the Philippines.
Foreign corporations already issued a license to transact business in the
Philippine prior to the effectivity of the Code continues to have such authority OBJECTIVE OF LICENSE: is not to prevent the foreign corporation from
under the terms and conditions of the license. Sec. 124 provides: performing isolated or single act, but to prevent it from acquiring a domicile
for the purpose of pursuing its business without taking steps to render it
Sec. 124. Application to existing foreign corporations. - Every foreign amenable to suit in the local courts. If the foreign corporation transacts
corporation which on the date of the effectivity of this Code is authorized to business in the Philippines without the requisite license, its officers may be
do business in the Philippines under a license therefore issued to it, shall subjected to the penal provisions of Sec. 144 of the Code.
continue to have such authority under the terms and condition of its license,
subject to the provisions of this Code and other special laws.
―DOING BUSINESS‖: As to what constitutes ―doing business‖ or In its decision of June 29, 1940, the Court of Appeals concluded that "it is
―transacting business‖ which would bar a foreign corporation from access to undeniable that the Mentholatum Co., through its agent, the Philippine-
our courts, no general rule or governing principle can be laid down. Indeed, American Drug Co., Inc., has been doing business in the Philippines by selling
ACCORDINGLY, the judgment of the Court of Appeals is reversed, and ...The true test, however, seems to be whether the foreign
another judgment is hereby rendered ordering the respondents, jointly and corporation is continuing the body or substance of the business or
severally, to pay the petitioner the sum of P2,349.62 with interest thereon at enterprise for which it warning-organized or whether it has
the rate of 6% per annum from March 13, 1961, the date of the filing of the substantially was retired from it and turned it over to another.
complaint, until the amount shall have been fully paid, and the sum of P600 (Traction Cos. v. Collectors of Int. Revenue [CCA., Ohio], 223 F. 984, 987.)
as attorney's fees. Costs against the respondents. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or workers or
ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING the exercise of some of the functions normally incident to, and in
CORPORATION and AURORA CONSOLIDATED SECURITIES and progressive prosecution of, the purpose and object of its organization.
INVESTMENT CORPORATION, petitioners, (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, 77, Pauline
vs. Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl. 111;
THE COURT OF APPEALS, THE HONORABLE MAXIMIANO C. Automotive Material Co. v. American Standard Metal Products Corp., 158
ASUNCION (Court of First Instance of Laguna, Branch II [Sta. Cruz]) N.E. 698, 703, 327 111. 367.) '
and STOKELY VAN CAMP, INC., respondents
(G.R. No. L-61523; July 31, 1986) In the case at bar, the transactions entered into by the respondent
with the petitioners are not a series of commercial dealings which
FACTS: Respondent Stokely Van Camp, Inc., a corporation organized and signify an intent on the part of the respondent to do business in the
existing under the laws of the state of Indiana, filed a complaint against Philippines but constitute an isolated one which does not fall under
Banahaw Milling Corporation, Antam Consolidated, Inc., Tambunting Trading the category of "doing business." The records show that the only reason
Corporation, Aurora Consolidated Securities and Investment Corporation and why the respondent entered into the second and third transactions with the
United Coconut Oil Mills, Inc. (Unicom) for collection of sum of money. petitioners was because it wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude coconut oil under the first
One of respondent’s subdivision ―Capital City Product Company‖ (Capital City) transaction and in order to give the latter a chance to make good on their
entered into a contracts where Coconut Oil Manufacturing (Phil), Inc. obligation. Instead of making an outright demand on the petitioners, the
(Comphil) were to sell to the former 500 long tons of crude coconut oil at respondent opted to try to push through with the transaction to recover the
US$0.30/lb, which it failed to comply with and Capital City was forced to buy amount of US$103,600.00 it lost. This explains why in the second
its coconut oil needs from the open market at a higher price resulting in a transaction, the petitioners were supposed to buy back the crude coconut oil
loss of US$103,600. they should have delivered to the respondent in an amount which will earn
the latter a profit of US$103,600.00. When this failed the third transaction
A 2nd contract was entered into to settle Capital City’s loss, Comphil was was entered into by the parties whereby the petitioners were supposed to sell
supposed to repurchase the coconut oil earlier purchased from the open crude coconut oil to the respondent at a discounted rate, the total amount of
market at a price of US$ 0.3925/lb, but the latter failed to pay. such discount being US$103,600.00. Unfortunately, the petitioners failed to
deliver again, prompting the respondent to file the suit below.
To compensate for the loss, Comphil entered into a 3rd contract agreeing to
sell the same quantity of coconut oil at a price of US$0.3425/lb which was From these facts alone, it can be deduced that in reality, there was only one
below the market price. That by the discounted amount, Comphil would have agreement between the petitioners and the respondent and that was the
compensated for the loss Capital City sustained. But still, Comphil failed to delivery by the former of 500 long tons of crude coconut oil to the latter, who
deliver. in turn, must pay the corresponding price for the same. The three seemingly
different transactions were entered into by the parties only in an effort to
fulfill the basic agreement and in no way indicate an intent on the part of the
respondent to engage in a continuity of transactions with petitioners which
Subsequently, a motion to dismiss was filed which was denied. WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS AGAINST
THE PETITIONERS
ISSUE: WON petitioner, FMC, has been doing business in the Philippines to
vest the Philippine court with jurisdiction? SINGLE ACT WITH INTENTION TO CONTINUE DOING BUSINESS
HELD: Yes. From the facts of record, the petitioner may be considered as FAR EAST INTERNATIONAL IMPORT and EXPORT CORPORATION,
doing business in the Philippines within the scope of Section 14, Rule 14 of plaintiff-appellee,
the Rules of the Court which provide: vs.
NANKAI KOGYO CO. LTD., ET AL., defendants,
SEC 14. Service upon private foreign corporations. If the defendant is a NANKAI KOGYO CO., LTD., defendant-appellant
foreign corporation or a non-resident joint stock company or association: (G.R. No. L-13525; November 30, 1962)
doing business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose or, if there be no such FACTS: Plaintiff Far East entered into a contract with herein appellant Nankai
agent, on the government official designated by law to that effect, or on any for the sale of steel scrap. Only 1,058.6 metric tons were delivered upon the
of its officers or agents within the Philippines. expiration of the export license of Far East.
For failure of Nankai and the shipping agent to comply, Far East filed a ISSUE2: WON the single act done in this case can be considered as doing
complaint for specific performance. business in the Philippines?
Nankai filed a motion to dismiss, on the ground of lack of jurisdiction over its HELD: Yes. In the instant case, the testimony of Atty. Pablo Ocampo that
person and the subject matter, which was denied. appellant was doing business in the Philippines corroborated by no less than
Nabuo Yoshida, one of appellant's officers, that he was sent to the Philippines
ISSUE: WON the trial court acquired jurisdiction over the subject matter and by his company to look into the operation of mines, thereby revealing the
over the person of the defendant-appellant through the proper service of defendant's desire to continue engaging in business here, after
summons? receiving the shipment of the iron under consideration, making the
Philippines a base thereof.
HELD: Yes. Defendant contends that Philippine Courts have no jurisdiction to
take cognizance of the case because the Nankai is not doing business in the The rule stated in the preceding section that the doing of a single act
islands; and that while it has entered into the transaction in question, same, doesnot constitute business within the meaning of statutes prescribing the
however, does not constitute "doing business", so as to make it amenable to conditions to be complied with the foreign corporations must be qualified
summons and subject it to the Court's jurisdiction. It bolstered this claim by a to this extent, that a single act may bring the corporation. In such a
provision in the contract which provides that "In case of disputes, Board of case, the single act of transaction is not merly incidental or casual, but is
Arbitration may be formed in Japan. Decision of the Board of Arbitration shall of such character as distinctly to indicate a purpose on the part of the
be final and binding on both BUYER and SELLER". foreign corporation to do other business in the state, and to make the
state a basis of operations for the conduct of a part of corporation's
The rule pertinent to the questions in issue provides — ordinary business. (17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572-
573, and authorities cited therein.) (Emphasis ours.)
SEC. 14. Service upon private foreign corporations. — If the defendant is a
foreign corporation, or a non-resident joint stock company or association, WHEREFORE, the judgment appealed from is hereby affirmed, with costs
doing business in the Philippines, service may be made on its resident against defendant-appellant Nankai Kogyo.
agent designated in accordance with law for that purpose, or, if there be
no such agent, on the government official designated by law to that effect, ESTOPPED TO QUESTION PERSONALITY TO SUE
or on any officer or agent within the Philipines. (Rule 7).
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC MULTI-
The above rule indicates three modes of effecting service of TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.) and
summons upon a private, foreign corporation, viz: (1) by serving FRANCISCO S. AGUIRRE, petitioners,
upon the agent designated in accordance with law to accept service vs.
of summons; (2) if there is no resident agent, by service on the THE COURT OF APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
government cial designated by law to that effect; and (3) by serving INC., respondents
on any officer or agent of said corporation with Philippines. The (G.R. No. 102223; August 22, 1996)
plaintiff complied with the third stated above, for it has been shown that Mr.
Ishida, who personally signed the contract for the purchase of the scrap in FACTS: Respondent ITEC entered into a contract with petitioner ASPAC
question in behalf of the Nankai Kogyo, the Trade Manager of said Company, referred to as ―Representative Agreement‖ where ASPEC was assigned as
Mr. Tominaga the Chief of the Petroleum Section of the same company and ITEC’s ―exclusive representative‖ in the Philippines for the sale of ITEC’s
Mr. Yoshida was the man-in-charge of the Import Section of the company's products.
Tokyo Branch. All these three, including the first two who were served with
Summons, were officers of the defendant company. By virtue of said contract, ASPAC sold electronic products exported by ITEC,
to their sole customer PLDT. ASPAC and PLDT executed a document entitled
Not only did appellant allege non-jurisdictional grounds in its pleadings to ―PLDT-ASPAC/ITEC PROTOCOL‖ which defined the project detais for the
have the complaint dismissed, but it also went into trial on the merits and supply of ITEC’s Interface Equipment in connection with the 5th Expansion
presented evidence destined to resist appellee's claim. Verily, there could not Program of PLDT.
be a better situation of acquired jurisdiction based on consent. Consequently,
the provision of the contract wherein it was agreed that disputes should be ITEC later on terminated its representative agreement with ASPAC and fied a
submitted to a Board of Arbitration which may be formed in Japan (in the complaint alleging that the latter and another corporation Digital Base
supposition that it can apply to the matter in dispute - payment of the scrap), Communications, Inc. (DIGITAL), the president of which is Francisco Aguirre
seems to have been waived with appellant's voluntary submission. Apart from who is also the president of ASPAC, used knowledge and information of
the fact that the clause employs the word "may". ITEC’s product specifications to develop their own line of equipment and
product support, which are similar, if not identical to ITEC’s own and offering
From the proven facts obtaining in this particular case, the appellant's them to ITEC’s customers.
defense of lack of jurisdiction appears unavailing. The case of Pacific
Micronesian Line, Inc. v. Baens del Rosario, et al., G.R. No. L-7154, October Defendants filed a motion to dismiss on the ground that ITEC had no legal
23, 1954, relied upon in the Motion to Dismiss and other pleadings presented capacity to sue as it is a foreign corporation doing business in the Philippines
by defendant-appellant, stand on a different footing. Therein, We made the without the required license, which was denied. On appeal, the CA affirmed
following pronouncements: the decision of the trial court.
. . . . And the only act it did here was to secure the services of Luceno ISSUE: WON private respondents ITEC is an unlicensed corporation doing
Pelingon to act as cook and chief steward in one of its vessels authorizing business in the Philippines, and WON it is barred from invoking the injunctive
to that effect the Luzon Stevedoring Co., Inc., a domestic corporation, and authority of the courts?
the contract of employment was entered into on July 18, 1951. It further
appears that petitioner has never sent its ships to the Philippines nor has it HELD: Yes and No (by estoppel). Generally, a "foreign corporation" has
transported nor even solicited the transportation passengers and cargoes no legal existence within the state in which it is foreign. This
to and from the Philippines. In words, petitioner engaged the services of proceeds from the principle that juridical existence of a corporation
Pelingon not as part of the operation of its business but merely to employ is confined within the territory of the state under whose laws it was
him as member of the crew in one of its ships. That act apparently is an incorporated and organized, and it has no legal status beyond such
In a long line of decisions, this Court has not altogether prohibited foreign In determining whether a corporation does business in the Philippines or not,
corporation not licensed to do business in the Philippines from suing or aside from their activities within the forum, reference may be made to the
maintaining an action in Philippine Courts. What it seeks to prevent is a contractual agreements entered into by it with other entities in the country.
foreign corporation doing business in the Philippines without a license from Thus, in the Top-Weld case (supra), the foreign corporation's LICENSE AND
gaining access to Philippine Courts. TECHNICAL AGREEMENT and DISTRIBUTOR AGREEMENT with their local
contacts were made the basis of their being regarded by this Tribunal as
The purpose of the law in requiring that foreign corporations doing corporations doing business in the country. Likewise, in Merill Lynch Futures,
business in the Philippines be licensed to do so and that they appoint an Inc. vs. Court of Appeals, etc., the FUTURES CONTRACT entered into by the
agent for service of process is to subject the foreign corporation doing petitioner foreign corporation weighed heavily in the court's ruling.
business in the Philippines to the jurisdiction of its courts. The object
is not to prevent the foreign corporation from performing single acts, but to With the above-stated precedents in mind, we are persuaded to conclude
prevent it from acquiring a domicile for the purpose of business without that private respondent had been "engaged in" or "doing business" in the
taking steps necessary to render it amenable to suit in the local courts. The Philippines for some time now. This is the inevitable result after a scrutiny of
implication of the law is that it was never the purpose of the legislature to the different contracts and agreements entered into by ITEC with its various
exclude a foreign corporation which happens to obtain an isolated order for business contacts in the country, particularly ASPAC and Telephone
business from the Philippines, and thus, in effect, to permit persons to avoid Equipment Sales and Services, Inc. (TESSI, for brevity). The latter is a local
their contracts made with such foreign corporations. electronics firm engaged by ITEC to be its local technical representative, and
to create a service center for ITEC products sold locally. Its arrangements,
There is no exact rule or governing principle as to what constitutes "doing" or with these entities indicate convincingly ITEC's purpose to bring about the
"engaging" or "transacting" business. Indeed, such case must be judged in situation among its customers and the general public that they are dealing
the light of its peculiar circumstances, upon its peculiar facts and upon the directly with ITEC, and that ITEC is actively engaging in business in the
language of the statute applicable. The true test, however, seems to be country.
whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized. In its Master Service Agreement with TESSI, private respondent required its
local technical representative to provide the employees of the technical and
Article 44 of the Omnibus Investments Code of 1987 defines the service center with ITEC identification cards and business cards, and to
phrase to include: correspond only on ITEC, Inc., letterhead. TESSI personnel are instructed to
answer the telephone with "ITEC Technical Assistance Center.", such
―soliciting orders, purchases, service contracts, opening offices, telephone being listed in the telephone book under the heading of ITEC
whether called "liaison" offices or branches; appointing Technical Assistance Center, and all calls being recorded and forwarded to
representatives or distributors who are domiciled in the ITEC on a weekly basis.
Philippines or who in any calendar year stay in the Philippines for
a period or periods totalling one hundred eighty (180) days or What is more, TESSI was obliged to provide ITEC with a monthly report
more; participating in the management, supervision or control of detailing the failure and repair of ITEC products, and to requisition monthly
any domestic business firm, entity or corporation in the the materials and components needed to replace stock consumed in the
Philippines, and any other act or acts that imply a continuity or warranty repairs of the prior month.
commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of some A perusal of the agreements between petitioner ASPAC and the respondents
of the functions normally incident to, and in progressive shows that there are provisions which are highly restrictive in nature, such as
prosecution of, commercial gain or of the purpose and object of to reduce petitioner ASPAC to a mere extension or instrument of the private
the business organization.‖ respondent.
Thus, a foreign corporation with a settling agent in the Philippines which The "No Competing Product" provision of the Representative Agreement
issued twelve marine policies covering different shipments to the Philippines between ITEC and ASPAC provides: "The Representative shall not represent
and a foreign corporation which had been collecting premiums on or offer for sale within the Territory any product which competes with an
outstanding policies were regarded as doing business here. existing ITEC product or any product which ITEC has under active
development." Likewise pertinent is the following provision: "When acting
The same rule was observed relating to a foreign corporation with an under this Agreement, REPRESENTATIVE is authorized to solicit sales within
"exclusive distributing agent" in the Philippines, and which has been selling the Territory on ITEC's behalf but is authorized to bind ITEC only in its
its products here since 1929, and a foreign corporation engaged in the capacity as Representative and no other, and then only to specific customers
business of manufacturing and selling computers worldwide, and had and on terms and conditions expressly authorized by ITEC in writing."
installed at least 26 different products in several corporations in the
Philippines, and allowed its registered logo and trademark to be used and When ITEC entered into the disputed contracts with ASPAC and
made it known that there exists a designated distributor in the Philippines. TESSI, they were carrying out the purposes for which it was
created, i.e., to market electronics and communications products.
In Georg Grotjahn GMBH and Co. vs. Isnani, it was held that the The terms and conditions of the contracts as well as ITEC's conduct indicate
uninterrupted performance by a foreign corporation of acts that they established within our country a continuous business, and not
pursuant to its primary purposes and functions as a regional area merely one of a temporary character.
headquarters for its home office, qualifies such corporation as one
doing business in the country.
A foreign corporation doing business in the Philippines may sue in Philippine In Top-Weld, we ruled that a foreign corporation may be exempted from the
Courts although not authorized to do business here against a Philippine license requirement in order to institute an action in our courts if its
citizen or entity who had contracted with and benefited by said corporation. representative in the country maintained an independent status during the
To put it in another way, a party is estopped to challenge the existence of the disputed contract. Petitioner is deemed to have acceded to
personality of a corporation after having acknowledged the same by such independent character when it entered into the Representative
entering into a contract with it. And the doctrine of estoppel to deny Agreement with ITEC, particularly, provision 6.2 (supra).
corporate existence applies to a foreign as well as to domestic corporations.
One who has dealt with a corporation of foreign origin as a corporate entity is IN VIEW OF THE FOREGOING PREMISES, the instant Petition is hereby
estopped to deny its corporate existence and capacity: The principle will be DISMISSED. The decision of the Court of Appeals dated June 7, 1991,
applied to prevent a person contracting with a foreign corporation from later upholding the RTC Order dated February 22, 1991, denying the petitioners'
taking advantage of its noncompliance with the statutes chiefly in cases Motion to Dismiss, and ordering the issuance of the Writ of Preliminary
where such person has received the benefits of the contract. Injunction, is hereby affirmed in toto.
The rule is deeply rooted in the time-honored axiom of Commodum ex injuria TRADEMARK INFRINGEMENT
sua non habere debet — no person ought to derive any advantage of his own
wrong. This is as it should be for as mandated by law, "every person must in WESTERN EQUIPMENT AND SUPPLY COMPANY, WESTERN
the exercise of his rights and in the performance of his duties, act with ELECTRIC COMPANY, INC., W. Z. SMITH and FELIX C. REYES,
justice, give everyone his due, and observe honesty and good faith." plaintiffs-appellees,
vs.
Concededly, corporations act through agents, like directors and officers. FIDEL A. REYES, as Director of the Bureau of Commerce and
Corporate dealings must be characterized by utmost good faith and fairness. Industry, HENRY HERMAN, PETER O'BRIEN, MANUEL B. DIAZ,
Corporations cannot just feign ignorance of the legal rules as in most cases, FELIPE MAPOY and ARTEMIO ZAMORA, defendants-appellants.
they are manned by sophisticated officers with tried management skills and (G.R. No. L-27897 December 2, 1927)
legal experts with practiced eye on legal problems. Each party to a corporate
transaction is expected to act with utmost candor and fairness and, thereby FACTS: The present case was filed and tried on the following facts:
allow a reasonable proportion between benefits and expected burdens. This 1. Petitioner Western Equipment and Supply Company, through its duly
is a norm which should be observed where one or the other is a foreign authorized agent, the plaintiff, Felix Reyes, applied to the defendant
entity venturing in a global market. Director of Bureau of Commerce and Industry (BCI) for the issuance of
a license to engage in business in the Philippine Islands which was
As observed by this Court in TOP-WELD (supra), viz: granted on Aug. 23, 1926.
The parties are charged with knowledge of the existing law at the time they 2. On the other hand, Western Electric Company, Inc, also organized and
enter into a contract and at the time it is to become operative. (Twiehaus v. existing under the laws of Nevada, was not issued such license but it
Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person was alleged that it has never engaged in business herein.
is presumed to be more knowledgeable about his own state law than his alien
or foreign contemporary. In this case, the record shows that, at least, 3. That a Philippine corporation known as Electric Supply Company, Inc.,
petitioner had actual knowledge of the applicability of R.A. No. 5455 at the where defendant Henry Herman was president, has been importing the
time the contract was executed and at all times thereafter. This conclusion is manufactures of plaintiff Western Electric Company, Inc.
compelled by the fact that the same statute is now being propounded by the
petitioner to bolster its claim. We, therefore sustain the appellate court's view 4. That defendant Henry Herman signed and filed AOI with the defendant
that "it was incumbent upon TOP-WELD to know whether or not IRTI and Fidel Reyes, as Director of BCI, with the intention to organize a domestic
ECED were properly authorized to engage in business in the Philippines when corporation to be known as ―Western Electric Company, Inc.‖ for the
they entered into the licensing and distributorship agreements." The very purpose, among others things, of manufacturing, buying, selling and
purpose of the law was circumvented and evaded when the petitioner dealing generally in electrical and telephone apparatus and supplies‖ in
entered into said agreements despite the prohibition of R.A. No. 5455. The violation of a trademark over ―Western Electric‖ existing in Washington,
parties in this case being equally guilty of violating R.A. No. 5455, they are in DC.
pari delicto, in which case it follows as a consequence that petitioner is not
entitled to the relief prayed for in this case. The lower court decided in favor of plaintiffs.
The doctrine of lack of capacity to sue based on the failure to ISSUE: WON plaintiff corporation can maintain an action to restraint
acquire a local license is based on considerations of sound public residents and inhabitants of the Philippines from organizing a corporation,
policy. The license requirement was imposed to subject the foreign when said inhabitants have knowledge of the existence of such foreign
corporation doing business in the Philippines to the jurisdiction of its courts. corporation?
It was never intended to favor domestic corporations who enter
into solitary transactions with unwary foreign firms and then HELD: Yes. In the case of Marshall-Wells Co. vs. Henry W. Elser & Co. (46
repudiate their obligations simply because the latter are not Phil., 70, 76), this court held:
licensed to do business in this country.
The noncompliance of a foreign corporation with the statute may be
In Antam Consolidated Inc. vs. Court of Appeals, et al. we expressed our pleaded as an affirmative defense. Thereafter, it must appear from the
chagrin over this commonly used scheme of defaulting local companies which evidence, first, that the plaintiff is a foreign corporation, second, that it is
are being sued by unlicensed foreign companies not engaged in business in doing business in the Philippines, and third, that it has not obtained the
the Philippines to invoke the lack of capacity to sue of such foreign proper license as provided by the statute.
companies. Obviously, the same ploy is resorted to by ASPAC to prevent the
injunctive action filed by ITEC to enjoin petitioner from using knowledge If it had been stipulated that the plaintiff, Western Electric Company, Inc.,
possibly acquired in violation of fiduciary arrangements between the parties. had been doing business in the Philippine Islands without first obtaining a
license, another and a very different question would be presented. That
By entering into the "Representative Agreement" with ITEC, Petitioner is company is not here seeking to enforce any legal or contract rights arising
charged with knowledge that ITEC was not licensed to engage in business
Private respondent filed a motion to dismiss on the ground that petitioner Rights of Foreign Registrants. — Persons who are nationals of, domiciled
had no capacity to sue which was denied. On appeal, the CA reversed the in, or have a bona fide or effective business or commercial establishment
trial court. in any foreign country, which is a party to an international convention or
treaty relating to marks or tradenames on the represssion of unfair
ISSUE: WON petitioner had capacity to sue? competition to which the Philippines may be party, shall be entitled to the
benefits and subject to the provisions of this Act ...
HELD: Yes. Petitioner maintains that it has substantially complied with the
requirements of Section 21-A of Republic Act R.A. No. 166, as amended. Tradenames of persons described in the first paragraph of this section shall
According to the petitioner, its complaint specifically alleged that it is not be protected without the obligation of filing or registration whether or not
doing business in the Philippines and is suing under the said Repulbic Act; they form part of marks.
that Section 21-A thereof provides that "the country of which the said
corporation or juristic person is a citizen, or in which it is domiciled, by treaty, We, therefore, hold that the petitioner had the legal capacity to file the action
convention or law, grants a similar privilege to corporate or juristic persons of below.
the Philippines" but does not mandatorily require that such reciprocity
between the Federal Republic of Germany and the Philippines be pleaded; SUING FOR VIOLATION OF THE PENAL CODE AND AGENT DOING
that such reciprocity arrangement is embodied in and supplied by the Union BUSINESS UNDER ITS OWN NAME
Convention for the Protection of Industrial Property Paris Convention) to
which both the Philippines and Federal Republic of Germany are signatories LA CHEMISE LACOSTE, S. A., petitioner,
and that since the Paris 'Convention is a treaty which, pursuant to our vs.
Constitution, forms part of the law of the land, our courts are bound to take HON. OSCAR C. FERNANDEZ, Presiding Judge of Branch XLIX,
judicial notice of such treaty, and, consequently, this fact need not be Regional Trial Court, National Capital Judicial Region, Manila and
averred in the complaint. GOBINDRAM HEMANDAS, respondents.
(G.R. No. L-63796-97; May 2, 1984)
We agree.
GOBINDRAM HEMANDAS SUJANANI, petitioner,
In the leading case of La Chemise Lacoste, S.A .v. Fernandez, (129 SCRA vs.
373), we ruled: HON. ROBERTO V. ONGPIN, in his capacity as Minister of Trade and
Industry, and HON. CESAR SAN DIEGO, in his capacity as Director of
But even assuming the truth of the private respondents allegation that the Patents, respondents
petitioner failed to allege material facto in its petition relative to capacity to (G.R. No. L-65659 May 2l, 1984)
sue, the petitioner may still maintain the present suit against respondent
Hernandes. As early as 1927, this Court was, and it still is, of the view that FACTS: Petitioner, a corporation organized and existing under the laws of
a foreign corporation not doing business in the Philippines needs France and not doing business in the Philippines, filed with the NBI a letter-
no license to sue before Philippine courts for infringement of complaint alleging therein the acts of unfair competition being committed by
trademark and unfair competition. Thus, in Western Equipment and respondent Hemandas and requesting their assistance in his apprehension
Supply Co. v. Reyes (51 Phil. 11 5), this Court held that a foreign and prosecution, after Hermandas acquired a patent for the use of ―CHEMISE
corporation which has never done any business in the Philippines and LACOSTE & DEVICE‖.
which is unlicensed and unregistered to do business here, but is widely
and favorably known in the Philippines through the use therein of its NBI filed with the respondent court for two search warrant which was issued
products bearing its corporate and tradename, has a legal right to maintain and for which a motion to quash was filed by Hermandas alleging that his
an action in the Philippines to restrain the residents and inhabitants thereof trademark is different from that of petitioner, which was granted by
from organizing a corporation therein bearing the same name as the respondent court.
foreign corporation, when it appears that they have personal knowledge of
the existence of such a foreign corporation, and it is apparent that the ISSUE: WON petitioner, having a representative, is doing business in the
purpose of the proposed domestic corporation is to deal and trade in the Philippines?
same goods as those of the foreign corporation.
HELD: No. Respondent states that not only is the petitioner not doing
Quoting the Paris Convention and the case of Vanity Fair Mills, Inc. v. T. business in the Philippines but it also is not licensed to do business in the
Eaton, Co. (234 F. 2d 633), this Court further said: Philippines. He also cites the case of Leviton Industries v. Salvador (114
SCRA 420) to support his contention The Leviton case, however, involved a
By the same token, the petitioner should be given the same treatment in complaint for unfair competition under Section 21-A of Republic Act No. 166
the Philippines as we make available to our own citizens. We are obligated which provides:
to assure to nationals of 'countries of the Union' an effective protection
against unfair competition in the same way that they are obligated to Sec. 21 — A. Any foreign corporation or juristic person to which a mark or
similarly protect Filipino citizens and firms. tradename has been registered or assigned under this Act may bring an
action hereunder for infringement, for unfair competition, or false
In the case of of Cerverse Rubber Corporation V. Universal Rubber Products, designation of origin and false description, whether or not it has been
Inc. (174 SCRA 165), we likewise re-aafirmed our adherence to the Paris licensed to do business in the Philippines under Act numbered Fourteen
Convention: Hundred and Fifty-Nine, as amended, otherwise known as the Corporation
Law, at the time it brings the complaint; Provided, That the country of
The ruling in the aforecited case is in consonance with the Convention of which the said foreign corporation or juristic person is a citizen, or in which
Converse Rubber Corporation v. Universal Rubber Products, Inc. (I 47 it is domiciled, by treaty, convention or law, grants a similar privilege to
SCRA 165), we likewise re-affirmed our adherence to the Paris Convention: corporate or juristic persons of the Philippines.
the Union of Paris for the Protection of Industrial Property to which the
Philippines became a party on September 27, 1965. Article 8 thereof We held that it was not enough for Leviton, a foreign corporation organized
provides that 'a trade name [corporation name] shall be protected in all and existing under the laws of the State of New York, United States of
the countries of the Union without the obligation of filing or registration, America, to merely allege that it is a foreign corporation. It averred in
whether or not it forms part of the trademark.' Paragraph 2 of its complaint that its action was being filed under the
In the present case, however, the petitioner is a foreign corporation not ISSUE3: WON petitioner has a right to maintain a suit for infringement of
doing business in the Philippines. The marketing of its products in the trademarks?
Philippines is done through an exclusive distributor, Rustan Commercial
Corporation. The latter is an independent entity which buys and then markets HELD: Yes. We are moreover recognizing our duties and the rights of foreign
not only products of the petitioner but also many other products bearing states under the Paris Convention for the Protection of Industrial Property to
equally well-known and established trademarks and tradenames. In other which the Philippines and France are parties. We are simply interpreting and
words, Rustan is not a mere agent or conduit of the petitioner. enforcing a solemn international commitment of the Philippines embodied in
a multilateral treaty to which we are a party and which we entered into
The rules and regulations promulgated by the Board of Investments pursuant because it is in our national interest to do so.
to its rule-making power under Presidential Decree No. 1789, otherwise
known as the Omnibus Investment Code, support a finding that the petitioner The Paris Convention provides in part that:
is not doing business in the Philippines. Rule I, Sec. 1 (g) of said rules
and regulations defines "doing business" as one" which includes, inter alia: ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the
(1) ... A foreign firm which does business through middlemen protection of industrial property, enjoy in all the other countries of the
acting on their own names, such as indentors, commercial brokers or Union the advantages that their respective laws now grant, or may
commission merchants, shall not be deemed doing business in the hereafter grant, to nationals, without prejudice to the rights specially
Philippines. But such indentors, commercial brokers or commission provided by the present Convention. Consequently, they shall have the
merchants shall be the ones deemed to be doing business in the same protection as the latter, and the same legal remedy against any
Philippines. infringement of their rights, provided they observe the conditions and
formalities imposed upon nationals.
(2) Appointing a representative or distributor who is domiciled in
the Philippines, unless said representative or distributor has an xxx xxx xxx
independent status, i.e., it transacts business in its name and for its
account, and not in the name or for the account of a principal. Thus, ARTICLE 6
where a foreign firm is represented by a person or local company which (1) The countries of the Union undertake, either administratively if their
does not act in its name but in the name of the foreign firm the latter is legislation so permits, or at the request of an interested party, to refuse or
doing business in the Philippines. to cancel the registration and to prohibit the use of a trademark which
xxx xxx xxx constitutes a reproduction, imitation or translation, liable to create
confusion, of a mark considered by the competent authority of the country
Applying the above provisions to the facts of this case, we find and of registration or use to be well-known in that country as being already the
conclude that the petitioner is not doing business in the Philippines. mark of a person entitled to the benefits of the present Convention and
Rustan is actually a middleman acting and transacting business in its own used for Identical or similar goods. These provisions shall also apply when
name and or its own account and not in the name or for the account of the the essential part of the mark constitutes a reproduction of any such well-
petitioner. known mark or an imitation liable to create confusion therewith.
ISSUE2: WON the criminal case can be maintained even if the foreign xxx xxx xxx
corporation is doing business without a license?
EFFECT OF NON-PLEADING: If the dismissal of the case is based on the The orders appealed from are affirmed, with costs against plaintiffs-
failure of the foreign corporation to aver its capacity to sue, would not, appellants
however, bar the institution of the same action, dismissal should not be
allowed, especially so if it would be an idle, circuitous ceremony considering OLYMPIA BUSINESS MACHINES CO. (PHIL.) INC. and CALIFORNIA
the absence of any meritorious substantial defense of the defendant. INSURANCE CO., LTD., petitioners,
Technical rules should not be accorded undue importance to frustrate and vs.
defeat a plainly valid claim (Olympia Business Machines vs. E. Razon, Inc.) E. RAZON, INC., TOYO LINE, LTD., and SEA BRIDGE CONTAINER
SHIPPING LINES, INC., respondents.
COMPLAINT BASED ON VIOLATION OF RPC OR THE CORPORATION (G.R. No. 75631; October 28, 1987)
IS MERELY DEFENDING ITSELF: averment of capacity to sue is not
likewise necessary as laid down in the case of Chemise Lacoste vs. FACTS: Olympia Office Machines, Ltd., a foreign corporation with offices at
Fernandez, or when the foreign corporation is not suing or maintaining a suit Hongkong, shipped 300 portable typewriters to its sister company in Manila,
but is merely defending itself from one filed against it (Times, Inc. vs. Olympia Business Machines Company (Phil.), Inc., such shipment insured
Reyes). with California Insurance Co., Ltd. another foreign corporation.
ATLANTIC MUTUAL INSURANCE COMPANY and CONTINENTAL The typewriters were discharged at North Harbor, Manila into the custody of
INSURANCE COMPANY, plaintiffs and appellants, the carrier’s agent which in turn turned it over to E. Razon, Inc. While in the
vs. latter’s possession, part of the shipment was stolen. California Insurance was
CEBU STEVEDORING CO., INC., defendant and appellee subrogated to the claim for loss after paying Olympia (Phil).
(G.R. No. L-18961; August 31, 1966)
FACTS: Herein respondents Antonio Villegas and Juan Ponce Enrile sought to The plaintiff-appellant Grey, holder of 57 shares (which is less than 3% of the
recover from herein petitioner damages upon an alleged libel arising from a outstanding capital stock of defendant corporation), was denied access to the
books and records of the company because, as alleged, the laws of New York
(a) That the stockholder of a corporation in New York has the right to 1. Failure to file its annual report or pay any fees as required by this Code;
inspect its books and records if it can be shown that he seeks information
for an honest purpose (14 C. J., 853), or to protect his interest as 2. Failure to appoint and maintain a resident agent in the Philippines as
stockholder. (In re Steinway, 159 N. Y., 250; 53 N. E., 1103; 45 L. R. A., required by this Title;
461 [aff. 31 App. Div., 70; 52 N. Y. S., 343]).
3. Failure, after change of its resident agent or of his address, to submit to
(b) That said right to examine and inspect the books of the corporation the Securities and Exchange Commission a statement of such change as
must be exercised in good faith, for a specific and honest purpose, and not required by this Title;
to gratify curiosity, or for speculative or vexatious purposes. (14 C. J., 854,
855.) 4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or by-
The appellant has made no effort to prove or even allege that the information laws or of any articles of merger or consolidation within the time prescribed
he desired to obtain through the examination and inspection of defendant's by this Title;
books was necessary to protect his interests as stockholder of the
corporation, or that it was for a specific and honest purpose, and not to 5. A misrepresentation of any material matter in any application, report,
gratify curiosity, nor for speculative or vexatious purposes. affidavit or other document submitted by such corporation pursuant to this
Title;
In view of the foregoing, we affirm the judgment of the lower court, with
costs against the appellant. 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
H. AMENDMENTS TO THE ARTICLES OF INCORPROATION
7. Transacting business in the Philippines outside of the purpose or purposes
Sec. 130. Amendments to articles of incorporation or by-laws of for which such corporation is authorized under its license;
foreign corporations. - Whenever the articles of incorporation or by-laws
of a foreign corporation authorized to transact business in the Philippines are 8. Transacting business in the Philippines as agent of or acting for and in
amended, such foreign corporation shall, within sixty (60) days after the behalf of any foreign corporation or entity not duly licensed to do business in
amendment becomes effective, file with the Securities and Exchange the Philippines; or
Commission, and in the proper cases with the appropriate government
agency, a duly authenticated copy of the articles of incorporation or by-laws, 9. Any other ground as would render it unfit to transact business in the
as amended, indicating clearly in capital letters or by underscoring the Philippines.
change or changes made, duly certified by the authorized official or officials
of the country or state of incorporation. The filing thereof shall not of itself Sec. 135. Issuance of certificate of revocation. - Upon the revocation of
enlarge or alter the purpose or purposes for which such corporation is any such license to transact business in the Philippines, the Securities and
authorized to transact business in the Philippines. Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
I. AMENDMENT OF LICENSE cases.
Sec. 131. Amended license. - A foreign corporation authorized to transact The Securities and Exchange Commission shall also mail to the corporation at
business in the Philippines shall obtain an amended license in the event it its registered office in the Philippines a notice of such revocation
changes its corporate name, or desires to pursue in the Philippines other or accompanied by a copy of the certificate of revocation.
additional purposes, by submitting an application therefor to the Securities
and Exchange Commission, favorably endorsed by the appropriate L. WITHDRAWAL OF FOREIGN CORPORATIONS
government agency in the proper cases.
Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws
J. MERGER/CONSOLIDATION and regulations, a foreign corporation licensed to transact business in the
Sec. 139. Incorporation and other fees. - The Securities and Exchange Sec. 145. Amendment or repeal. - No right or remedy in favor of or
Commission is hereby authorized to collect and receive fees as authorized by against any corporation, its stockholders, members, directors, trustees, or
law or by rules and regulations promulgated by the Commission. officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either
Sec. 140. Stock ownership in certain corporations. - Pursuant to the by the subsequent dissolution of said corporation or by any subsequent
duties specified by Article XIV of the Constitution, the National Economic and amendment or repeal of this Code or of any part thereof.
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by Sec. 146. Repealing clause. - Except as expressly provided by this Code,
business or industry to frustrate the provisions thereof or of applicable laws, all laws or parts thereof inconsistent with any provision of this Code shall be
and shall submit to the Batasang Pambansa, whenever deemed necessary, a deemed repealed.
report of its findings, including recommendations for their prevention or
correction. Sec. 147. Separability of provisions. - Should any provision of this Code
or any part thereof be declared invalid or unconstitutional, the other
Maximum limits may be set by the Batasang Pambansa for stockholdings in provisions, so far as they are separable, shall remain in force.
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 Sec. 148. Applicability to existing corporations. - All corporations
related to each other by consanguinity or affinity or by close business lawfully existing and doing business in the Philippines on the date of the
interests, or whenever it is necessary to achieve national objectives, prevent effectivity of this Code and heretofore authorized, licensed or registered by
illegal monopolies or combinations in restraint or trade, or to implement the Securities and Exchange Commission, shall be deemed to have been
national economic policies declared in laws, rules and regulations designed to authorized, licensed or registered under the provisions of this Code, subject
promote the general welfare and foster economic development. to the terms and conditions of its license, and shall be governed by the
provisions hereof: Provided, That if any such corporation is affected by the
In recommending to the Batasang Pambansa corporations, business or new requirements of this Code, said corporation shall, unless otherwise
industries to be declared vested with a public interest and in formulating herein provided, be given a period of not more than two (2) years from the
proposals for limitations on stock ownership, the National Economic and effectivity of this Code within which to comply with the same.
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the Sec. 149. Effectivity. - This Code shall take effect immediately upon its
extent of Filipino ownership, the labor intensity of the activity, the export approval.
potential, as well as other factors which are germane to the realization and
promotion of business and industry.