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San Beda College of Law

85
MEMORY AID IN COMMERCIAL LAW

CORPORATION CODE
(B.P. Blg. 68, effective May 1, 1980)

I. GENERAL PROVISIONS its sole liabilities. (Creese vs.

CORPORATION CA, 93 SCRA 483)
 An artificial being created by 2. Right to
operation of law having the right of bring actions – may bring civil
succession, and the powers, attributes and criminal actions in its own
and properties expressly authorized by name in the same manner as
law and incident to its existence. (Sec. natural persons. (Art. 46, Civil
2) Code)
3. Right to
ATTRIBUTES OF A CORPORATION acquire and possess property –
1. It is an artificial being. property conveyed to or
2. It is created by operation of law. acquired by the corporation is in
3. It enjoys the right of succession. law the property of the
4. It has the powers, attributes and corporation itself as a distinct
properties expressly authorized by legal entity and not that of the
law or incident to its existence. stockholders or members. (Art.
44(3), Civil Code)
THEORIES ON THE FORMATION OF A 4. Acquisition
CORPORATION: of court of jurisdiction – service
1. Concession Theory – espouses that a of summons may be made on the
corporation is an artificial creature president, general manager,
without any existence until it has corporate secretary, treasurer or
received the imprimatur of the state in-house counsel. (Sec. 11, Rule
acting according to law, through the 14, Rules of Court).
SEC. (Tayag vs. Benguet 5. Changes in
Consolidated, Inc., 26 SCRA 242) individual membership – remains
2. Theory of corporate enterprise or unchanged and unaffected in its
economic unit – espouses that the identity by changes in its
corporation is not merely an individual membership. (The
artificial being, but more of an Corporation Code of the
aggregation of persons doing Philippines Annotated, Hector
business, or an underlying business de Leon, 2002 ed.)
unit. (Philippine Corporate Law, 6. Entitlement
Cesar Villanueva, 2001 ed.) to constitutional guaranties:
3. Genossenschaft Theory – treats a a. Due process (Albert vs.
corporation as “ the reality of the University Publishing, 13
group as a social and legal entity, SCRA 84)
independent of state recognition and b. Equal protection of the law
concession”. (Tayag vs. Benguet (Smith, Bell & Co. vs.
Consolidated, Inc., 26 SCRA 242) Natividad, 40 Phil. 136)
c. Protection against
DOCTRINE OF SEPARATE PERSONALITY unreasonable searches and
 A corporation has a juridical seizures. (Stonehill vs.
personality separate and distinct from Diokno, 20 SCRA 383)
that of its stockholders or members.  A corporation is not
 Used for purposes of convenience and entitled to invoke the right
to subserve the ends of justice. against self-incrimination.
 Consequences/significance: (Bataan Shipyard vs. PCGG)
1. Liability for 7.Liability for torts – a corporation
acts or contracts – obligations is liable whenever a tortuous act
incurred by a corporation, acting is committed by an officer or
through its authorized agents are agent under the express

COMMERCIAL LAW COMMITTEE

 CHAIRPERSON: Garny Luisa Alegre  ASST. CHAIRPERSON:Jayson O’S Ramos  EDP: Beatrix I. Ramos  SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario
(Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel
Gatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)
86 2005 CENTRALIZED BAR OPERATIONS

direction or authority of the  Rules:

stockholders or members acting a. There must have been
as a body, or, generally, from fraud or evil motive in
the directors as the governing the affected transaction
body. (PNB vs. CA, 83 SCRA 237) and the mere proof of
8. A corporation is not entitled to control of the
moral damages because it has no corporation by itself
feelings, no emotions, no senses. would not authorize
(ABS-CBN vs. Court of Appeals) piercing.
9. Liability for Crimes – since a b. The main action should
corporation is a mere legal seek for the
fiction, it cannot be held liable enforcement of
for a crime committed by its pecuniary claims
officers, since it does not have pertaining to the
the essential element of malice; corporation against
in such case the responsible corporate officers or
officers would be criminally stockholders.
liable. (People vs. Tan Boon 2. Alter Ego Cases – when the
Kong, 54 Phil.607) corporate entity is merely a farce
since the corporation is an alter ego,
DOCTRINE OF PIERCING THE VEIL OF business conduit or instrumentality
CORPORATE ENTITY of a person or another corporation.
 Requires the court to see through the  Rules:
protective shroud which exempts its a. It applies because of the
stockholders from liabilities that they direct violation of a central
ordinarily would be subject to, or corporate law principle of
distinguishes a corporation from a separating ownership from
seemingly separate one, were it not for management.
the existing corporate fiction. (Lim vs. b. If the stockholders do not
CA, 323 SCRA 102) respect the separate entity,
 Rules: (Philippine Corporate Law, others cannot also be
Cesar Villanueva, 2001 ed.) expected to be bound by the
1. has only a res judicata effect separate juridical entity.
2. to prevent wrong or fraud and c. Applies even when there are
not available for other purposes no monetary claims sought
3. judicial prerogative only to be enforced.
4. must be with necessary and with 3. Equity cases – when piercing the
factual basis corporate fiction is necessary to
 When directors and officers are achieve justice or equity.
unable to compensate a party for a
personal obligation, it is far-fetched to INSTRUMENTALITY / ALTER EGO RULE
allege that a corporation is perpetuating  Where one corporation is so organized
fraud or promoting injustice, and and controlled and its affairs are
thereby could be held liable therefor by conducted so that it is, in fact, a mere
piercing the corporate veil. (Francisco instrumentality or adjunct of the other,
Motors, Inc. vs. CA, G.R. No. 100812, the fiction of the corporate entity of the
June 25, 1999) “instrumentality” may be disregarded.
 Requisites:
3 CLASSES OF PIERCING (Philippine 1. There must be control,
Corporate Law, Cesar Villanueva, 2001 not mere majority or complete
ed.) stock control, but complete
domination, not only of finances,
1. Fraud Cases – when a corporation is but of policy, and business
used as a cloak to cover fraud, or to practice in respect to the
do wrong. transaction attacked so that the
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
87
MEMORY AID IN COMMERCIAL LAW

corporate entity as to this A partner as such can The suit against a

transaction had, at that time, no sue a co-partner who member of the
separate mind, will or existence mismanages board of directors
of its own (control); or trustees who
mismanages must
2. Such control must
be in the name of
have been used by the defendant the corporation
to commit fraud or wrong, to
perpetrate the violation of a 7. Right of succession
statutory or other positive duty, Partnership has no Corporation has
or dishonest and unjust act in right of succession right of succession
contravention of plaintiff’s legal
rights (breach of duty); and 8. Extent of liability to third persons
3. Such control and Partners are liable Stockholders are
breach of duty must proximately personally and liable only to the
cause the injury to the plaintiff. subsidiarily extent of the
(sometimes shares subscribed
(Concept Builders, Inc. vs. NLRC,
solidarily) for by them
257 SCRA, 149) partnership debts to
third persons
Partnership Corporation 9. Transferability of interest
1. Creation Partner cannot Stockholder has
Created by mere Created by law or transfer his interest generally the right
agreement of the by operation of law in the partnership so to transfer his
parties as to make the shares without
2. Number of incorporators transferee a partner prior consent of
May be organized by Requires at least without the the other
at least two persons five incorporators unanimous consent of stockholders
(except a all the existing because
corporation sole) partners because the corporation is not
partnership is based based on this
3. Commencement of juridical on the principle of principle
personality delectus personarum
Acquires juridical Acquires juridical
personality from the personality from 10. Term of existence
moment of execution the date of partnership may be corporation may
of the contract of issuance of the established for any not be formed for a
partnership certificate of period of time term in excess of
incorporation by stipulated by the 50 years extendible
the Securities and partners to not more than
Exchange 50 years in any one
Commission instance
4. Powers 11. Firm name
Partnership Corporation can Limited partnership corporation may
may exercise any exercise only the is required by law to adopt any name
power authorized by powers expressly add the word “Ltd.” provided it is not
the partners granted by law or To its name the same as or
(provided it is not implied from those similar to any
contrary to law, granted or incident registered firm
morals, good to its existence name
customs, public 12. Dissolution
order, public policy) may be dissolved at can only be
5. Management any time by any or all dissolved with the
When management is The power to do of the partners consent of the
not agreed upon, business and State
every partner is an manage its affairs
agent of the is vested in the 13. Governing Law
partnership board of directors governed by the Civil governed by the
or trustees Code Corporation Code

6. Effect of mismanagement

COMMERCIAL LAW COMMITTEE

 The special right or privilege

conferred upon an existing corporation
to the business for which it was created.
Example, use of the streets of a
municipality to lay pipes or tracks, or
ADVANTAGES VIS-À-VIS DISADVANTAGES operation of a messenger and express
OF A BUSINESS CORPORATION (The delivery service.
Corporation Code of the Philippines
Annotated, Hector de Leon, 2002 ed.) PRIMARY SECONDARY
Refers to the Refers to the exercise
ADVANTAGES DISADVANTAGES franchise of being or of rights. Example:
1.has a legal 1. complica- existing as a right of eminent
capacity to ted in corporation domain
act and formation Vested in the Vested in the
contract as a and individuals who corporation after its
distinct unit manageme compose the incorporation and not
in its own nt corporation upon the individuals
name 2. high cost who compose the
2. continuity of of corporation.
existence formation Cannot be sold or May be sold or
3. its credit is and transferred because transferred; subject
strengthened operations it is inseparable to sale on execution,
by its 3. its credit is from the corporation subject to levy.
continuity of weakened itself.
existence by the
4. centralized limited
CLASSES OF CORPORATION
management liability
in the board feature 1. AS TO ORGANIZERS
of directors. 4. lack of a. public – by State only; and
5. its creation, personal b.private – by private persons alone
management, element. or with the State.
organization 5. greater 2. AS TO FUNCTIONS
and degree of a. public – government of a portion
dissolution governmen of the territory; and
are tal b. private – usually for profit-
standardized supervision
making
as they are 6. manage-
governed ment and 3. AS TO GOVERNING LAW
under one control are a. public – Special Laws;
general separated and
incorporation from b. private – Law on Private
law. ownership. Corporations
6. limited 7. Stockhol- 4. AS TO LEGAL STATUS
liability ders have a. De jure corporation – organized
7. shareholders little voice in accordance with the
are not the in the
requirements of law.
general conduct of
agents of the the  b. De facto corporation – organized
business business. with a colorable compliance with
8. transferability of the requirements of a valid law.
shares Its existence cannot be inquired
collaterally. Such inquiry may be
FRANCHISES OF CORPORATION made by the Solicitor General in
1. Primary or corporate a quo warranto proceeding.
franchise/General Franchise (Sec. 20)
 The right or privilege granted by the   Requisites:
State to individuals to exist and act as a 1. The existence of a valid
corporation after its incorporation. law under which it may be
2. Secondary or special franchise incorporated;
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
89
MEMORY AID IN COMMERCIAL LAW

2. A bona fide attempt in management. It is one that holds

good faith to incorporate stocks in other companies for
under such law; purposes of control rather than
3. Actual use or exercise in for mere investment.
good faith of corporate b. Subsidiary Corporation - one
powers; and which is so related to another
4. Issuance of a certificate corporation that the majority of
of incorporation by the SEC its directors can be elected
as a minimum requirement directly or indirectly by such
of continued good faith. other corporation. (The
 The only difference Corporation Code of the
between a de facto Philippines Annotated, Hector
corporation and a de jure de Leon, 2002 ed.)
corporation is that a de jure c. Affiliates - company which is
corporation can successfully subject to common control of a
resist a suit by a state mother holding company and
brought to challenge its operated as part of the system.
existence; a de facto d. Parent and Subsidiary
corporation cannot sustain Corporation - separate entities
its right to exist. with power to contract with
c. Corporation by estoppel – group each other. The board of
of persons that assumes to act as directors of the parent company
a corporation knowing it to be determines its representatives to
without authority to do so, and attend and vote in the
enters into a transaction with a stockholder’s meeting of its
third person on the strength of subsidiary. The stockholders of
such appearance. It cannot be the parent company demand
permitted to deny its existence representation in the board
in an action under said meetings of its subsidiary.
transaction. (Sec. 21) It is 7. AS TO PLACE OF INCORPORATION
neither de jure nor de facto. a. Domestic corporation- a
d. Corporation by prescription – corporation formed, organized,
one which has exercised or existing under Philippine laws.
corporate powers for an b. Foreign corporation – a
indefinite period without corporation formed, organized,
interference on the part of the or existing under any laws other
sovereign power, e.g. Roman than those of the Philippines.
Catholic Church. (Sec. 123)
5. AS TO EXISTENCE OF SHARES OF
STOCK ONE-MAN CORPORATION
a. Stock corporation – a corporation  A corporation wherein all or
(1) whose capital stock is divided substantially all of the stocks is held
into shares and (2) which is directly or indirectly by one person.
authorized to distribute to However, it should still follow the
shareholders dividends or formal requirements of a
allotments of the surplus profits corporation (e.g. number of
on the basis of the shares held. incorporators, board of directors
(Sec. 3) composed of stockholders owning
b. Non-stock corporation – does not shares in a nominal capacity) in
issue stocks nor distribute order to validly enjoy the attributes
dividends to their members. of the corporation, so as to avoid
6. AS TO RELATIONSHIP OF the application of the doctrine of
MANAGEMENT AND CONTROL piercing the veil of corporate
a. Holding Corporation - it is one entity.
which controls another as a
subsidiary by the power to elect

COMMERCIAL LAW COMMITTEE

TESTS TO DETERMINE NATIONALITY OF signed the Articles and acknowledged

CORPORATIONS the same before a notary public. They
1. INCORPORATION TEST – determined have no powers beyond those vested in
by the state of incorporation, regardless them by the statute.
of the nationality of the stockholders.  Qualifications:
2. DOMICILE TEST – determined by the 1. natural person;
state where it is domiciled. 2. not less than 5 but not
 The domicile of a corporation is the more than 15;
place fixed by the law creating or 3. of legal age;
recognizing it; in the absence thereof, it 4. majority must be
shall be understood to be the place residents of the Philippines; and
where its legal representation is 5. each must own or
established or where it exercise its subscribe to at least one share.
principal functions. (Art. 51, NCC) (Sec. 10)
3. CONTROL TEST – determined by the GENERAL RULE: Only natural persons
nationality of the controlling can be incorporators.
stockholders or members. This test is EXCEPTION: When otherwise allowed
applied in times of war. Also known as by law, e.g., Rural Banks Act of 1992,
the WARTIME TEST. where incorporated cooperatives are
allowed to be incorporators of rural
“PHILIPPINE NATIONAL” UNDER THE banks. Note: However, it is undeniable
FOREIGN INVESTMENT ACT OF 1991 that corporations can be corporators.
(R.A. No. 7042): c. Stockholders – owners of shares of
1. A corporation organized under the stock in a stock corporation
laws of the Philippines of which at least d. Members – corporators of a
60% of the outstanding capital stock corporation which has no capital stock
entitled to vote is owned and held by
Filipino citizens; INCORPORATORS CORPORATORS
2. A foreign corporation licensed as signatory to the stockholder (stock
doing business in the Philippines of Articles of corporation) or
which 100% of the outstanding capital Incorporation member (non-stock
stock entitled to vote is wholly owned by corporation)
Filipinos; and fait accompli; they may cease to
 However, it provides that where a accomplished fact be such if they
(the Articles of subsequently lose
corporation and its non-Filipino Incorporation cannot their qualifications
stockholders own stocks in a SEC- be amended to
registered enterprise, at least 60% of the replace them)
capital stock outstanding and entitled to number is limited to no restriction as to
vote of both corporations and at least 5-15 number
60% of the members of the board of must have contractual may be such
directors of both corporations must be capacity through a guardian
Filipino citizens (double 60% rule).
NOTE: The law applies the control test OTHER COMPONENTS
both with respect to the ownership of a. Promoter - A person who, acting alone
shares entitled to vote and the or with others, takes initiative in
membership in the board of directors. founding and organizing the business or
enterprise of the issuer and receives
COMPONENTS OF A CORPORATION consideration therefor.
a. Corporators – those who compose a He is an agent of the incorporators but
corporation, whether as stockholders or not of the corporation.
members Contracts by the promoter for and in
b. Incorporators - They are those behalf of a proposed corporation
mentioned in the Articles of generally bind only him, subject to and
Incorporation as originally forming and to the extent of his representations, and
composing the corporation, having not the corporation, unless and until
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
91
MEMORY AID IN COMMERCIAL LAW

after these contracts are ratified, and in the certificates of stock

expressly or impliedly, by its Board of representing such shares;
Directors/Trustees. c. Redeemable shares may be
b. Subscriber – persons who have agreed deprived of voting rights in the
to take and pay for original, unissued articles of incorporation, unless
shares of a corporation formed or to be otherwise provided in the Code.
formed.  Redeemable shares may be
c. Underwriter – a person who redeemed, regardless of the existence of
guarantees on a firm commitment and/ unrestricted retained earnings (Sec. 8),
or declared best effort basis the provided that the corporation has, after
distribution and sale of securities of any such redemption, sufficient assets in its
king by another company. (Sec. 3 R.A. books to cover debts and liabilities
8799) inclusive of capital stock.
4. TREASURY SHARES
CLASSIFICATION OF SHARES  Shares that have been earlier issued
1. COMMON SHARES as fully paid and have thereafter been
 The basic class of stock ordinarily and acquired by the corporation by purchase,
usually issued without extraordinary donation, and redemption or through
rights and privileges, and the owners some lawful means. (Sec. 9)
thereof are entitled to a pro rata share  If purchased from stockholders: The
in the profits of the corporation and in transaction in effect is a return to the
its assets upon dissolution and, likewise, stockholders of the value of their
in the management of its affairs without investment in the company and a
preference or advantage whatsoever. reversion of the shares to the
2. PREFERRED SHARES corporation. The corporation must have
 Those issued with par value, and surplus profits with which to buy the
preferences either with respect to (a) shares so that the transaction will not
assets after dissolution, (b) distribution cause an impairment of the capital.
of dividends, or both, and other If acquired by donation from the
preferences. stockholders: The act would amount to a
Limitations: surrender of their stock without getting
a. If deprived of voting rights, it shall back their investments that are instead,
still be entitled to vote on matters voluntarily given to the corporation.
enumerated in Section 6 paragraph 6.  Treasury shares need not be sold at
b. Preference must not be violative of par or issued value but may be sold at
the Code. the best price obtainable, provided it is
c. May be issued only with a stated par reasonable. When treasury shares are
value. sold below its par or issued value, there
d. The board of directors may fix the can be no watering of stock because
terms and conditions only when so such watering contemplates an original
authorized by the articles of issuance of shares.
incorporation and such terms and  Treasury shares have no voting rights
conditions shall be effective upon filing a as long as they remain in treasury
certificate thereof with the SEC. (uncalled and subject to reissue).
3. REDEEMABLE SHARES Reason: A corporation cannot in any
 Those which permit the issuing proper sense be a stockholder in itself
corporation to redeem or purchase its and equal distribution of voting rights
own shares. will be effectively lost.
 Limitations:  Neither are treasury shares entitled to
a. Redeemable shares may be issued dividends or assets because dividends
only when expressly provided for in cannot be declared by a corporation to
the articles of incorporation; itself.
b. The terms and conditions 5. FOUNDERS' SHARE
affecting said shares must be stated  Shares issued to organizers and
both in the articles of incorporation promoters of a corporation in

COMMERCIAL LAW COMMITTEE

consideration of some supposed right or as spurious stock. Its issuance is

property. considered null and void.
 Shares classified as such in the 10. WATERED STOCK
articles of incorporation which may be  A stock issued not in exchange for its
given special preference in voting rights equivalent either in cash, property,
and dividend payments. But if an share, stock dividends, or services.
exclusive right to vote and be voted for  “Water” in the stock represents the
as director is granted, this privilege is difference between the fair market
subject to approval by the SEC, and value at the time of the issuance of the
cannot exceed 5 years from the date of stock and the par or issued value of said
approval. stock. Both par and no par stocks can
6. VOTING SHARES thus be watered stocks.
 Shares with a right to vote. It includes stocks:
7. NON-VOTING SHARES a. Issued without consideration.
 Shares without right to vote. b. Issued as fully paid when the
 The law only authorizes the denial of corporation has received a lesser sum of
voting rights in the case of redeemable money than its par or issued value.
shares and preferred shares, provided c. Issued for a consideration other than
that there shall always be a class or actual cash, the fair valuation of which
series of shares which have complete is less than its par or issued value.
voting rights. d. Issued as stock dividend when there
 These redeemable and preferred are no sufficient retained earnings to
shares, when such voting rights are justify it.
denied, shall nevertheless be entitled to 11. PAR VALUE SHARES
vote on the following fundamental  Shares with a value fixed in the
matters: Key: A2 SI2 MID certificates of stock and the articles of
a. amendment of incorporation.
Articles of Incorporation 12. NO PAR VALUE SHARES
b. adoption and  Shares having no par value but have
amendment of by-laws; issued value stated in the certificate or
c. sale or disposition of articles of incorporation.
all or substantially all  Limitations:
of corporate property; a. No par value shares cannot have
d. incurring, creating or an issued price of less than P5.00;
increasing bonded b. The entire consideration for its
indebtedness; issuance constitutes capital so that no
e. increase or decrease part of it should be distributed as
of capital stock dividends;
f. merger or c. They cannot be issued as
consolidation of capital stock preferred stocks;
g. investments of d. They cannot be issued by banks,
corporate funds in another trust companies, insurance
corporation or another companies, public utilities and
business purpose; and building and loan association;
h. corporate dissolution e. The articles of incorporation
must state the fact that it issued no
8. ESCROW STOCK par value shares as well as the
 Deposited with a third person to be number of said shares;
delivered to a stockholder or his assign f. Once issued, they are deemed
after complying with certain conditions, fully paid and non-assessable. (Sec.
usually payment of full subscription 6)
price. 13. STREET CERTIFICATE
9. OVER-ISSUED STOCK  A stock certificate endorsed by the
 Stock issued in excess of the registered holder in blank and transferee
authorized capital stock. It is also known
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
93
MEMORY AID IN COMMERCIAL LAW

can command its transfer to his name II. INCORPORATION AND ORGANIZATION
from the issuing corporation.
14. CONVERTIBLE SHARE STEPS IN THE CREATION OF A
 A share that is changeable by the CORPORATION
stockholder from one class to another at a. PROMOTION – a number of business
a certain price and within a certain operations peculiar to the commercial
period. world by which a company is generally
15. FRACTIONAL SHARE brought into existence. (18 Am. Jur. 2d
 A share with a value of less than one 647, cited in de Leon p. 116)
full share. b. INCORPORATION
 Steps:
DOCTRINE OF EQUALITY OF SHARES 1. Drafting and execution of Articles of
 Where the articles of incorporation do Incorporation by the incorporators and
not provide for any distinction of the other documents required for
shares of stock, all shares issued by the registration of the corporation
corporation are presumed to be equal 2. Filing with the SEC of the articles of
and enjoy the same rights and privileges incorporation
and are also subject to the same 3. Payment of filing and publication fees
liabilities. (Sec. 6) 4. Issuance by the SEC of the certificate
of incorporation
DEFINITION OF TERMS: c. FORMAL ORGANIZATION AND
1. CAPITAL STOCK OR LEGAL STOCK OR COMMENCEMENT OF THE TRANSACTION
STATED CAPITAL - The amount fixed in OF BUSINESS
the corporate charter to be subscribed  These are conditions subsequent,
and paid in cash, kind or property at the which may be satisfied by substantial
organization of the corporation or compliance in order that a corporation
afterwards and upon which the may legally continue as such.
corporation is to conduct its operation.  Formal organization:
2. CAPITAL – The value of the actual 1. Adoption of By-Laws and filing of the
property or estate of the corporation same with the SEC;
whether in money or property. Its net 2. Election of board of
worth (or stockholder’s equity) is its directors/trustees, and officers;
assets less liabilities. 3. Establishment of principal office;
3. AUTHORIZED CAPITAL STOCK - The 4. Providing for subscription and
capital stock divided into shares with par payment of capital stock.
values. Par value stocks are required in
the case of corporations issuing TERM OF CORPORATE EXISTENCE
preferred shares, as well as in the case  Limitations:
of banks, trust companies, insurance a. The term shall not exceed 50 years in
companies, building and loan any one instance.
associations, and public utilities. It is the b. The amendment is effected before
total amount in the charter, which may the expiration of corporate term, for
be raised by the corporation for its after dissolution by expiration of the
operations. corporate term there is no more
4. SUBSCRIBED CAPITAL STOCK - The corporate life to extend.
total amount of the capital stock c. The extension cannot be made earlier
subscribed whether fully paid or not. than 5 years prior to the expiration date
5. OUTSTANDING CAPITAL STOCK - The unless there are justifiable reasons as
portion of the capital stock issued to determined by the SEC.
subscribers except treasury stocks.
6. STATED CAPITAL – The capital stock CAPITAL STOCK REQUIREMENT
divided into no par value shares.  General Rule: No minimum authorized
7. PAID-UP CAPITAL – The amount paid capital stock as long as the paid-up
by the stockholders on subscriptions capital is not less than P5,000.00
from unissued shares of the corporation. Except:
a. as provided for by special law

COMMERCIAL LAW COMMITTEE

1.  Domestic Insurance t) Teaching

Corporations - P500T capital u) Agriculture
stock; 50% subscribed and the v) Fisheries
balance payable in 12 months. 3. Retail trade enterprises with paid-up
2. Private Development capital of less than
Banks US$2,500,000(Sec. 5 of RA 8762)
- P4M for class A 4. Cooperatives (Ch. III, Art. 26 of RA
- P2M for class B 6938)
- P1M for class C 5. Private Security Agencies (Sec. 4 of
3. Investment Companies – RA 5487)
paid up at least P500T 6. Small-scale Mining (Sec. 3 of RA
4. Savings and Loan 7076)
Corporation – to be fixed by the 7. Utilization of Marine Resources in
Monetary Board, but not less archipelagic waters, territorial sea,
than P100T and exclusive economic zone as well
5. Financing Companies as small-scale utilization of natural
Paid up: - P2M for Metro Manila resources in rivers, lakes, bays, and
- P1M for Cities lagoons (Art. XII, Sec. 2 of the
- P500T for others Constitution)
b. provided that at least 25% of the 8. Ownership, operation and
authorized capital stock has been management of cockpits (Sec. 5 of
subscribed and at least 25% of the total PD 449)
subscription must be paid-up 9. Manufacture, repair, stockpiling
and/or distribution of nuclear
 FILIPINO PERCENTAGE OWNERSHIP weapons (Art. II, Sec. 8 of the
REQUIREMENT Constitution)
10. Manufacture, repair, stockpiling
NO FOREIGN EQUITY and/or distribution of biological,
chemical and radiological weapons
1. Mass Media except recording (Art. and anti-personnel mines (Various
XVI, Sec. 11 of the Constitution; treaties to which the Philippines is a
Presidential Memorandum dated 04 signatory and conventions supported
May 1994) by the Philippines)
2. Practice of all 11. Manufacture of firecrackers and
professions other pyrotechnic devices (Sec. 5 of
a) Engineering RA 7183)
b) Medicine and Allied
Professions Up to Twenty Percent (20%) Foreign
c) Accountancy Equity
d) Architecture
e) Criminology 12. Private radio communications
f) Chemistry network (RA 3846)
g) Customs Brokerage
h) Environmental Planning Up to Twenty-Five Percent (25%)
i) Forestry Foreign Equity
j) Geology
k) Interior Design 13. Private recruitment, whether for
l) Landscape Architecture local or overseas employment (Art.
m) Law 27 of PD 442)
n) Librarianship 14. Contracts for the construction and
o) Marine Deck Officers repair of locally-funded public works
p) Marine Engine Officers (Sec. 1 of CA 541, LOI 630) except:
q) Master Plumbing a) infrastructure/development
r) Sugar Technology projects covered in RA 7718;
s) Social Work and

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
95
MEMORY AID IN COMMERCIAL LAW

b) projects which are foreign by the owners of the separate units

funded or assisted and or owned by a corporation (Sec. 5 of
required to undergo RA 4726)
international competitive
bidding (Sec. 2a of RA 7718) Up to Sixty Percent (60%) Foreign
15. Contracts for the construction of Equity
defense-related structures (Sec. 1 of
CA 541) 27. Financing companies regulated by
the Securities and Exchange
Up to Thirty Percent (30%) Foreign Commission (Sec. 6 of RA 5980 as
Equity amended by RA 8556)
28. Investment houses regulated by the
16. Advertising (Art. XVI, Sec. 11 of the SEC (Sec. 5 of PD 129 as amended by
Constitution) RA 8366)

Up to Forty Percent (40%) Foreign ARTICLES OF INCORPORATION (AI)

Equity  The document prepared by the
17. Exploration, development and persons establishing a corporation and
utilization of natural resources (Art. filed with the SEC containing the matters
XII, Sec. 2 of the Constitution) required by the Code.
18. Ownership of private lands (Art. XII,  Significance:
Sec. 7 of the Constitution; Ch. 5, 1. The issuance of a certificate of
Sec. 22 of CA 141; Sec. 4 of RA 9182) incorporation signals the birth of the
19. Operation and management of corporation’s juridical personality;
public utilities (Art. XII, Sec. 11 of 2. It is an essential requirement for
the Constitution; Sec. 16 of CA 146) the existence of a corporation, even
20. Ownership/establishment and a de facto one.
administration of educational
institutions (Art. XIV, Sec. 4 of the
Constitution)
 Contents: (Sec. 14)
21. Culture, production, milling,
1. name of corporation;
processing, trading excepting
2. purpose/s, indicating the primary
retailing, of rice and corn and
and secondary purposes;
acquiring, by barter, purchase or
3. place of principal office;
otherwise, rice and corn and the by-
4. term of existence;
products thereof (Sec. 5 of PD
5. names, citizenship and residences of
194;Sec. 15 of RA 8762
incorporators;
22. Contracts for the supply of
6. number, names, citizenship and
materials, goods and commodities to
residences of directors or trustees;
government-owned or controlled
7. names, nationalities, and residences
corporation, company, agency or
of the persons who shall act as
municipal corporation (Sec. 1 of RA
directors or trustees until the first
5183)
regular ones are elected and
23. Project Proponent and Facility
qualified;
Operator of a BOT project requiring a
8. if a stock corporation, the amount of
public utilities franchise (Art. XII,
its authorized capital stock, number
Sec. 11 of the Constitution; Sec. 2a
of shares and in case the shares are
of RA 7718)
par value shares, the par value of
24. Operation of deep sea
each share;
commercial fishing vessels (Sec. 27 of
9. names, residences, number of
RA 8550)
shares, and the amounts subscribed
25. Adjustment Companies (Sec. 323
and paid by each of the original
of PD 612 as amended by PD 1814)
subscribers which shall not be less
26. Ownership of condominium units
than 25% of authorized capital stock;
where the common areas in the
10. if non-stock, the amount of capital,
condominium project are co-owned
the names, residences, and amount

COMMERCIAL LAW COMMITTEE

paid by each contributor, which shall 2. Names of original

not be less than 25% of total subscribers to the capital stock
subscription; of the corporation and their
11. name of treasurer elected by subscribed and paid up capital;
subscribers; and 3. Treasurer elected by the
12. if the corporation engages in a original subscribers;
nationalized industry, a statement 4. Members who
that no transfer of stock will be contributed to the initial capital
allowed if it will reduce the stock of a non-stock corporation;
ownership of Filipinos to a 5. Date and place of
percentage below the required legal execution of the articles of
minimum. incorporation;
6. Witnesses to the signing
AMENDMENT OF ARTICLES OF and acknowledgment of the
INCORPORATION articles.
 Limitations:
1. The amendment of any provision or GROUNDS FOR REJECTION OF ARTICLES
matters stated in the articles of OF INCORPORATION OR AMENDMENT
incorporation is not allowed when it will THERETO
be contrary to the provisions or 1. The articles or its amendment is not
requirement prescribed by the Code or substantially in accordance with the
by special law or changes any provision form prescribed
in the articles of incorporation stating an 2. The purposes of the corporation are
accomplished fact patently unconstitutional, illegal,
2. It must be for legitimate purposes immoral, or contrary to government
3. It must be approved by the required rules and regulations
vote of the board of directors or trustees 3. The Treasurer’s Affidavit concerning
and the stockholders or members the amount of capital stock subscribed
4. The original articles and amended and/or paid is false
articles together must contain all 4. The required percentage of ownership
provisions required by law to be set out of the capital stock to be owned by
in the articles of incorporation Filipino citizens has not been complied
5. Such articles, as amended, must be with
indicated by underscoring the changes
made, and a copy thereof duly certified GROUNDS FOR SUSPENSION OR
under oath by the corporate secretary REVOCATION OF CERTIFICATE OF
and a majority of the directors or REGISTRATION (Pres. Decree No. 902-A)
trustees stating that the amendments 1. Fraud in procuring its certificate of
have been duly approved by the required incorporation
vote of the stockholders or members 2. Serious misrepresentation as to what
must be submitted to the SEC the corporation can do or is doing to the
6. The amendments shall take effect great prejudice of, or damage to, the
only upon their approval by the SEC general public
7. If the corporation is governed by 3. Refusal to comply with or defiance of
special law, the amendments must a lawful order of the SEC restraining the
be accompanied by a favorable commission of acts which would amount
recommendation of the appropriate to a grave violation of its franchise
government agency. 4. Continuous inoperation for a period of
at least 5 years
NON-AMENDABLE FACTS IN THE 5. Failure to file the by-laws within the
ARTICLES OF INCORPORATION required period
 Those matters referring to facts 6. Failure to file required reports
existing as of the date of the
incorporation such as: III. BOARD OF DIRECTORS/TRUSTEES
1. Names of incorporators;  Qualifications:

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

1. For a stock corporation, ownership of in case of labor in case of labor

at least 1 share capital stock of the dispute disputes
corporation in his own name, and if he
ceases to own at least one share in his BOARD OF DIRECTORS/TRUSTEES AS
own name, he automatically ceases to REPOSITORY OF CORPORATE POWERS
be a director. (Sec. 23) For a non-stock GENERAL RULE: The corporate powers
corporation, only members of the of the corporation shall be exercised, all
corporation can be elected to seat in the business conducted and all property of
Board of Trustees. such corporation controlled and held by
 In order to be eligible as a director, the board of directors or trustees. (Sec.
what is material is the legal title to, not 23)
beneficial ownership of the stocks EXCEPTIONS:
appearing on the books of the 1. In case of an Executive
corporation Committee duly authorized in the
2. A majority of the directors/trustees by-laws;
must be residents of the Philippines. 2. In case of a contracted manager
(Sec. 23) which may be an individual, a
3. He must not have been convicted by partnership, or another corporation.
final judgment of an offense punishable Note: In case the contracted
by imprisonment for a period exceeding manager is another corporation, the
6 years or a violation of the Corporation special rule in Sec. 44 applies.
Code, committed within five years from 3. In case of close corporations, the
the date of his election. (Sec. 27) stockholders may manage the
4. Only natural persons can be elected business of the corporation instead
directors/trustees. by a board of directors, if the
 In case of corporate stockholders or articles of incorporation so provide.
members, their representation in the
board can be achieved by making their  The power to purchase real property
individual representatives trustees of the is vested in the board of directors or
shares or membership to make them trustees. While a corporation may
stockholders/members of record. appoint agents to negotiate for the
5. Other qualifications as may be purchase of real property needed by
prescribed in the by-laws of the the corporation, the final say will
corporation. have to be with the board, whose
6. Must be of legal age approval will finalize the
transaction. A corporation can only
CORPORATE OFFICERS exercise its powers and transact its
1. President – must be a director; business through its board of
2. Treasurer – may or may not be a directors and through its officers and
director; as a matter of sound agents when authorized by a board
corporate practice, must be a resolution or by its by-laws. (Spouses
resident Constantine Firme vs. Bukal
3. Secretary – need not be a director Enterprises and Development
unless required by the by-laws; must Corporation, G.R. No. 146608,
be a resident and citizen of the October, 23, 2003)
Philippines; and
4. Such other officers as may be LIMITATIONS ON POWERS OF BOARD OR
provided in the by-laws. DIRECTORS/TRUSTEES
1. Limitations imposed by the
CORPORATE CORPORATE Constitution, statutes, articles of
OFFICER EMPLOYEE incorporation or by-laws.
Position is provided Employed by the 2. Cannot perform constituent or those
for in the by-laws or action of the involving fundamental changes in the
under the managing officer of corporation requiring the approval of
Corporation Code the corporation
stockholders or members.
RTC has jurisdiction NLRC has jurisdiction

COMMERCIAL LAW COMMITTEE

3. Cannot exercise powers not possessed the duties enjoined on them by law and
by the corporation. (The Corporation the by-laws (Sec. 25)
Code of the Philippines Annotated, 2. Duty of Diligence
Hector de Leon, 2002 ed.)  Legal Basis: Directors or trustees who
willfully and knowingly vote for or assent
NATURE OF POWERS OF BOARD OF to patently unlawful acts of the
DIRECTORS/TRUSTEES (The Corporation corporation or who are guilty of gross
Code of the Philippines Annotated, negligence or bad faith in directing the
Hector de Leon, 2002 ed.) affairs of the corporation shall be liable
a. Under the Theory of Original Power, jointly and severally for all damages
the powers of the board of directors or resulting therefrom suffered by the
trustees are ORIGINAL and corporation, its stockholders or members
UNDELEGATED. The stockholders or and other persons (Sec. 31)
members do not confer, nor can they 3. Duty of Loyalty
revoke those powers.  Legal Basis: Directors or trustees who
b. They are DERIVATIVE only in the sense acquire any pecuniary or personal
of being received from the State in the interest in conflict with their duty as
act of incorporation. such directors or trustees shall be liable
jointly and severally for all damages
BUSINESS JUDGMENT RULE resulting therefrom. (Sec. 31)
A resolution or transaction pursued When a director or trustee
within the corporate powers and attempts to acquire or acquires in
business operations of the corporation, violation of his duty, any interest
and passed in good faith by the board of adverse to the corporation in respect of
directors, is valid and binding, and any matter which has been reposed in
generally the courts have no authority to him in confidence as to which equity
review the same and substitute their imposes a liability upon him to deal in
own judgment, even when the exercise his own behalf, he shall be liable as
of such power may cause losses to the trustee for the corporation and must
corporation or decrease the profits of a account for all the profits which
department. (Philippine Corporate Law, otherwise would have accrued to the
Cesar Villanueva, 2001 ed.) corporation (Sec. 31, 2nd par.)
Where a director, by virtue of his
Consequences: office, acquires for himself a business
a. Resolutions and transactions entered opportunity which should belong to the
into by the Board within the powers of corporation, thereby obtaining profits
the corporation cannot be reversed by which should belong to the corporation,
the courts not even on the behest of the he must account to the latter for all such
stockholders. profits by refunding the same (Sec. 34)
b. Directors and officers acting within
such business judgment cannot be held ELECTION OF DIRECTORS/TRUSTEES
personally liable for such acts. Limitations:
(Philippine Corporate Law, Cesar a. At any meeting of stockholder or
Villanueva, 2001 ed.) members called for the election of
directors or trustees, there must be
THREE-FOLD DUTIES OF DIRECTORS: present either in person or by
(Philippine Corporate Law, Cesar representative authorized to act by
Villanueva, 2001 ed.) written proxy, the owners of the
1. Duty of Obedience majority of the outstanding capital stock
 To direct the affairs of the or majority of the members entitled to
corporation only in accordance with the vote.
purposes for which it was organized. b. The election must be by ballot if
 Legal Basis: The directors or trustees requested by any voting member or
and officers to be elected shall perform stockholder.

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

c. A stockholder cannot be deprived in transfer book of the

the articles of incorporation or in the by- corporation.
laws of his statutory right to use any of
the methods of voting in the election of REMOVAL OF DIRECTORS/TRUSTEES
directors. Limitations:
d. No delinquent stock shall be voted. a. Vote of the stockholders representing
e. The candidates receiving the highest at least 2/3 of the outstanding capital
number of votes shall be declared stock 2/3 of the members entitled to
elected. vote
b. At a regular or special meeting after
METHODS OF VOTING proper notice is given
a. Straight Voting – every stockholder c. Removal may be with or without
may vote such number of shares for as cause.
many persons as there are directors to d. A minority director elected through
be elected. cumulative voting cannot be removed
b. Cumulative voting for one candidate – without cause. (Sec. 28)
a stockholder is allowed to concentrate
his votes and give one candidate, as EXTENT OF POWERS OR AUTHORITY OF
many votes as the number of directors to CORPORATE OFFICERS
be elected multiplied by the number of 1. The authority which he has by virtue
his shares shall equal. of his office;
c. Cumulative voting by distribution - a 2. The authority which is expressly
stockholder may cumulate his shares by conferred upon him or is incidental to
multiplying the number of his shares by the effectualness of such express
the number of directors to be elected authority;
and distribute the same among as many 3. As to third persons dealing with him
candidates as he shall see fit. without notice of any restriction thereof,
the authority which the corporation
LIMITATIONS ON THE STOCKHOLDER’S holds the officer out as possessing or is
RIGHT TO VOTE estopped to deny.
1. Where the articles of 4. The nature of the corporate business
incorporation provides for must also be taken into consideration;
classification of shares and
pursuant to Sec. 6, non-voting 5. The nature act of an officer though
shares are not entitled to originally unauthorized, may become
vote except as provided for in upon the corporation by a subsequent
the last paragraph of Sec. 6. ratification. (The Corporation Code of
2. Preferred or redeemable the Philippines Annotated, Hector de
shares may be deprived of the Leon, 2002 ed.)
right to vote unless otherwise
provided in the Code.  It is a familiar doctrine that if a
3. Fractional shares of stock corporation knowingly permits one of it
cannot be voted. officers, or any other agent, to act
4. Treasury shares have no within the scope of an apparent
voting rights as long as they authority, it holds him out to the public
remain in the treasury. as possessing the power to do those acts;
5. Holders of stock declared and thus, the corporation will, as against
delinquent by the board of anyone who has in good faith dealt with
directors for unpaid it through such agent, be estopped from
subscription are not entitled denying the agent’s authority. (LapuLapu
to vote or to a representation Foundation Inc., vs. Court of Appeals, et
at any stockholder’s meeting. al., G.R. No. 126006, January 29, 2004,
6. A transferee of stock cannot Callejo, J.)
vote if his transfer is not
registered in the stock and PERSONAL LIABILITY OF DIRECTORS

COMMERCIAL LAW COMMITTEE

1. Willfully and knowingly voting for 3. The corporation has an interest or a

and assenting to patently unlawful reasonable expectancy.
acts of the corporation; (Sec. 31)  The rule shall be applied
2. Gross negligence or bad faith in notwithstanding the fact that the
directing the affairs of the director risked his own funds in the
corporation; (Sec. 31) venture. (Sec. 34)
3. Acquiring any personal or pecuniary
interest in conflict of duty; (Sec. 31) 2. Contracts of self-dealing directors
4. Consenting to the issuance of  Contracts which are entered into by
watered stocks, or, having the corporation with one or more of its
knowledge thereof, failing to file own directors/trustees, or officers. (Sec.
objections with the secretary;(Sec. 32)
65)  They are voidable, unless:
5. Agreeing or stipulating in a contract a) The presence of such
to hold himself liable with the director/trustee in the board
corporation; or meeting approving the contract was
6. By virtue of a specific provision of not necessary to constitute a quorum
law for such meeting;
b) The vote of such director/trustee
DOCTRINE OF DOCTRINE OF in the board meeting approving the
LIMITED LIABILITY IMMUNITY contract was not necessary for the
approval of the contract;
 Shields the  Protects a c) The contract is fair and reasonable
corporators from person acting for under the circumstances;
corporate liability and in behalf of the d) In the case of an officer, there was
beyond their agreed corporation from
previous authorization by the board
contribution to the being himself
capital or shareholding personally liable for of directors.
in the corporation. his authorized  Although not all said conditions are
actions present, the corporation may elect not
to attack or question the validity of the
REMEDIES IN CASE OF MISMANAGEMENT contract, without prejudice, however, to
1. Receivership; the liability of the director/trustee for
2. Injunction, if the act has not yet damages under Sec. 31.
been done;  Where any of the first two conditions
3. Dissolution if the abuse amounts to a is absent, said contract must be ratified
ground for quo warranto but the by the vote of the stockholders
Solicitor General refuses to act; and representing at least 2/3 of the
4. Derivative suit or complaint filed outstanding capital stock or 2/3 of the
with SEC. members in a meeting called for the
purpose, provided that full disclosure of
the adverse interest of the director/
SPECIAL RULES ON CONTRACTS trustee involved is made at such
ENTERED INTO BY meeting. (Sec. 32)
DIRECTORS/TRUSTEES OR OFFICERS: 3. Contracts of interlocking directors
1. Doctrine of Corporate Opportunity  Contracts entered into between
 Unless his act is ratified, a director corporations with interlocking directors
shall refund to the corporation all the (interest of said directors is
profits he realizes on a business “substantial”, i.e. exceeding 20% of the
opportunity which: outstanding capital stock).
1. The corporation is financially able to  They are valid, provided that:
undertake; a. The contract is not fraudulent;
2. From its nature, is in line with and
corporations business and is of b. The contract is fair and
practical advantage to it; and reasonable under the circumstances.

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

 If the interlocking director’s interest

in one corporation or corporations is IV. POWERS OF THE CORPORATION
“nominal” (not exceeding 20% of the 1. Express Powers - granted by
outstanding capital stock), then all the law, Corporation Code, and its
conditions prescribed in Sec. 32 on self- Articles of Incorporation or
dealing directors must be present with Charter
respect to the corporation in which he 2. Inherent/Incidental Powers –
has nominal interest. (Sec. 33) not expressly stated but are
deemed to be within the
COMPENSATION OF DIRECTORS OR capacity of corporate entities
TRUSTEES
3. Implied/Necessary Powers –
General Rule: They shall be entitled to
exists as a necessary
reasonable per diems only
consequence of the exercise of
Except:
the express powers of the
a. when their compensation is fixed in
corporation or the pursuit of its
the by-laws
purposes as provided for in the
b. when granted by the vote of
Charter
stockholders representing at least a
majority of the outstanding capital stock Classification:
1. Acts in the usual course of business
at a regular or special meeting
2. Acts to protect debts owing to the
c. when they are also officers of the
corporation
corporation
3. Acts which involve embarking in a
different business usually to collect
EXECUTIVE COMMITTEE
debts out of profits
 A body created by the by-laws and
4. Acts to protect or aid employees
composed of some members of the board
5. Acts to increase business (The
which, subject to the statutory
Corporation Code of the Philippines
limitations, has all the authority of the
Annotated, Hector de Leon, 2002 ed.)
board to the extent provided in the
board resolution or by-laws. (The
GENERAL POWERS AND CAPACITY (Sec.
Corporation Code of the Philippines
36)
Annotated, Hector de Leon, 2002 ed.)
1. To sue and be sued;
 Must be provided for in the by laws 2. Of succession;
and composed of not less than 3 3. To adopt and use of corporate seal;
members of the board appointed by the 4. To amend its Articles of
board. Incorporation;
 May act by a majority vote of all of its 5. To adopt its by-laws;
members. 6. For stock corporations: issue and sell
stocks to subscribers and treasury
stocks; for non-stock corporations:
admit members;
7. To purchase, receive, take or grant,
hold, convey, sell, lease, pledge,
Limitations on the Powers of the mortgage and deal with real and
Executive Committee (Sec. 35) personal property, securities and
 It cannot act on the following: bonds
1. Matters needing stockholder 8. To enter into merger or
approval; consolidation;
2. Filling up of board vacancies; 9. To make reasonable donations for
3. Amendment, repeal or adoption of public welfare, hospital, charitable,
by-laws; cultural, scientific, civic or similar
4. Amendment or repeal of any purposes, provided that no donation
resolution of the Board which by its is given to any (i) political party, (ii)
express terms is not amendable or candidate and (iii) partisan political
repealable; and activity.
5. Cash dividend declaration.

COMMERCIAL LAW COMMITTEE

10. To establish pension, retirement, b. By increasing/decreasing the par

and other plans for the benefit of its value of existing shares without
directors, trustees, officers and increasing/decreasing the number of
employees. shares;
11. To exercise other powers essential or c. By increasing/decreasing the number
necessary to carry out its purposes. of shares and increasing/decreasing the
par value.
SPECIAL/SPECIFIC POWERS (Secs. 37- TOOLS AVAILABLE TO THE
44) STOCKHOLDERS TO REPLENISH CAPITAL
1. Power to extend a. Additional subscription to shares of
or shorten corporate term; stock of the corporation by stockholders
2. Increase or or by investors;
decrease corporate stock; b. Advances by the stockholders to the
3. Incur, create, or corporation;
increase bonded indebtedness; c. Payment of unpaid subscription by the
4. Sell, dispose, stockholders; and
lease, encumber all or substantially d. Loans from third persons.
all of corporate assets; 3.Incur, create or increase bonded
5. Purchase or indebtedness
acquire own shares provided:  Corporate bond – an obligation to pay
a.there is an unrestricted a definite sum of money at a future time
retained earnings, and at fixed rate of interest
b. it is for a legitimate purpose.
6. Invest corporate BONDED DEBENTURE
funds in another corporation or INDEBTEDNESS
business for other purpose other  Secured by a  Serial obligations
than primary purpose; mortgage on or notes issued on
7. Power to declare corporate property. . the basis of the
dividends out of unrestricted (Philippine general credit of the
retained earnings; Corporate Law, corporation. Hence,
8. Enter into Cesar Villanueva, they are not bonded
management contract with another 2001 ed.) indebtedness
corporation (not with an individual
4. Sell, dispose, lease, encumber all or
or a partnership-within general
substantially all of corporate assets;
powers) whereby one corporation
undertakes to manage all or  No ratificatory vote needed:
substantially all of the business of a. If it is necessary in the usual and
the other corporation for a period regular course of business
not longer than 5 years for any one b. if the proceeds of the sale or other
term. disposition of such property and assets
be appropriated for the conduct of the
CORPORATE ACTS (see ANNEX for remaining business
procedure and requisites) 5. Power to acquire own shares
1. Power to extend or shorten corporate  Instances:
term a. To eliminate fractional shares out of
 May be used as means to voluntarily stock dividends
dissolve a corporation b. To collect or compromise an
2. Power to increase or decrease capital indebtedness to the corporation, arising
stock out of unpaid subscription, in a
delinquency sale and to purchase
delinquent shares sold during said sale
WAYS OF INCREASING/DECREASING
c. To pay dissenting stockholders
THE CAPITAL STOCK
d. To acquire treasury shares
a. By increasing/decreasing the number
e. Redeemable shares regardless of
of shares and retaining the par value;
existence of retained earnings
f. To effect a decrease of capital stock
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
103
MEMORY AID IN COMMERCIAL LAW

g. In close corporations, when there is a c. When it can be clearly shown that

deadlock in the management of the such retention is necessary under special
business circumstances obtaining in the
Note: In letters a-c, there must be corporation, such as when there is a
unrestricted retained earnings need for special reserve for probable
6. Invest corporate funds in another contingencies.
corporation or business for other purpose  Sources of dividends:
other than primary purpose GENERAL RULE: Dividends can only be
 The other purposes for which the declared and paid out of actual and bona
funds may be invested must be among fide unrestricted retained earnings.
those enumerated as secondary purposes SPECIAL RULES:
and must further comply with the a. Where a corporation sold its real
requirements of Section 42. property, which is not being used for
7. Power to declare dividends out of business, at a gain, the income derived
unrestricted retained earnings therefrom may be availed of for
 RETAINED EARNINGS = ASSETS – dividend distribution.
LIABILITIES AND LEGAL CAPITAL b. Increase in the value of a fixed asset
 “UNRESTRICTED” – if the retained as a result of its revaluation is not
earnings have not been reserved or set retained earning. However, increase in
aside by the board of directors for some the value of fixed assets as a result of
corporate purpose revaluation (“Revaluation surplus”)
DIVIDENDS may be declared as cash or stock
 Corporate profits set aside, declared, dividends provided that the company:
and ordered to be paid by the directors (i) Has sufficient income from
for distribution among shareholders at a operations from which the
fixed time. depreciation on the appraisal increase
 Forms: was charged
a. Cash (ii) Has no deficit at the time the
b. Property depreciation on the appraisal increase
c. Stock was charged to operations; and
 While cash dividends due on (iii) Such depreciation on appraisal
delinquent shares can be applied to the increase previously charged to
payment of the unpaid balance, stock operations has not been impaired by
dividends cannot be applied as payment losses.
for unpaid subscription. c. Dividends can be declared out of the
 The right to dividends is based on duly amount received in excess of the par
recorded stockholdings; value of shares (“paid-in surplus”)
accordingly, the corporation is when:
prohibited from entitling thereto (i) That they be declared only as
anyone else. stock dividends and not cash;
General Rule: Stock corporations are (ii) No creditors are prejudiced; and
prohibited from retaining surplus profits (iii) There is no impairment of
in excess of 100% of their paid-in capital capital.
stock  Note that unlike par value
Except: shares, when no par value shares
a. When justified by definite corporate are sold at a premium, the entire
expansion projects approved by the consideration paid is considered
board of directors capital; hence the same cannot be
b. When the corporation is prohibited declared as dividends.
under any loan agreement with any d. Reduction surplus can be a source of
financial institution or creditor from dividends. Rule on paid-in surplus is
declaring dividends without its/his applicable.
consent and such consent has not yet e. No dividends can be declared out of
been secured capital except only in two instances: 1)
liquidating dividends; and 2) dividends

COMMERCIAL LAW COMMITTEE

from investments in wasting asset TRUST FUND DOCTRINE (TFD)

corporation.  The subscribed capital stock of the
 It permits corporations solely or corporation is a trust fund for the
principally engaged in the exploitation payment of debts of the corporation
of “wasting assets” to distribute the which the creditors have the right to
net proceeds derived from look up to satisfy their credits, and
exploitation of their holdings such as which the corporation may not dissipate.
mines, oil wells, patents and The creditors may sue the stockholders
leaseholds, without allowance or directly for the latter’s unpaid
deduction for depletion. subscription.
f. Profits realized from sale of treasury  Application of the TFD:
shares are part of capital and cannot 1. Where the corporation has
be declared as cash or stock dividend distributed its capital among the
as purchase and sale of such shares are stockholders without providing for
regarded as contractions and the payment of creditors;
expansions of paid-in capital. 2. Where it had released the
g. Money cannot be borrowed for the subscribers to the capital stock from
payment of dividends because their subscriptions;
indebtedness is not a retained earning 3. Where it has transferred the
of the corporation. corporate property in fraud of its
h. Corporate earnings which have not yet creditors; and
been received even though they 4. Where the corporation is insolvent.
consist in money which is due, cannot  Coverage of the TFD:
be included in the profits out of which 1. If the corporation is solvent, the TFD
dividends may be paid. extends to the capital stock represented
by the corporation’s legal capital.
CASH DIVIDENDS STOCK 2. If the corporation is insolvent, the
DIVIDENDS TFD extends to the capital stock of the
1. Involves a 1. Does not involve corporation as well as all of its property
disbursement to the any disbursement and assets.
stockholders of
 Exceptions to the TFD:
accumulated earnings
2. When declared and 2. Since it is still 1. Redemption of redeemable shares
paid becomes the part of corporate (Sec. 8)
absolute property of property, may be 2. In close corporation, when there
the stockholder and reached by should be a deadlock and the SEC orders
cannot be reached by corporate creditors the payment of the appraised value of
creditors of the the stockholder’s share. (Sec. 104)
corporation in the
absence of fraud 8. Power to enter into management
3. Declared only by 3. Declared by the contract
the board of directors board with the
at its discretion concurrence of the
stockholders EXECUTIVE MANAGEMENT
representing at COMMITTEE CONTRACT
least 2/3 of the
outstanding capital 1. Its creation must 1. Express power of
stock at a be provided for in a corporation
regular/special the by-laws
meeting
4. Does not increase 4. Corporate 2. A governing body 2. Management
the corporate capital capital is increased which functions as company must
5. Its declaration 5. No debt is the board itself. always be subject to
creates a debt from created by its (The Corporation the superior power
the corporation to declaration Code of the of the board to give
each of its Philippines specific directions
stockholders Annotated, Hector from time to time or
de Leon, 2002 ed.) to recall the

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

delegation of d. Executory contracts apparently

managerial power. authorized but ultra vires – the
(The Corporation principle of estoppel shall apply.
Code of the ULTRA VIRES ACTS AND ILLEGAL ACTS
Philippines
Annotated, Hector  Ultra vires (“beyond powers”) refers
de Leon, 2002 ed.) only to an act outside or beyond
corporate powers, including those that
may ostensibly be within such powers
ULTRA VIRES (“beyond powers”) ACT but are, by general or special laws,
 An act which is beyond the conferred either prohibited or declared illegal. It is
powers of a corporation or the purposes in this context that the Code has used
or objects for which it is created as the term.
defined by the law of its organization.
(Republic vs. Acoje Mining Co., Inc. 7 ULTRA VIRES ACTS ILLEGAL ACTS
SCRAS 361) Not necessarily Unlawful; against
unlawful, but outside law, morals, public
 An act done by a corporation outside
the powers of the policy, and public
of the express and implied powers corporation order
vested in it by its charter and by the Can be ratified Cannot be ratified
law. (Bar Review Materials in Can bind the parties Cannot bind the
Commercial Law, Jorge Miravite, 2002 if wholly or partly parties
ed.) executed
 Types: (Philippine Corporate Law,
Cesar Villanueva, 2001 ed.)  TEST whether or not a corporation
1. Acts done beyond the powers of may perform an act: consider the
the corporation as provided logical and necessary relation between
in the law or its articles of the act questioned and the corporate
incorporation; purpose expressed by law or in the
2. Acts or contracts entered into in charter. If the act is lawful in itself and
behalf of a corporation by not prohibited, and is done for the
persons who have no corporate purpose of serving corporate ends, and
authority (Note: This is reasonably contributes to the promotion
technically ultra vires acts of of those ends in a substantial and not in
officers and not of the a remote and fanciful sense.
corporation); and (Montelibano vs. Bacolod-Murcia Milling
3. Acts or contracts, which are per Co., Inc., 5 SCRA 36)
se illegal as being contrary to
law. REMEDIES IN CASE OF ULTRA VIRES
 An ultra vires act may be that of: ACTS
a. The corporation; 1. State
b. The Board of Directors; and a. Obtain a judgment of forfeiture; or
c. The corporate officers. b. The SEC may suspend or revoke the
certificate of registration
 Effects of ultra vires act on:
2. Stockholders
a. Executed contract – courts will not
a. Injunction; or
set aside or interfere with such
b. Derivative suit
contracts;
3. Creditors
b. Executory contracts – no
a. Nullification of contract in fraud of
enforcement even at the suit of
creditors
either party (void and
unenforceable);
V. BY-LAWS
c. Part executed and part executory
– principle of “no unjust enrichment  Rules of action adopted by a
at expense of another” shall apply; corporation for its internal government
and and for the regulation of conduct and
prescribe the rights and duties of its
stockholders or members towards itself

COMMERCIAL LAW COMMITTEE

and among themselves in reference to b. Time and manner of calling and

the management of its affairs. conducting regular or special meetings of
the stockholder or members
 Functions: c. The required quorum in meeting of
a. Supplement the articles of stockholders or members and the
incorporation manner of voting therein
b. Provide for details not important d. The form for proxies of stockholders
enough to be stated in the articles of and members and the manner of voting
incorporation them
c. Continuing rule for the government of e. The qualification, duties and
the corporation and the individuals compensation of directors or trustees,
composing it officers and employees
d. Define the rights and duties of f. Time for holding the annual election
corporate officers and directors/trustees of directors or trustees and the mode or
and of stockholders/members towards manner of giving notice thereof
the corporation and among themselves g. Manner of election or appointment
e. Source of authority for corporate and the term of office of all officers
officers and agents of the corporation other than directors or trustees
 Requisites for validity: h. Penalties for violation of the by-laws
a. Must not be contrary to law nor i. In case of stock corporations, the
with the Corporation Code manner of issuing certificates
b. Must not be contrary to morals j. Such other matters as may be
and public policy; necessary for the proper or convenient
c. Must not impair obligations and transaction of its corporate business and
contracts; affairs
d. Must be general and uniform;
e. Must be consistent with the ARTICLES OF BY-LAWS
charter or articles of incorporation; INCORPORATION
and Condition precedent in Condition
f. Must be reasonable, not arbitrary the acquisition of subsequent; its
or oppressive. corporate existence; absence merely
furnishes a ground
 Binding effect: for the revocation of
a. As to members and corporation the franchise
 They have the force of contract Essentially a contract For the internal
between the members themselves. between the government of the
 They are binding only upon the corporation and the corporation but has
corporation and on its members and stockholders/ the force of a
those having direction, management and members; between contract between
the stockholders/ the corporation and
control of its affairs.
member inter se, and the stockholders/
b. As to third persons between the members, and
 They are not bound to know the by- corporation and the between the
laws which are merely provisions for the State; stockholders and
government of a corporation and notice members;
to them will not be presumed. Executed before May be executed
 Reason: By-laws have no extra- incorporation after incorporation.
corporate force and are not in the Sec. 46 allows the
filing of the by-laws
nature of legislative enactments so far as
simultaneously with
third persons are concerned. the Articles of
Incorporation
CONTENTS OF BY-LAWS Amended by a May be amended by
a. Time, place and manner of calling and majority of the a majority vote of
conducting regular or special meetings of directors/ trustees the BOD and
directors or trustees and stockholders majority vote of
representing 2/3 of outstanding capital
the outstanding stock or a majority

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

capital stock, or 2/3 of the member in such person to exercise the voting rights
of the members in non-stock of the former.
case of non-stock corporation b. Unless otherwise provided in the
corporations proxy, it shall be valid only for the
Power to Power to amend or meeting for which it is intended.
amend/repeal articles repeal by-laws or
cannot be delegated adopt new by-laws
c. No proxy shall be valid and effective
by the stockholders/ may be delegated for a longer period than five years at any
members to the board by the 2/3 of the one time. (Sec. 58)
of directors/ trustees outstanding capital  The right to vote by proxy may be
stock or 2/3 of the exercised in any of the following
members in the instances:
case of non-stock 1. Election of the board of directors or
corporation trustees;
2. Voting in case of joint ownership of
VI. MEETINGS stock;
3. Voting by trustee under voting trust
STOCKHOLDERS/MEMBERS MEETING agreement;
4. Pledge or mortgage of shares;
WHEN: 5. As provided for in its by-laws.
1. REGULAR - held on the date fixed Note: Stockholders or members may
in the by-laws or if not fixed on any attend and vote in their meetings by
date in April;and proxy (Sec. 58); directors cannot do so.
2. SPECIAL - held at any time Directors must always act in person.
deemed necessary or as so provided (Sec. 25).
in the by-laws.  EXTENT OF AUTHORITY
WHERE: a. GENERAL PROXY – confers a general
 In the city or municipality where the discretionary power to attend and vote
principal office of the corporation is at annual meeting.
located, and if practicable, in the b. LIMITED PROXY – restrict the authority
principal office of the corporation. to vote to specified matters only and
 However, in the case of non-stock may direct the manner in which the vote
corporations, the by-laws may shall be cast
provide that meetings may be held
at any place even outside the VOTING TRUST
principal place of the corporation.  An agreement whereby one or more
(Sec. 93) stockholders transfer their shares of
stocks to a trustee, who thereby
BOARD MEETING (Sec. 53) acquires for a period of time the voting
WHEN: rights (and/or any other rights) over such
1. REGULAR - held monthly, unless shares; and in return, trust certificates
otherwise provided in the by-laws; are given to the stockholder/s, which
and are transferable like stock certificates,
2. SPECIAL - held at any time upon subject, however, to the trust
the call of the president. agreement.
WHERE: Limitations:
 May be held anywhere in or outside of a. Cannot be entered into for a period
the Philippines. exceeding 5 years at any one time
except when it is a condition in a loan
PROXY agreement or for the purpose of
Limitations: circumventing the law against
a. It must be in writing and signed by monopolies and illegal combinations
the stockholder or member (as principal) b. The agreement must not be used for
and filed before the scheduled meeting purposes of fraud
with the corporate secretary, and given c. It must be in writing and notarized
to another person (as agent) authorizing and specify the terms and conditions
thereof

COMMERCIAL LAW COMMITTEE

d. A certified copy of the agreement still to be formed shall be deemed a

must be filed with the corporation and subscription. (Sec. 60)
with the SEC  The subscribed shares need not be
e. The agreement shall be subject to paid in full in order that the subscription
examination by any stockholder of the may be valid. The subscription contract
corporation is a consensual contract that is perfected
f. Unless expressly renewed, all rights upon the meeting of the minds of the
granted in the agreement shall parties. The name of the subscriber is
automatically expire at the end of the recorded in the stock and transfer book,
agreed period and from that time, such subscriber
becomes a stockholder of record
VOTING TRUSTS PROXY entitled to all the rights of a
The trustee votes as The proxy holder stockholder. Until the stocks are fully
owner rather than as votes as agent paid, it continues to be a subsisting
mere agent liability that is legally enforceable.
The trust may vote in The proxy must vote
person or by proxy in person
unless the agreement
 In Ong Yong, et.al, vs. David Tiu, the
provides otherwise Court did not allow the rescission of the
Pre-Subscription agreement since the
Trustee acquires Proxy has no legal action was filed by the Tius in their
legal title to the title to the shares of
personal capacities. It ruled that it was
shares of the the principal
transferring the corporation who had the legal
stockholder personality to file the suit, it being the
The agreement must Proxy need not be real party in interest.
be notarized notarized
The agreement is Revocable anytime UNDERWRITING AGREEMENT
irrevocable except one with  An agreement between a corporation
interest and a third person, termed the
Trustee is not limited Proxy can only act at “underwriter”, by which the latter
to act at any a specified
agrees, for a certain compensation, to
particular meeting stockholder’s
meeting (if not
take a stipulated amount of stocks or
continuing) bonds, specified in the underwriting
A trustee can vote A proxy can only vote agreement, if such securities are not
and exercise all the in the absence of the taken by those to whom they are first
rights of the owners of the stock offered.
stockholder even
when the latter is UNDERWRITING STOCK
present AGREEMENT SUBSCRIPTION
An agreement must A proxy is usually of AGREEMENT
not exceed 5 years at shorter duration
The signers obligate The obligation of the
any one time except although under Sec.
themselves to take signer to the
when the same is 58 it cannot exceed 5
the shares of stock purchasers and to
made a condition of years at any one time
which cannot be the public is
a loan.
sold. absolute.
The voting right is The right to vote is
Underwriters are There is no
divorced from the inherent in or
given commission. commission.
ownership of stocks inseparable from the
The signer can He becomes a
right to ownership of
refuse to become a stockholder of the
stock
stockholder/ company and is liable
member of the to pay the amount
VII. STOCKS AND STOCKHOLDERS company. due on the stock.

SUBSCRIPTION CONTRACT - any contract

for the acquisition of unissued stock in STOCK OPTION
an existing corporation or a corporation  A privilege granted to a party to
subscribe to a certain portion of the
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
109
MEMORY AID IN COMMERCIAL LAW

unissued capital stock of a corporation a. Necessary or proper in

within a certain period and under the carrying on the
terms and conditions of the grant corporate business
exercisable by the grantee at any time b. Ascertainable pecuniary
within the period granted. value
WARRANT c. Capable of being
 A type of security which entitles the transferred and applied
holder the right to subscribe to, the to payment of debts
unissued capital stock of a corporation or 3. Labor or services actually rendered
to purchase issued shares in the future, to the corporation;
evidenced by a Warrant Certificate, 4. Previously incurred corporate
whether detachable or not, which may indebtedness;
be sold or offered for sale to the public. 5. Amounts transferred from
unrestricted retained earning to
PRE-INCORPORATION SUBSCRIPTION stated capital,
AGREEMENTS (PISA) 6. Outstanding shares in exchange for
 Subscription of shares of stock of a stocks in the event of reclassification
corporation still to be formed shall be or conversion.
irrevocable for a period of at least 6 Note: Shares of stock shall not be issued
months from date of subscription, in exchange for promissory notes or
unless: future services. Note that there is no
1. All of the other prohibition on the use of checks, bills or
subscribers consent to the notes in payment of the “cash”
revocation; consideration.
2. The incorporation of said
corporation fails to materialize SHARES OF STOCK
with said period or within a  Interest or right which owner has in
longer period as may be the management of the corporation, and
stipulated in the contract of its surplus profits, and, on dissolution, in
subscription; provided that no all of its assets remaining after the
pre-incorporation subscription payment of its debt.
may be revoked after the
submission of the articles of CERTIFICATE OF STOCK
incorporation to the SEC. (Sec.  The document evidencing the
61) ownership of shares of stocks by a
stockholder and the full payment of its
MODES OF ISSUANCE OF SHARES issue or subscription price.
a. By subscription before and after  It is not essential to the ownership
incorporation to original, unissued stock and/or existence of the share of stock.
b. By sale of treasury stock after  Where the certificate of stock reflects
incorporation for money, property or a greater volume of shares than the
service actual number of shares issued or to be
c. By subscription to new issues of stock issued, the following rules may be
in case of an increase in the capital considered:
stock 1. To the extent that there is an
d. By making a stock dividend overissue, the excess issuance (over
the authorized capital stock or the
VALID CONSIDERATIONS IN stated capital) shall be void as being
SUBSCRIPTION AGREEMENT (Sec. 62) ultra vires.
1. Cash actually received; 2. If there is no overissue, but no
2. Property, tangible or intangible, payment has been made to cover the
actually received AND necessary or par or stated value of the excess
convenient for its use and lawful shares, the latter would constitute
purposes; “watered” stocks.
Requisites; 3. If there is no overissue and
watering of stocks, the corporation

COMMERCIAL LAW COMMITTEE

may be bound to honor the certificate certificate in favor of the transferee and
(if duly signed and released by its cancel the former certificate.
authorized officers) in the hands of a  Only absolute transfers need be
holder in good faith, reserving a right registered. The pledge or mortgage itself
of recourse that an aggrieved party need not be recorded in the stock and
may pursue against the culpable or transfer book, but a chattel mortgage
unjustly enriched party. must comply with the Chattel Mortgage
Law, and a pledge would require the
shares to be placed in the possession of
the creditor/pledgee. The agreement
CAPITAL STOCK SHARES OF STOCK must appear in a public instrument to
Amount paid in or Interest or right take effect against third persons.
secured to be paid which the (Chemphil vs. CA, 251 SCRA 257)
in by the stockholder has in
stockholders upon the management of EFFECTS OF UNREGISTERED TRANSFER
which the the corporation, and
OF SHARES
corporation is to its surplus profits,
conduct its and upon a a. It is valid and binding as between the
operation. It is the dissolution, in all of transferor and the transferee
property of the its assets remaining b. It is invalid as to the corporation
corporation itself after payment of except when notice is given to the
(monetary value). corporate debts. corporation for purposes of registration
c. It is invalid as against corporate
SHARES OF STOCK CERTIFICATE OF creditors and the transferor is still liable
STOCK to the corporation
Unit of interest in a Evidence of the d. It is invalid as to the attaching or
corporation holder’s ownership executing creditors of the transferor, as
of the stock and of well as subsequent purchasers in good
his right as a faith without notice of the transfer.
shareholder
Incorporeal or Concrete and
intangible property tangible
ISSUANCE OF CERTIFICATE OF STOCK
May be issued by the May be issued only if No certificate of stock shall be issued
corporation even if the subscription is until the full amount of the subscription
the subscription is fully paid. is paid. Basis: Doctrine of Individuality
not fully paid. of Subscription that espouses that the
subscription is one, entire, indivisible,
REQUIREMENTS FOR TRANSFER OF and whole contract, which cannot be
STOCK divided into portions. (SEC Opinion)
a. In case of shares covered by a
certificate, the indorsement of the COLLECTION OF UNPAID SUBSCRIPTION
owner or his agent coupled with delivery 1. Voluntary payment
is essential a. Upon the date specified in the
b. Where no certificate has been issued subscription contract
or for some reason it is not in the b. Upon call by the Board of
possession of the stockholder, it may be Directors
transferred by means of a deed of 2. Involuntary payment
assignment duly recorded in the books of a. Extra-judicial
the corporation i. Delinquency sale
c. To be valid against the corporation ii. Application of dividends
and third persons, the transfer must be b. Judicial action
recorded in the stock and transfer book Note: The prescriptive period in case of
d. The transferee must present the subscription of shares begins to run only
indorsed certificate to the corporate from the time the board of directors
secretary who shall effect the transfer in declares that the balance are due and
the corporate books, issue a new stock payable. It does not begin to run from

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

the date of the subscription. (Garcia vs.  No delinquency stock shall be voted
Suarez, 67 Phil. 441) for or be entitled to vote or
representation at any stockholders
DELINQUENCY meeting, nor shall the holder be entitled
1. If the subscription contract fixes the to any of the rights of a stockholder
date for payment, failure to pay on except the right to dividends in
such date shall render the entire accordance with the provisions of this
balance due and payable with Code until and unless he pays the
interest. Thirty days therefrom, if amount due on his subscription with
still unpaid, the shares become accrued interest, and the cost and
delinquent, as of the due date, and expenses of advertisement, if any. (Sec.
subject to sale, unless the board 71)
declares otherwise.
2. If no date is fixed in the subscription
contract, the board of directors can
make the call for payment, and PROCEDURE FOR THE SALE OF
specify the due date. The notice of DELINQUENT STOCKS (Sec. 68)
call is mandatory. The failure to pay 1. Call by resolution demanding
on such date shall render the entire payment of the balance. However, if
balance due and payable with the contract of subscription
interest. Thirty days therefrom, if prescribes the date of payment, no
still unpaid, the shares become call is necessary.
delinquent, as of the date of call, 2. Notice of the board resolution given
and subject to sale, unless the board to the stockholders by the corporate
declares otherwise. (Sec. 67) secretary, either personally or by
registered mail. Publication of notice
 Effect: of call is not required.
A. Upon the stockholder 3. Failure of the stockholder to pay
1. Accelerates the within a grace period of 30 days from
entire amount of the unpaid the date specified in the contract of
subscription; subscription or in the call, the stocks
2. Subjects the shall be declared delinquent and
shares to interest, expenses and shall be subject to sale.
costs; 4. Notice of delinquency served on the
3. Disenfranchises subscribers either personally or
the shares from any right that registered mail and publication in a
inheres to a shareholder, except newspaper of general circulation in
the right to dividends (but which the province or the city where
shall be applied to any amount principal office is located for once a
due on said shares or, in the case week for 2 consecutive weeks.
of stock dividends, to be Notice shall state the amount due on
withheld by the corporation until each subscription plus accrued
full payment of the delinquent interest, and the date, time and
shares. (Sec. 43) place of the sale which shall not be
B. Upon the director owning delinquent less than 30 days nor more than 60
shares days from the date the stocks
1. He can continue serving in that become delinquent.
capacity unless and until said shares are 5. Sale of the delinquent shares at
totally bidded away, he continues to be public auction.
the owner thereof and in the interim he
is not disqualified. HIGHEST BIDDER IN A DELINQUENCY
2. A delinquent stockholder seeking to SALE
be elected as director may not be a a. The person participating in the
candidate for, nor be duly elected to, delinquency sale who offers to pay the full
the board. amount of the balance of the subscription
together with the accrued interest, costs

COMMERCIAL LAW COMMITTEE

of advertisement and expenses of sale, b. Right to remove directors

for the smallest number of shares. In 2. PROPRIETARY RIGHTS
other words, the amount of the bid does a. Right to dividends;
not vary but only the number of shares to b. Right to issuance of stock
be bought changes and determines the certificate for fully paid shares;
highest bidder. c. Proportionate participation in
b. If there is no bidder as mentioned the distribution of assets in
above, the corporation may bid for the liquidation;
same, and the total amount due shall be d. Right to transfer of stocks in
credited as paid in full in the books of corporate books;
the corporation. Such shares shall be e. Right to recover stocks
considered as treasury shares. unlawfully sold for delinquent
payment of subscription
PROCEDURE FOR ISSUANCE OF NEW f. Preemptive right
CERTIFICATE OF STOCK IN LIEU OF PREEMPTIVE RIGHT OF STOCKHOLDERS
LOST, STOLEN OR DESTROYED ONES  It is the shareholders’ preferential
(Sec. 73) right to subscribe to all issues or
1. Filing with the corporation an dispositions of shares of any class in
affidavit in triplicate by the registered proportion to their present
owner setting forth the circumstances as stockholdings.
to how the certificate was lost, stolen or  Purpose: to enable the shareholder to
destroyed, the number of shares, serial retain his proportionate control in the
number of the certificate and the name corporation and to retain his equity in
of the corporation that issued the same. the surplus.
2. Publication of notice of loss by the  Extends to treasury shares in case of
corporation in a newspaper of general their reissuance.
circulation in the place of the principal  If the shares preferentially offered to
office, once a week for 3 consecutive a stockholder are not subscribed or
weeks. purchased by him, it does not follow that
3. After the lapse of 1 year from the said shares shall again be re-offered on a
date of the last publication, if no contest pro rata basis to stockholders who
has been presented, the corporation already exercised their preemptive
shall cancel in its books the certificate rights. There is no preemptive right with
of stock, which has been lost, stolen or respect to the share to be re-offered.
destroyed, and issue in lieu thereof a
 In case additional issues of originally
new certificate of stock.
authorized shares:
However, if the registered owner
 GENERAL RULE: There is no
files a bond or other securities as may be
preemptive right. This is on the theory
necessary to the board, the new
that when a corporation at its inception
certificate of stock may be issued even
offers its first shares, it is presumed to
before the expiration of one (1) year
have offered all of those which it is
period.
authorized to issue.
 The prescribed procedure does not  EXCEPTION: When a corporation at its
apply to a case where the inception offers only a specified portion
certificates are in the company’s of its authorized capital stock for
possession when mislaid which subscription. If subsequently, it offers
thereby obligates the corporation, the remaining unsubscribed portion,
not the stockholder, to suffer the there would be preemptive right as to
consequences. (SEC Opinion) the remaining portion thus offered for
subscription.
RIGHTS OF STOCKHOLDERS (Pandect of  When pre-emptive right not available:
Commercial Law and Jurisprudence, a. When denied by the article of
Justice Jose Vitug, 1997 ed.) incorporation
1. MANAGERIAL RIGHTS b. Shares requiring stock offering or
a. Voting rights; and minimum stock ownership by the public
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
113
MEMORY AID IN COMMERCIAL LAW

c. Shares to be issued in good faith with management to sue unless such a

the approval of the stockholders demand would be futile
representing 2/3 of the outstanding (iii) The stockholder/member
capital stock, in exchange for property must be such at the time of the
needed for corporate purposes or in objectionable acts or
payment of a previously contracted debt transactions unless the
transactions are continuously
PRE-EMPTIVE RIGHT vis-à-vis RIGHT OF injurious
FIRST REFUSAL (Philippine Corporate (iv) The action must be brought
Law, Cesar Villanueva, 2001 ed.) in the name of the corporation
PRE-EMPTIVE RIGHT OF FIRST  The number of shares of the
RIGHT REFUSAL stockholder is immaterial since
May be exercised Arises only by virtue he is not suing in his own behalf
even when there is of contractual Note: The mere trustee of
no express provision stipulations but is shares registered in his name
of law also granted under cannot file a derivative suit for
the provisions on
he is not a stockholder in his own
Close Corporation
Pertains to Exercisable against right. (Bitong vs. CA, 292 SCRA
unsubscribed another stockholder 304)
portion of the of the corporation of
authorized capital his shares of stock LIABILITIES OF STOCKHOLDERS
stock. A right that a. Liability to the corporation for unpaid
may be claimed subscription
against the b. Liability to the corporation for
corporation interest on unpaid subscription
c. Liability to creditors of the
3. REMEDIAL RIGHTS corporation on the unpaid subscription
a. Individual suit – a suit instituted d. Liability for watered stock
by a shareholder for his own e. Liability for dividends unlawfully paid
behalf against the corporation; f. Liability for failure to create
b. Representative suit – a suit filed corporation
by a shareholder in his behalf
and in behalf likewise of other VIII. CORPORATE BOOKS AND RECORDS
stockholders similarly situated INSPECTION RIGHTS
and with a common cause  Limitations:
against the corporation; and a. The right must be
c. Derivative suit – a suit filed in exercised during reasonable
behalf of the corporation by its hours on business days;
shareholders (not creditors b. The person demanding
whose remedies are merely the right has not improperly used
subsidiary such as accion nay information obtained
subrogatoria and accion through any previous
pauliana) upon a cause of action examination of the books and
belonging to the corporation, but records of the corporation; and
not duly pursued by it, against c. The demand is made in
any person or against the good faith or for a legitimate
directors, officers and/or purpose. (Sec. 74)
controlling shareholders of the
 The right extends, in consonance with
corporation.
equity, good faith, and fair dealing, to a
Requisites: foreign subsidiary wholly-owned by the
(i) An existing cause of action in corporation.
favor of the corporation
 Books required to be kept by the
(ii) The stockholder/member
corporation:
must first make a demand upon
1. Book of Minutes
the corporation or the
a. minutes of stockholder or
members meetings; and

COMMERCIAL LAW COMMITTEE

b. minutes of board meetings. subject to all the duties and liabilities of

2. Book of all business transactions; a corporation;
3. Stock and transfer book, 4. The surviving or consolidated
in case of stock corporations. corporation shall thereafter possess all
 Corporate records required by the SEC the rights, privileges, immunities and
to be kept and/or registered: franchises of each of the constituent
1. Books of Account; corporations;
2. List of Stockholders or Members; 5. All property, real or personal, and all
and receivables due to, and all other interest
3. Financial Records. of each constituent corporation, shall be
deemed transferred to and vested in
IX. MERGER AND CONSOLIDATION such surviving or consolidated
MERGER CONSOLIDATION corporation without further act or deed;
 A union whereby  The union of two 6. The surviving or consolidated
one or more existing or more existing corporation shall be responsible for all
corporations are corporations to form the liabilities and obligations of each of
absorbed by another a new corporation the constituent corporations;
corporation which called the 7. Any claim, action or proceeding
survives and consolidated pending by or against any of the
continues the corporation.
constituent corporations may be
combined business.
prosecuted by or against the surviving or
consolidated corporations; and
PROCEDURE: 8. The rights of the creditors or lien
a. The board of directors or trustees of upon the property of any of each
each corporation shall approve a plan of constituent corporation shall not be
merger or consolidation impaired by such merger or
b. The plan shall be submitted for consolidation.
approval by the stockholders or members
of each of such corporation at separate GENERAL RULE: When one corporation
corporate meetings duly called for the buys all the shares of another
purpose corporation, this will not operate to
c. The articles of merger or dissolve the other corporation and as the
consolidation shall be executed by each two corporations still maintaining their
of the constituent corporations separate corporate entities, one will not
d. Submission to the SEC for approval answer for the debts of the other.
e. The SEC may or may not conduct a EXCEPTIONS AS TO NON-ASSUMPTION
hearing OF LIABILITIES:
f. Issuance of certificate of merger or 1. If there is an express assumption of
consolidation by the SEC liabilities;
2. If there is a consolidation or merger;
EFFECTS OF MERGER OR 3. If the purchase was in fraud of
CONSOLIDATION (Sec. 80) creditors; and
1. The constituent corporations shall 4. If the purchaser is merely a
become a single corporation which, in continuation of the seller.
case of merger shall be the surviving
corporation and, in the case of DE FACTO MERGER
consolidation, shall be the consolidated  One corporation acquiring all or
corporation; substantially all of the properties of
2. The separate existence of the another corporation in exchange for
constituent corporation shall cease, shares of stock of the acquiring
except that of the surviving corporation; corporation. The acquiring corporation
3. The surviving or consolidated would end-up with the business
corporation shall possess all rights, enterprise of the selling corporation
privileges, immunities and powers and whereas the latter would end up with
basically its remaining assets being the
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
115
MEMORY AID IN COMMERCIAL LAW

shares of stock of the acquiring owner. What the purchaser actually

corporation and may then distribute it as purchased is the ability to elect the
liquidating dividend to its stockholders. members of the board of the corporation
(Philippine Corporate Law, Cesar who run the business.
Villanueva, 2001 ed.)
X. APPRAISAL RIGHT
MERGER and SALE OF ASSETS
CONSOLIDATION APPRAISAL RIGHTS
1. Sale of assets is 1.merger/consolidati  The right to withdraw from the
always involved on is not always corporation and demand payment of the
involved fair value of his shares after dissenting
2. There is automatic 2. Purchasing from certain corporate acts involving
assumption of corporation is not fundamental changes in corporate
liabilities generally liable for structure, namely: Key: ASIM
the debts and
liabilities of the
1. An amendment to the
selling corporation articles that has the effect of a)
3. There is 3. The selling changing or restricting the rights
continuance of the corporation ordinarily of shareholders or of authorizing
enterprise and of the contemplates a preferences over those of
stockholders liquidation of the outstanding shares, or b)
enterprise changing the term of corporate
4. Title to the assets 4. Transfer of title is existence;
are transferred by by virtue of contract 2. Sale, encumbrance or
operation of law other dispositions of all or
5. The constituent 5. The selling
substantially all of the corporate
corporations are corporation is not
automatically dissolved by the property or assets. (Sec. 81)
dissolved mere transfer of all 3. Merger or consolidations;
its property and
4. Investment of corporate
TYPES OF ACQUISITIONS (Philippine funds in another corporation or
Corporate Law, Cesar Villanueva, 2001 in a purpose other than the
ed.) primary purpose; (Sec. 42)
a. “ASSETS-ONLY” LEVEL  Other instances when right available:
 The purchaser is interested only in 5. When a corporation invest its funds
the raw assets and properties of the in another corporation or business
business. He is not interested in the for any purpose other than its
entity of the corporate owner of the primary purpose
assets nor of the goodwill and other 6. In a close corporation, a
factors relating to the business itself. stockholder for any reason
 The transferee would not be liable for compel the corporation to
the debts and liabilities of his transferor purchase his shares when the
since there is no privity of contract over corporation has sufficient assets
debt obligations between the transferee in its books to cover its debts
and the transferor’s creditors and liabilities exclusive of
b. “BUSINESS-ENTERPRISE” LEVEL capital stock
 The transferee merely continues the
same business of the transferor since he PROCEDURE
obtains the earning capability of the a. The dissenting stockholder shall make
venture a written demand on the corporation
 The transferee is liable for the debts within 30 days after the date on which
and liabilities of the transferor the vote was taken for the payment of
c. “EQUITY” LEVEL the fair value of his shares. Failure to do
so, shall be deemed a waiver of his a
 The purchaser takes control and
waiver of his appraisal right
ownership of the business by purchasing
b. If the proposed corporate action is
the shareholdings of the corporate
implemented or effected, the

COMMERCIAL LAW COMMITTEE

corporation shall pay to such 4. The Commission determines that such

stockholder, upon surrender of the stockholder is not entitled to
corresponding certificate of stock within appraisal right.
10 days after demanding payment of his
shares XI. NON-STOCK CORPORATION
c. Upon payment of the agreed or  A corporation organized for an
awarded price, the stockholder shall eleemosynary purpose, and no part of
transfer his shares to the corporation whose income is, during its existence,
distributable as dividends to its
LIMITATIONS ON THE EXERCISE OF members, trustees, or officers, subject
APPRAISAL RIGHT to the provisions of the Corporation Code
1. Any of the instances provided for by on dissolution. (Sec. 87)
law for the exercise of the right must  Any profit which it may obtain as an
be present. incident to its operations shall,
2. The dissenting stockholder must have whenever necessary or proper, be used
voted against the proposed corporate for the furtherance of the purpose or
action. purposes for which it was organized.
3. The stockholder must make a written
demand within 30 days from the date
that the vote was taken.  Eleemosynary purposes: charitable,
4. The price must be based on the fair religious, educational, professional,
value of the shares as of the day prior cultural, recreational, fraternal,
to the date in which the vote was literary, scientific, social, civic service,
taken. or similar purposes, like trade, industry,
5. Payment of the shares must be made agricultural. (Sec. 88)
only out of the unrestricted retained  They are governed by the same rules
earnings of the corporation. established for stock corporations,
6. Upon payment, the stockholder must whenever pertinent, subject, however,
transfer his shares to the corporation. to a number of special features.
Effect of the Exercise of the Right: RULES ON CONVERSION (SEC Opinion)
a. All rights accruing to the such shares 1. Stock to non-stock corporation
shall be suspended  Conversion may be made by mere
b. The dissenting stockholder shall be amendment of the articles of
entitled to receive payment of the incorporation.
fair value of his shares as agreed upon 2. Non-stock to stock corporation
between him and the corporation or
 The corporation must first be
as determined by the appraisers
dissolved; mere amendment of the
chosen by them.
articles of incorporation would not
suffice because the conversion would
GENERAL RULE: A dissenting change the corporate nature from non-
stockholder who demands payment of his profit to monetary gain.
shares is no longer allowed to withdraw
 The conversion without dissolving it
from his decision
first would be tantamount to distribution
Except when: of its assets or income to its members
1. The corporation consents to the inasmuch as after its conversion, the
withdrawal asset of the non-stock corporation would
2. The proposed corporate action is now be treated as payment to the
abandoned or rescinded by the subscriptions of the members who will
corporation now become stockholders of the
3. The proposed corporate action is corporation.
disapproved by the SEC where its
approval is necessary RIGHTS OF MEMBERS

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

1. To be entitled to 1 vote unless 2. Assets held by the corporation upon a

otherwise provided in the condition requiring return, transfer or
articles or by-laws conveyance, and which condition occurs
2. To vote by proxy unless by reason of dissolution, shall be
otherwise provided in the returned, transferred or conveyed in
articles or by-laws accordance with such requirements
3. To transfer membership if 3. Assets received and held by the
allowed by the articles or by- corporation subject to limitations
laws permitting their use only for charitable,
4. To be elected as trustee religious, benevolent, educational or
similar purposes but not held upon a
condition requiring return, transfer or
STOCK NON-STOCK conveyance by reason of dissolution,
Has capital stock Does not have shares shall be transferred or conveyed to one
divided into shares and may not or more corporations, societies or
and with authority to distribute profits to organizations engaged in activities in the
distribute dividends its members Philippines substantially similar to those
to its stockholders of the dissolving corporation pursuant to
Stockholders may Members cannot
a plan of distribution
transfer their shares transfer their
membership unless 4. Other assets, if any, shall be
allowed by the distributed in accordance with the
articles or by-laws provisions of the articles of incorporation
Cumulative voting is Cumulative voting or the by-laws
available in the not available unless 5. In any other case, assets may be
election of directors otherwise provided in distributed to such persons, societies,
the articles or by- organizations or corporations, whether
laws or not organized for profit, as may be
Directors cannot Trustees may exceed specified in a plan of distribution.
exceed 15 in number 15 in number
The term of a The term of a trustee
 The plan of distribution shall be
director is 1 year is 3 years; 1/3 of the approved by a majority vote of the
Board shall be board of trustees and by 2/3 of the
elected annually members having voting rights at a
Stockholders may Members may be meeting
vote by proxy deprived of the right
to vote by proxy in XII. CLOSE CORPORATION
the articles or by-  A special kind of stock corporation:
laws
1. whose articles of incorporation
Officers are elected Officers may be
should provide that:
by the Board of directly elected by
Directors the members unless a.the number of stockholders
otherwise provided in shall not exceed 20;
the articles or by- b.issued stocks are subject to
laws transfer restrictions, with a right
Stockholders and Members may be of preemption in favor of the
directors must act in allowed by the by- stockholders or the corporation;
a meeting, except laws to vote by mail and
where a mere or other similar c. the corporation shall not be
written assent is means
listed in the stock exchange or
sufficient or a formal
meeting unnecessary its stocks should not be publicly
offered; AND
RULES FOR DISTRIBUTION OF ASSETS IN 2. whose at least 2/3 of the voting
CASE OF DISSOLUTION (SEC. 94) stocks or voting rights should not be
1. All liabilities and obligations of the owned or controlled by another
corporation shall be paid, satisfied and corporation which is not a close
discharged or adequate provision shall corporation. (Sec. 96)
be made therefor  Characteristics:

COMMERCIAL LAW COMMITTEE

1. Stockholders may act as Its articles of Its articles must

directors without need of incorporation need contain the special
election and therefore are liable only contain the matters prescribed by
as directors; general matters Sec. 97, aside from
enumerated in Sec. the general matters
2. Stockholders who are
14 of the Code. in Sec. 14. Failure to
involved in the management of do so precludes a de
the corporation are liable in the jure close corporation
same manner as directors are. status.
3. Quorum may be greater Its status as an 2/3 of its voting stock
than mere majority; ordinary stock or voting rights must
4. Transfers of stocks to corporation is not not be owned or
others, which would increase the affected by the controlled by another
number of stockholders to more ownership of its corporation which is
than the maximum are invalid; voting stock or not a close
voting rights. corporation.
5. Corporate actuations
Its articles cannot Its articles may
may be binding even without a classify its directors. classify its directors.
formal board meeting, if the Business of the Business of the
stockholder had knowledge or corporation is corporation may be
ratified the informal action of managed by the managed by the
the others; board of directors. stockholders if the
6. Preemptive right extends articles so provide,
to all stock issues; but they are liable as
7. Deadlocks in board are directors.
settled by the SEC, on the The corporate Its articles may
officers and provide that any or
written petition by any
employees are all of the corporate
stockholder; and elected by a officers or employees
8. Stockholder may majority vote of all may be elected or
withdraw and avail of his right of the members of the appointed by the
appraisal. board of directors. stockholders.
Note: Special rules are provided for
close corporations because it is The pre-emptive The pre-emptive right
essentially an incorporated partnership. right is subject to is subject to no
(The Corporation Code of the the exceptions found exceptions unless
in Sec. 39. denied in the articles
Philippines Annotated, Hector de Leon,
The appraisal right may The appraisal right may
2002 ed.) be exercised by a be exercised and
stockholder only in the compelled against the
 The following cannot be a close cases provided in Secs. corporation by a
81 and 42 of the Code. stockholder for any
corporation: reason.
a. mining companies; Except as regards In case of an
b. oil companies; redeemable shares, arbitration of an
c. stock exchanges; the purchase by the intra-corporate
d. banks; corporation of its deadlock by the SEC,
e. insurance companies; own stock must the corporation may
f. public utilities; always be made from be ordered to
g. education institutions; the unrestricted purchase its own
h. other corporations declared to be retained earnings. shares from the
stockholders
vested with public interest. (Sec.
regardless of the
96) availability of
unrestricted retained
ORDINARY STOCK CLOSE earnings.
CORPORATION CORPORATION Arbitration of intra- Arbitration of intra-
corporate deadlock corporate deadlock
by the SEC is not a by the SEC is an
remedy in case the available remedy in
directors or case the directors or
stockholders are so stockholders are so
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
119
MEMORY AID IN COMMERCIAL LAW

divided respecting divided respecting 2. RELIGIOUS CORPORATION

the management of the management of  A corporation composed entirely of
the corporation. the corporation. spiritual persons and which is organized
for the furtherance of a religion or for
POWERS OF THE SEC IN CASE OF perpetuating the rights of the church or
DEADLOCK IN CLOSE CORPORATIONS for the administration of church or
1. Cancel or alter any provision in the religious work or property. It is different
articles of incorporation or bylaws from an ordinary non-stock corporation
2. Cancel, alter or enjoin any organized for religious purposes.
resolution of the corporation  Kinds:
3. Direct or prohibit any act of the A) CORPORATION SOLE
corporation - A special form of corporation,
4. Require the purchase at their fair usually associated with the clergy,
value of shares of any stockholder consisting of one person only and his
either by any stockholder or by the successors, who is incorporated by
corporation regardless of the law to give some legal capacities and
availability of unrestricted retained advantages; and
earnings. B) RELIGIOUS SOCIETIES
5. Appoint a provisional director - A non-stock corporation
6. Dissolve the corporation governed by a board but with religious
7. Granting such other relief as the purposes. It is incorporated by an
circumstances may warrant. aggregate of persons, e.g. religious
order, diocese, synod, sect, etc.
XIII. SPECIAL CORPORATIONS
1. EDUCATIONAL CORPORATION
 A stock or non-stock corporation
organized to provide facilities for
teaching or instruction.
 A favorable recommendation of the XIV. DISSOLUTION AND WINDING UP
DECS is essential for the approval of its (LIQUIDATION)
articles and by-laws.
 It is primarily governed by special DISSOLUTION
laws and suppletorily by the provisions of  Extinguishment of the franchise of a
the Code. corporation and the termination of its
corporate existence.
NON-STOCK EDUCATIONAL
EDUCATIONAL CORPORATION  Modes:
CORPORATION 1. Voluntary
A non-stock A special corporation a) Application for dissolution with the
corporation which may a stock or
SEC
non-stock
i. Where no creditors are
Governed by the Governed by special
provisions on non- laws and by the affected
stock corporations general provisions of ii. Where creditors are affected
and suppletorily by the Corporation Code b) Shortening of the corporate term
the provisions on by amending the articles of
stock corporations incorporation.
The number of board The number of the 2. Involuntary
of trustees may be board of trustees a) Expiration of the corporate term;
more than 15 should not be less b) Failure to organize and commence
than 5 but not more
business within 2 years from the date
than 15.
of issuance of the certificate of
The term of office of The term of office of
the board of trustees the board of trustees incorporation (Note: However, the
shall be 3 years shall be 5 years SEC has opined that the dissolution in
this case is not automatic. The
corporation continues to exist as
such, notwithstanding its non-

COMMERCIAL LAW COMMITTEE

operational status until the SEC distributed to the stockholders or

orders its dissolution after notice and members.
hearing.)  Methods:
c) Legislative dissolution; 1. By the corporation itself through
d) Quo warranto suit against a de its board of directors/trustees;
facto corporation; 2. By a trustee to whom the
e) Minority stockholders’ suit for corporate assets have been
dissolution on justifiable grounds; or conveyed; and
f) SEC dissolution, upon complaint 3. By a management committee or
and after notice and hearing, on the rehabilitation receiver appointed
following grounds: by the SEC.
i. The corporation was illegally Note: The 3-year period of liquidation
organized; does not apply to Methods 2 and 3 as
ii. Continuous inactivity long as the trustee or the receiver is
(subsequent to incorporation, appointed within the said period.
organization and  The termination of the life of a
commencement of business) juridical entity does not by itself
for at least 5 years; cause the extinction or diminution of
iii. Serious dissension in the the rights and liabilities of such
corporation; or entity nor those of its owners and
iv. Commission by the creditors alike (see Sec. 145).
corporation of illegal or ultra
vires acts or violations of the  The word “trustee” as sued in the
Code. corporation statute must be
understood in its general concept
EFFECTS OF DISSOLUTION which could include the counsel to
a. Transfer of legal title to corporate whom was entrusted the prosecution
property to the stockholders who of the suit filed by the corporation.
become co-owners thereof (Spouses Gelano vs. CA)
b. Continuation of corporate business LIQUIDATION REHABILITATION
merely as an association without Connotes a winding Connotes a reopening
up or settling with or reorganization
juridical personality creditors and debtors
c. Conveyance by the stockholders of Winding up process Contemplates a
their respective shareholdings toward so that assets may be continuance of
the creation of a new corporation to distributed to those corporate life in an
continue the business of the old effort to restore the
entitled
corporation to its
d. Reincorporation of the dissolved former successful
corporation by refilling new articles of operation
incorporation and by-laws
e. The corporation continues as a body XV. FOREIGN CORPORATION
corporate for 3 years for purposes of  A corporation formed, organized or
winding up existing under any law other than those
f. Cessation of corporate existence for of the Philippines, and whose laws allow
all purposes upon the expiration of the Filipino citizens and corporations to do
winding up period of 3 years. (The business in its own country or state.
Corporation Code of the Philippines (Sec. 123)
Annotated, Hector de Leon, 2002 ed.  The definition espouses the
incorporation test and the reciprocity
LIQUIDATION rule and is significant for licensing
 The process by which all the assets of purposes.
the corporation are converted into liquid  It is not permitted to “transact or do
assets (cash) in order to facilitate the business in the Philippines” until it has
payment of obligations to creditors, and secured a license for that purpose from
the remaining balance, if any, is to be the SEC and a certificate of authority

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

from the appropriate government 6. Failure to pay taxes, imposts and

agency. assessments;
7. Engage in business unauthorized by
RESIDENT AGENT SEC;
 An individual, who must be of good 8. Acting as dummy of a foreign
moral character and of sound financial corporation; and
standing, residing in the Philippines, or a 9. Not licensed to do business in the
domestic corporation lawfully Philippines. (Sec. 134)
transacting business in the Philippines,
designated in a written power of TEST OF “DOING OR TRANSACTING
attorney by a foreign corporation BUSINESS IN THE PHILIPPINES”:
authorized to do business in the  The Corporation Code does not define
Philippines, on whom any summons and the phrase “doing or transacting
other legal processes may be served in business.”
all actions or other legal proceedings A. Jurisprudential Tests (Philippine
against the foreign corporation. (Sec. Corporate Law, Cesar Villanueva, 2001
127-128) ed.)
1. Twin characterization test
CONTENTS FOR APPLICATION OF a) Whether the foreign corporation is
LICENSE maintaining or continuing in the
1. Date and term of incorporation Philippines the body or substance of
2. The address of the principal office in the business for which it was
the country of incorporation organized or whether it has
3. The name and address of resident substantially retired from it and
agent turned it over another (Substance
4. The place in the Philippines where Test); and
it intends to operate b) Whether there is continuity of
5. The specific purpose or purposes commercial dealings and
6. The names and addresses of the arrangements, contemplating to
present directors and officers of the some extent the performance of acts
corporation or works or the exercise of some
7. A statement of its authorized functions normally incident to and in
capital stock progressive prosecution of, the
8. A statement of its outstanding purpose and object of its
capital stock organization (Continuity Test).
9. A statement of the amount actually 2. Contract Test
paid in  Whether the contracts entered
10. Such additional information as may into by the foreign corporation, or by
be necessary to enable the SEC to an agent acting under the control
determine whether such corporation and direction of the foreign
is entitled to license corporation, are consummated in the
Philippines.
GROUNDS FOR REVOCATION OF
LICENSE B. Statutory Tests
1. Failure to file annual reports 1. Foreign Investment Act of 1991 (R.A.
required by the Code; No. 7042)
2. Failure to appoint and maintain a  Acts constituting “doing business”:
resident agent; a) Soliciting orders, service
3. Failure to inform the SEC of the contracts, opening offices,
change of residence of the resident whether called “liaison” offices
agent; or branches;
4. Failure to submit copy of amended b) Appointing representatives or
articles or by-laws or articles of distributors domiciled in the
merger or consolidation; Philippines or who in any
5. A misrepresentation in material calendar year stay in the country
matters in reports;

COMMERCIAL LAW COMMITTEE

for a period or periods totaling apart from their common business in the
180 days or more; sense that there is no intention to
c) Participating in the engage in a progressive pursuit of the
management, supervision or purpose and object of business
control of any domestic business, transaction. (Eriks Pte.Ltd vs. CA, 267
firm or entity or corporation in SCRA 567)
the Philippines; and 2. In Pari Delicto Rule
d) Any other act or acts that imply In the case of Top-Weld Manufacturing
a continuity of commercial vs. ECED, S.A., the Court denied the
dealings or arrangements, and relief prayed for by petitioner when it
contemplate to that extent the ruled that the very purpose of the law
performance of acts or works, or was circumvented and evaded when the
the exercise of some of the petitioner entered into the said
functions normally incident to, agreements despite the prohibition
and in progressive prosecution contained in the questioned law. The
of, commercial gain or of the parties were considered as being in pari
purpose of the business delicto because they equally violated
organization. R.A. 5455
2. Implementing Rules of R.A. No. 7042 3. Estoppel Rule
 Acts not constituting “doing  A party is estopped from questioning
business”: the capacity of a foreign corporation to
a) Mere investment as a institute an action in our courts where it
shareholder in a domestic had obtained benefits from its dealings
corporation and/or the exercise with such foreign corporations and
of rights as such investor; thereafter committed a breach or sought
b) Appointing a representative or to renege on its obligations. (European
distributor domiciled in the Resources vs. Ingnieburo)
Philippines which transacts
business in its own name and for
its own account; EFFECTS OF LACK OF LICENSE
c) Publication of a general A. On suits
advertisement through any print 1. Foreign corporation doing business in
or broadcast media; the Philippines:
d) Maintaining a stock of goods in a) may not sue or intervene in any
the Philippines solely for the action in any court or
purpose of having the same administrative agency of the
processed by another entity in Philippines; but
the Philippines; b) may be sued on any valid cause of
e) Consignment by the foreign action recognized in the
corporation of equipment with a Philippines (under the doctrine of
local company to be used in the quasi-estoppel by acceptance of
processing of products for benefits). (Sec. 133)
export; 2. Foreign corporation not doing business
f) Collecting information in the in the Philippines:
Philippines; and a) Generally, it may not sue and be
g) Performing services auxiliary to sued in any court or
an existing isolated contract of administrative agency of the
sale which are not on a Philippines;
continuing basis. b) However, it may sue and be sued
for isolated transactions, as well
C. Jurisprudential Rules as for those which are casual or
1. Doctrine of Isolated Transactions incidental thereto.
 Foreign corporations, even B. On contracts
unlicensed ones, can sue or be sued on a  The contracts contemplated are those
transaction or series of transactions set that satisfy the “contract test” or those
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
123
MEMORY AID IN COMMERCIAL LAW

that make a foreign corporation as one Note: A corporate officer’s dismissal is

“doing business in the Philippines.” always a corporate act and/or an intra-
 GENERAL RULE: The contracts are corporate controversy. However, the
unenforceable. They are enforceable corporate officers contemplated are
only upon securing a license. those whose offices are created by the
 EXCEPTION: However, the contracts Corporation Code or the by-laws.
are null and void if they are contrary to
law, morals, good customs, public order INTRA-CORPORATE DISPUTE
and public policy.  Elements:
1. Status or relationship of the parties –
INSTANCES WHEN A FOREIGN controversy must be between and
CORPORATION MAY SUE IN THE among corporators, between
PHILIPPINES WHETHER OR NOT corporators and the corporation
LICENSED TO DO BUSINESS THEREAT 2. Nature of the question – intrinsic
1. To seek redress for an isolated connection with the regulation or
business transaction; the internal affairs of the
2. To protect its corporate reputation, corporation
name, and goodwill;  Examples:
3. To enforce a right not arising out of a 1. Action by a corporate officer to
business transaction, e.g. tort that recover compensation from the
occurred in the Philippines; corporation
4. When the parties have contractually 2. Action by a stockholder to compel
stipulated that Philippines is the venue issuance of certificate of stocks
of actions; and 3. Action for recovery of corporate
5. When the party sued is barred by the funds
principle of estoppel and/or principle of Note: Allegations in the complaint
unjust enrichment from questioning the determines jurisdiction.
capacity of the foreign corporation.

SECURITIES AND EXCHANGE

COMMISSION GROUNDS FOR SUSPENSION OR
REORGANIZATION CANCELLATION OF CERTIFICATE OF
DECREE (P.D. No. 902- REGISTRATION (SEC. 6[L])
A) 1. fraud in procuring registration;
2. serious misrepresentation as to
ORIGINAL AND EXCLUSIVE objectives of corporation;
JURISDICTION OF THE RTC (Sec. 5 in 3. refusal to comply with lawful order
relation to Sec. 5.2 OF RA 8799): of SEC;
1. Fraudulent devices and schemes 4. continuous inoperation for at least 5
employed by directors detrimental years;
to the public interest and to other 5. failure to file by-laws within
firms; required period;
2. Intra-corporate disputes; 6. failure to file reports; and
3. Disputes with the state in relation to 7. Others similar grounds.
their franchise and right to exist as
such; INTERIM RULES OF PROCEDURE ON
4. Controversies in election, CORPORATE REHABILITATION (effective
appointment of directors or trustees; December 15, 2000)
5. Petition to be declared in a state of
suspension of payments; CORPORATE REHABILITATION
6. Petition for rehabilitation; and  A process to try to conserve and
7. Appointment of rehabilitation administer the corporation’s assets in
receiver or management committee the hope that it may eventually be able
(provisional remedies). to return from financial stress to
solvency.

COMMERCIAL LAW COMMITTEE

 Nature: in rem, summary, and non- d. direct the creditors to file their
adversarial verified comment or opposition
 Applicability: These Rules apply to not later than 10 days before the
petitions for rehabilitation filed by initial hearing; their failure to do
corporations, partnerships and so would bar them from any
associations pursuant to P.D. 902-A participating in the proceedings.
 Steps: 4. Publication of the stay order in a
1. Filing verified petition with the newspaper of general circulation once a
appropriate RTC by: week for 2 consecutive weeks;
a. corporate debtor who foresees 5. Referral of rehabilitation plan to
the impossibility of meeting its rehabilitation receiver;
debts when they respectively fall 6. Meetings between corporate debtor
due; or with creditors. Discussions on the
b. creditors holding at least 25% of rehabilitation plan;
the debtor’s total liabilities; 7. Submission of final rehabilitation plan
2. The following shall be annexed to the to the RTC for approval;
petition: 8. The petition shall be dismissed (which
a. audited financial statements at results into the automatic lifting of the
end of its last fiscal year; stay order unless RTC ordered otherwise)
b. interim financial if no rehabilitation plan is approved
statement; after 180 days from initial hearing;
c. schedule of debts and 9. Approval or disapproval of the
liabilities; rehabilitation plan by RTC.
d. inventory of assets;
e. rehabilitation plan; REHABILITATION RECEIVER
f. schedule of payments  A person appointed by the RTC, in
and disposition of assets effected behalf of all the parties for the purpose
within 3 months preceding the of preserving and conserving the
filing of the petition; property and preventing its possible
g. schedule of cash flow for destruction or dissipation, if it were left
the last 3 months’ in the possession of any of the parties.
h. statement of possible  He acts in a fiduciary capacity and
claims; with impartiality towards all interested.
i. affidavit of general  He does not take over the
financial condition; management and control of the debtor,
j. at least 3 nominations but shall closely oversee and monitor the
for rehabilitation receiver; operations of the debtor during the
k. certificate under oath pendency of the proceedings. (Bar
that directors and stockholders Review Materials in Commercial Law,
have irrevocably approved/ Jorge Miravite, 2002 ed.)
consented to all actions/matters
necessary under the rehabilitation POWERS AND FUNCTIONS OF
plan. MANAGEMENT COMMITTEE OR
3. The court shall issue the stay order REHABILITATION RECEIVER (Sec. 6[d],
not later than 5 days from the filing of P.D. 902-A)
the petition, which among others, shall: 1. To take
a. appoint a rehabilitation receiver; custody of, and control over, all the
b. stay all actions for claims against existing assets and property of such
the debtor, which shall cover entities under management;
both secured and unsecured 2. To
creditors; evaluate the existing assets and
c. set an initial hearing for the liabilities, earnings and operations of
petition (not earlier than 45 days such corporations, partnerships or
but not later than 60 days from other associations;
filing of the petition); and
2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT
CHAIRPERSONS
Maricel Abarentos (Over-all Chairperson), Ronald Jalmanzar (Over-all Vice Chair), Yolanda
Tolentino(VC-Acads), Jennifer Ang(VC- Secretariat), Joy Inductivo (VC-Finance), Elaine Masukat (VC-
EDP), Anna Margarita Eres (VC-Logistics) Jonathan
Mangundayao (Political Law), Francis Benedict Reotutar (Labor Law), Romuald Padilla (Civil Law),
Charmaine Torres (Taxation Law), Mark David Martinez (Criminal Law), Garny Luisa Alegre (Commercial
Law), Jinky Ann Uy (Remedial Law), Jackie Lou Bautista (Legal Ethics)
San Beda College of Law
125
MEMORY AID IN COMMERCIAL LAW

3. To civil/intra-corporate case before SEC

determine the best way to salvage does not preclude the simultaneous and
and protect the interest of the concomitant filing of a criminal action
investors and creditors; before the regular courts; such that a
4. To study, fraudulent act may give rise to liability
review and evaluate the feasibility for violation of the rules and regulations
of continuing operations and of the SEC cognizable by the SEC itself,
structure and rehabilitate such as well as criminal liability for violation
entities if determined to be feasible of the Revised Penal Code cognizable by
by the RTC; the regular courts, both charges to be
5. To filed and proceeded independently, and
report and be responsible to the RTC may be simultaneously with the other.
until dissolved; and (Fabia vs. CA, G.R.No. 132684.
6. May September 11, 2002.)
overrule or revoke the actions of the
previous management and board of Automatic Stay
directors of the entity under  Effect of appointment of a
management, notwithstanding any management committee or rehabilitation
provision of law, articles of receiver
incorporation or by-laws to the  All actions for claims against the
contrary. corporation shall be suspended
accordingly.
 Mere disagreement among  Purpose/justification: To enable the
stockholders as to the affairs of the management committee or the
corporation would not in itself suffice as rehabilitation receiver to effectively
a ground for the appointment of a exercise its powers free from any
management committee. At least where judicial or extrajudicial interference
there is no imminent danger of loss of that might unduly hinder or prevent the
corporate property or of any other injury rescue of the debtor company.
to stockholders, management of (Rubberworld v. NLRC)
corporate business should not be wrested  No definite duration; deemed to apply
away from duly elected officers, who are during the entire period that the
prima facie entitled to administer the corporate debtor is under management
affairs of the corporation, and placed in committee or the rehabilitation
the hands of the management receiver. (BF Homes v. CA)
committee. However, where the
dissension among stockholders is such
that the corporation cannot successfully
carry on its corporate functions the
appointment of a management
committee becomes imperative. (Ramon
Jacinto and Jaime Colayco vs. First
Women’s Credit Corporation, G.R. No. SECURITIES REGULATION CODE (SRC)
154049, August 28, 2003) (R.A. No. 8799)

RA 8799 effectively amended Sec. 5 of PURPOSES:

PD 902-A, jurisdiction over intra- 1. To
corporate disputes is now vested in the establish a socially conscious,
RTCs. However, while Sec. 5 was free market that regulates itself
amended, there is no repeal of Sec. 6 2. To
thereof declaring that the fraudulent encourage the widest
acts or schemes, which the SEC shall participation of ownership in
exclusively investigate and prosecute, enterprises
are those in violation of any law or rules 3. To
and regulations administered and enhance the democratization of
enforced by the SEC alone. The filing of wealth

COMMERCIAL LAW COMMITTEE

4. To prospectus, communications and

promote the development of the reports (Section 57)
capital market 14. Protection against manipulation
5. To of security prices, manipulative and
protect investors deceptive devices (Section 59), fraud
6. To in pre-need plans and commodities
ensure full and fair disclosure futures contracts (Section 60),
about securities fraudulent transactions (Section 58),
7. To and insider trading (Section 61);
minimize if not totally eliminate 15. Establishment of trust funds to
insider trading and other compensate investors for
fraudulent or manipulative extraordinary losses or damage they
devices and practices which may suffer due to business failure or
create distortions in the free fraud or mismanagement of the
market. (Sec. 2) persons with whom they transact
(Section 36.5[a]).
FEATURES WHICH ARE INTENDED TO
PROTECT THE INVESTING PUBLIC POWERS AND FUNCTIONS OF THE SEC
1. All securities are required to be 1. Supervision over
registered before they can be sold to corporations, partnerships,
the public (Section 8); and grantees of primary
2. Rejection and revocation of franchise;
registration of securities (Section 2. Approve, reject registration
13); statements/licensing
3. Regulation of pre-need plans. applications;
(Section 16); 3. Suspend, revoke, after
4. Protection of shareholder notice and hearing primary
interests (Section 19); franchise on grounds;
5. Prohibition on fraud, 4. Regulate/supervise
manipulation and insider trading activities of persons to
(Sections 24, 25, 26 and 27); ensure compliance;
6. Regulations of Securities Market 5. Supervise monitor, suspend
Professionals (Section 28); or take over, exchanges,
7. Revocation, refusal or suspension clearing agencies and SROs;
of registration of brokers, dealers 6. Recommend policies,
and salesmen and associated persons advise, propose legislation
(Section 29); to Congress on securities
8. Restrictions on “over-the- market;
counter” markets (Section 32); 7. Prepare, approve, amend or
9. Self-regulation of associations of repeal rules, regulations,
securities brokers, dealers and other issue opinions
securities related organizations 8. Enlist the aid and support of
(Section 29); and/or deputize any and all
10. Registration of clearing agencies enforcement agencies of
(Section 42); the Government as well as
11. Limitations on margin trading or any private institution,
the amount of credit that may be corporation, firm,
extended on any security (Section association or person in the
49) implementation of its
12. Civil liabilities arising from false powers;
statement in the registration 9. Issue cease and desist
statement (Section 56) orders to prevent fraud or
13. Civil liabilities arising from false injury;
statements or omissions in the 10. Punish for contempt of the
Commission;

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

11. Compel the officers of any investment of principal in the underlying

registered corporation or security.
association to call meetings  Kinds:
of stockholders or 1. OPTIONS – contracts that give the
members; buyer the right, but not the
12. Issue subpoena duces tecum obligation, to buy or sell an
and summon witnesses to underlying security at a
appear in any proceedings predetermined price, called the
of the Commission; and exercise or strike price, on or before
13. Exercise such other powers a predetermined date, called the
as may be provided by law expiry date, which can only be
which are necessary or extended in accordance with
incidental to the carrying Exchange rules.
out its express powers. 2. WARRANTS – rights to subscribe or
(Sec. 5) purchase new shares or existing
SECURITIES shares in a company, on or before a
 Shares, participation or interest in a predetermined date, called the
corporation or in a commercial expiry date, which can only be
enterprise or profit-making ventures and extended in accordance with
evidenced by a certificate, contract, Exchange rules. Warrants generally
instrument whether written or electronic have a longer exercise period than
in character. (Sec. 3) options. (SRC Rule 3.1-1)
 Kinds:
1. Shares of stocks, bonds, debentures, REGISTRATION OF SECURITIES
notes, evidence of indebtedness,  GENERAL RULE: A registration
asset-backed securities; statement duly filed and approved by
2. Investment contracts, certificates of the SEC is necessary before securities
interest or participation in a profit- may be sold and offered for sale or
sharing agreement, certificates of distribution within the Philippines. Prior
deposit for a future subscription to any sale, information on the
3. Fractional undivided interests in oil, securities, in such form and substance
gas, or other mineral rights; prescribed by the SEC, shall be made
4. Derivatives like options and warrants; available to each prospective purchaser.
5. Certificates of assignments and (Sec. 8)
participation, trust certificates,  EXCEPTIONS:
voting trust certificates or similar 1. Exempt securities; and
instruments; 2. Exempt transactions.
6. Proprietary or non-proprietary
membership certificates in EXEMPT SECURITIES (Sec. 9)
corporations; 1. Any security issued or guaranteed by
7. Other instruments as may in the the Government of the Philippines, or
future be determined by the SEC. by any political subdivision or agency
(Sec. 3) thereof, or by any person controlled
 Classes: by and acting as an instrumentality of
1. Exempt securities and securities said Government.
covered by exempt transactions; and 2. Any security issued or guaranteed by
2. Securities that are not exempt or the the government of any country with
sale of which is not an exempt which the Philippines maintains
transaction. diplomatic relations, or by any state,
province or political subdivision or
DERIVATIVE agency thereof on the basis of
 A financial instrument, including reciprocity.
options and warrants, whose value 3. Certificates issued by a receiver or by
depends on the interest in or a trustee in bankruptcy duly approved
performance of an underlying security, by the proper adjudicatory body.
but which does not require any

COMMERCIAL LAW COMMITTEE

4. Any security or its derivatives the sale  It is mandatory to make a tender

or transfer of which, by law, is under offer for equity shares of a public
the supervision and regulation of the company in an amount equal to the
Office of the Insurance Commission, number of shares that the person intends
Housing and land Use Regulatory to acquire in the following
Board, or the Bureau of Internal circumstances:
Revenue. a. The person intends to acquire 15% or
5. Any security issued by a bank except more of the equity shares of a public
its own shares of stock. company pursuant to an agreement
6. Any securities added by the SEC by made between or among the person
rule or regulation after public and one or more sellers;
hearing. b. The person intends to acquire 30% or
more of the equity shares of a public
EXEMPT TRANSACTIONS (Sec. 10) company within a period of 12
1. Judicial sale by executor, months; or
administrator, guardian/receiver in c. The person intends to acquire shares
insolvency or bankruptcy. that would result in ownership of
2. Sale of pledged or mortgaged security more than 50% of the equity shares of
to liquidate a bona fide debt. a public company. (SRC Rule 19)
3. Sale on isolated transactions by  Tender offer is made:
owner. 1. By filing with the SEC a declaration
4. Distribution of stock dividends. to make a tender offer;
5. Sale of capital stock exclusively to 2. By furnishing the issuer or the
stockholders where no commission is originator of the security a
paid. statement containing such
6. The issuance of bonds or notes information required under Sec. 17
secured by mortgage upon real estate of the SRC:
or tangible personal property, where i. Annual Report (includes balance
the entire mortgage are sold to a sheet, profit and loss statement);
single purchaser at a single sale. and
7. Issuance of security in exchange of ii. Periodical reports for interim fiscal
any security from same issuer periods; and
pursuant to right of conversion. 3. By publishing all requests or
8. Broker’s transactions invitations for tender, or materials,
9. Pre-incorporation subscription and making a tender offer or requesting
subscription pursuant to an increase or inviting letters of such a security.
of the ACS.
10. Exchange of securities by issuer with PUBLIC COMPANY
existing security holders exclusively 1. Any corporation with a class of equity
11. Sale to less than 20 persons during securities listed on an Exchange; or
any 12- month period 2. Any corporation with assets in excess
12. Sale of securities to banks, of P50M and having 200 or more holders,
registered investment house, at least 200 of which are holding at least
insurance companies, pension fund or 100 shares of a class of its equity
retirement plan maintained by the securities.
government or other persons
authorized by the BSP to engage in UNLAWFUL ACTS
trust functions. 1. For any beneficial owner, director, or
officer to sell any security if the
TENDER OFFER seller or his principal does not own or
 A publicly announced intention by a does not deliver it within 20 days
person acting alone or in concert with from sale. (Sec. 23.3)
other persons to acquire equity 2. Manipulation of security prices. (Sec.
securities of a “public company.” 24.1)

2005 CENTRALIZED BAR OPERATIONS EXECUTIVE COMMITTEE AND SUBJECT

3. Employment of manipulative or price within the same time, the same

deceptive device or contrivance in shares of stock.
connection with purchase and sale of 6. WASH SALE – The operation of
authorities. Execution of “short sale”, simultaneously buying and selling the
“stop-loss order” not in accordance same stock. It is any transaction in any
with SEC rules. (Sec. 24.2) security which involves no change in the
4. For any member of Exchange directly beneficial ownership thereof. It is the
or indirectly endorse or guarantee the reverse of “MATCHED ORDERS” wherein
performance of any “put”, “call”, there is a change in the ownership of the
“straddle”, “option” or “privilege” in securities.
relation to any security registered. 7. SHORT SWING TRANSACTION - One
(Sec. 25) where a person buys securities and
5. Fraudulent transactions in the sale of sells the same within a period of six
securities. (Sec.26) months.
6. Insider trading (Sec. 27) 8. FLOOR TRADER - A professional
7. For an insider to communicate trader in securities who acts for
material non-public information about himself and not for the account of
the issuer or security. (Sec. 27.3) others, hence, receives no
8. Unlawful Tender Offer. (Sec 27.4) commission at all.
9. Use of Extensive Credit. (Sec 48.1) 9. HYPE AND DUMP –Engaging in buying
activity at increasingly higher prices
DEFINITION OF TERMS: and then selling securities in the
1. SHORT SALE – A contract for sale of market at higher securities.
shares of stock which the seller does not 10. BOILER ROOM SALES –The use of
own, or certificates which are not within high-pressure sales tactics to
his control, so as to be available for promote purchases and sales of
delivery at the time when delivery must securities.
be made. 11. “OVER THE COUNTER TRANSACTION”
2. STOP-LOSS ORDER – The direction by a Transactions which are not made at the
customer to his broker that if the stock exchange, but directly between
commodity touches the price named, the the broker and the customer.
broker shall close the trade at the best 12. “OVER-THE-COUNTER” MARKET
available price.  A market created other than a
3. PUT – An option that, in consideration registered stock exchange for both the
of a premium paid, gives the purchaser purchase and sale of any security.
the right to make the seller take from
him a given number of shares of a named INSIDER TRADING
stock between a given time at a  The selling or buying of a security by
stipulated price which is usually below an insider while in possession of material
the prevailing market price of the stock non-public information with respect to
at the time the “put” is purchased. the issuer or the security. It is
4. CALL - An option that, in considered unlawful unless:
consideration of a premium paid, 1. The insider proves that the
entitles the buyer the right to compel information was not gained from such
the seller to deliver to him a certain relationship, or
number of shares within a given time at 2. If the other party selling to or buying
a stipulated price which is usually higher from the insider (or his agent) is
than the prevailing market price at the identified, the insider proves:
time the “call” is bought. “Call” is the a. that he disclosed the information
reverse of “put.” to the other party, or
5. STRADDLE – The double privilege of a b. that he had reason to believe
“put” and a “call,” and secures to the that the other party otherwise is
holder the right to demand of the seller also in possession of the
at a certain price within a certain time a information. (Sec. 27.1)
certain number of shares of specified
stock, or to require him to take, at the

COMMERCIAL LAW COMMITTEE

INSIDER
 A person who, with respect to a
particular security, may be any of the
following:
1. The issuer;
2. The director or officer of, or a person
controlling the issuer;
3. A person whose relationship or former
relationship to the issuer gives him
access to material information about the
issuer or the security that is not
generally available to the public;
4. A government employee, or director,
or officer of an exchange, clearing
agency and/or self-regulatory
organization who has access to material  The credit extended must be for an
information about an issuer or a security amount not greater than whichever is
that is not generally available to the higher of:
public; or 1. 65% of
5. A person who learns such information current market price of the
by a communication from any of the security
foregoing insiders. (Sec. 3.8) 2. 100% of
the lowest market price of
MATERIAL NON-PUBLIC INFORMATION security during the preceding 36
(formerly Fact of Special Significance) calendar months, but not greater
a. Information about the issuer or the than 75% of the current market
security which has not been generally price. (Sec. 48)
disclosed to the public and would
likely affect the market price of the Margin
security after being disseminated to  Sum of money, or its equivalent,
the public and the lapse of a placed in the hands of a broker by
reasonable time for the market to principal or persons on whose account
absorb the information; or the purchase is to be made, as a security
b. Information about the issuer or the to the former against losses to which he
security which would be considered may be exposed by a subsequent
by a reasonable person important depression in the market value of the
under the circumstances in stock.
determining his course of action to
buy, sell or hold security. (Sec. 27.2) Margin Call
 Demand made by the broker on the
MARGIN TRADING investor to deposit money or securities
 A kind of trading that allows a broker with the broker when a purchase is made
to advance for the customer/investor or when the investor’s equity in a margin
part of the purchase price of a security account falls below a minimum standard
and to keep it as a collateral for such set by the exchange or broker.
advance.

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