128 MEMORY AID IN

COMMERCIAL LAW
Corporation Law

DOCTRINE OF LIMITED CAPACITY ostensibly be within such powers but are,

No corporation under the Corporation Code by general or special laws, either
shall possess or exercise any corporate prohibited or declared illegal. It is in this
powers, except those conferred by law, its context that the Code has used the term.
articles of incorporation, those implied from
express powers, and those as are necessary ULTRA VIRES IILLEGAL ACTS
or incidental to the exercise of the powers so ACTS
conferred. Not necessarily Unlawful; against law,
unlawful, but outside morals, public policy,
DOCTRINE OF GENERAL CAPACITY the powers of the and public order
The corporation is said to hold such powers as corporation
are not prohibited or withheld from it by
general laws. Cannot be ratified, Cannot be ratified
Reason: In Civil Law,
ratification is an act of
ULTRA VIRES ACTS approving a contract
 An act committed outside the object for entered into by
which a corporation is created as defined another without
by the law of its organization and therefore authorization. It is
beyond the powers conferred upon it by required that at the
law (Republic vs. Acoje Mining Co., Inc. 7 time of the
SCRA 361). ratification, the cause
 An act done by a corporation outside of of nullity has already
ceased to exist. An
the express and implied powers vested in ultra vires act is not
it by its charter and by the law (Bar within the power of
Review Materials in Commercial Law, the corporation;
Jorge Miravite, 2002 ed.). hence, the ground for
being such cannot
Types (Philippine Corporate Law, Cesar cease. (Philippine
Villanueva, 2001 ed.): Corporate Law
1. Acts done beyond the powers of the Compendium,
corporation as provided in the law or its Timoteo Aquino,
2006 ed.)
articles of incorporation;
Can bind the parties if Cannot bind the parties
2. Acts or contracts entered into in behalf of wholly or partly
a corporation by persons who have no executed
corporate authority
Note: This is technically ultra vires acts of Test whether or not a corporation may
officers and not of the corporation; and perform an act: Consider the logical and
3. Acts or contracts, which are per se illegal necessary relation between the act questioned
as being contrary to law. and the corporate purpose expressed by law
or in the charter. If the act is lawful in itself and
 An ultra vires act may be that of: not prohibited, and is done for the purpose of
a. The corporation; serving corporate ends, and reasonably
b. The Board of Directors; and contributes to the promotion of those ends in a
c. The corporate officers. substantial and not in a remote and fanciful
sense (Montelibano vs. Bacolod-Murcia Milling
Effects of ultra vires act on: Co., Inc., 5 SCRA 36).
1. Executed contract – courts will not set
aside or interfere with such contracts; Remedies in Case of Ultra Vires Acts
2. Executory contracts – no enforcement 1. State
even at the suit of either party (void and a. Obtain a judgment of forfeiture; or
unenforceable); b. The SEC may suspend or revoke the
3. Part executed and part executory – certificate of registration
principle of “no unjust enrichment at 2. Stockholders
expense of another” shall apply; and a. Injunction; or
4. Executory contracts apparently authorized b. Derivative suit
but ultra vires – the principle of estoppel 3. Creditors
shall apply. a. Nullification of contract in fraud of
creditor
 Ultra vires (“beyond powers”) refers only to
an act outside or beyond corporate
powers, including those that may
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the stockholders or members voting for

them.
XI. BY-LAWS  A copy thereof duly certified to by a
majority of the directors or trustees
Concept, Use and Nature and counter-signed by the secretary of
BY-LAWS - Rules of action adopted by a the corporation shall be filed with the
corporation for its internal government and for SEC which shall be attached to the
the regulation of conduct and prescribe the original articles of incorporation.
rights and duties of its stockholders or
members towards itself and among Effectivity: upon the approval of the SEC.
themselves in reference to the management of
its affairs. Effect of non-filing within the required
Functions: period - Failure to submit the by-laws within
1. Supplement the articles of incorporation 30 days from incorporation does not
2. Provide for details not important enough to automatically dissolve the corporation. It is
be stated in the articles of incorporation merely a ground for suspension or revocation
3. Continuing rule for the government of the of its charter after proper notice and hearing.
corporation and the individuals composing
it Contents of By-laws (Sec. 47)
4. Define the rights and duties of corporate 1. Time, place and manner of calling and
officers and directors/trustees and of conducting regular or special meetings of
stockholders/members towards the the directors or trustees;
corporation and among themselves 2. Time and manner of calling and conducting
5. Source of authority for corporate officers regular or special meetings of the
and agents of the corporation stockholders or members;
3. The required quorum in meetings of
Requisites for the validity of the By-laws: stockholders or members and the manner
1. Must not be contrary to law nor with the of voting therein;
Corporation Code 4. The form of proxies of stockholders and
2. Must not be contrary to morals and public members and the manner of voting them;
policy; 5. The qualification, duties and compensation
3. Must not impair obligations and contracts; of directors, trustees, officers and
Amendments to the by-laws cannot impair employees;
the obligation of existing contracts or any 6. The time for holing the annual election of
vested right. The right of an employee to directors or trustees and the mode or
security of tenure cannot be adversely manner of giving notice;
affected by any amendment in the by- 7. The manner of election or appointment
laws. Hence, his services can only be and the term of office of all officers other
terminated for causes provided for by law than directors or trustees;
(Salafranca vs. Philamlife Village 8. The penalties for violation of the by-laws;
Homeowners Association, 300 SCRA 9. In the case of stock corporations, the
469). manner of issuing certificates; and
4. Must be general and uniform; 10. Such other matters as may be necessary
5. Must be consistent with the charter or for the proper or convenient transaction of
articles of incorporation; and its corporate business.
6. Must be reasonable, not arbitrary or
oppressive. Amendment of By-Laws (Sec. 48)
1. The majority of the board of directors or
Adoption of By-Laws (Sec. 46) trustees and the owners of at least a
Required votes: majority of the outstanding capital stock, or
1. If it is adopted prior to incorporation at least a majority of the members of a
– The by laws must be signed and non-stock corporation, at a regular or
approved by all the incorporators and filed special meeting duly called for the
with the SEC together with the articles of purpose, may amend or repeal any by-law
incorporation. or adopt new by-laws; or
2. If it is adopted and filed after incorporation 2. The owners of 2/3 of the outstanding
– The affirmative vote of the stockholders capital stock or 2/3 of the members in a
representing at least a majority of the non-stock corporation may delegate to the
outstanding capital stock, or of at least a board of directors or trustees the power to
majority of the members shall be amend or repeal any by-laws or adopt new
necessary. The by-laws shall be signed by by-laws.
130 MEMORY AID IN
COMMERCIAL LAW
Corporation Law

 The delegated power shall be considered

as revoked whenever stockholders owning
or representing a majority of the
outstanding capital stock or a majority of
the members in a non-stock corporation ARTICLES OF BY-LAWS
shall so vote at a regular or special INCORPORATION
meeting. Condition precedent in Condition subsequent; its
 The amended or new by-laws shall only be the acquisition of absence merely
effective upon the issuance by the SEC of corporate existence; furnishes a ground for
a certification that the same are not the revocation of the
inconsistent with the Code. franchise
Essentially a contract For the internal
Binding Effects between the government of the
1. As to members and corporation corporation and the corporation but has the
 They have the force of contract between stockholders/ force of a contract
the members themselves. members; between the between the corporation
 They are binding only upon the stockholders/ member and the stockholders/
inter se, and between members, and between
corporation and on its members and those
the corporation and the the stockholders and
having direction, management and control State; members;
of its affairs.
2. As to third persons
 They are not bound to know the by-laws Executed before May be executed after
incorporation incorporation. Sec. 46
unless they have notice, actual or
allows the filing of the by-
constructive (China Banking Corporation laws simultaneously with
vs. CA, 270 SCRA 503). the Articles of
Reason: By-laws have no extra-corporate Incorporation
force and are not in the nature of
legislative enactments so far as third Amended by a majority May be amended by a
persons are concerned. of the directors/ majority vote of the BOD
trustees and and majority vote of
By-laws in Relation to Articles of stockholders outstanding capital
Incorporation (The Corporation Code of the representing 2/3 of the stock or a majority of the
Philippines, Hector S. De Leon & Hector M. outstanding capital member in non-stock
stock, or 2/3 of the corporation
De Leon, Jr., 2006 ed.)
members in case of
 By-laws are subordinate to the charter of non-stock corporations
the corporation and part of its charter is its Power to Power to amend or
articles of incorporation. amend/repeal articles repeal by-laws or adopt
 A by-law which is not consistent with the cannot be delegated new by-laws may be
charter but is in conflict with it is void. by the stockholders/ delegated by the 2/3 of
 A by-law can neither enlarge the rights members to the board the outstanding capital
and powers conferred by the charter nor of directors/ trustees stock or 2/3 of the
restrict the duties and liabilities imposed members in the case of
non-stock corporation
thereby, and case it attempts to do so, the
charter will prevail.
XII. CORPORATE MEETINGS

Kinds of Corporate Meetings

1. Meetings of stockholders or members:
a. Regular – held annually on a date
fixed in the by-laws, or if not fixed, on
any date in April as determined by the
board.
b. Special - held at any time deemed
necessary or as provided in the by-
laws.
Where: In the city or municipality where
the principal office of the corporation is
located, and if practicable, in the principal
office of the corporation.
2. Meetings of directors or trustees:
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a. Regular - held by the board monthly, 6. Sequestered shares: Two tiered test to
unless the by-laws provide otherwise. determine whether the PCGG may vote
b. Special - held by the board at any sequestered shares:
time upon the call of the president or a. whether there is prima facie
as provided in the by-laws. evidence showing that the said shares
Where: anywhere in or out of the are ill-gotten and thus belong to the
Philippines, unless the by-laws provide state; and
otherwise b. whether there is an immediate
danger of dissipation thus
Requirements of a valid meeting necessitating their continued
1. It must be held at the proper place. sequestration and voting by the PCGG
2. It must be held at the stated date and at while the main issue is pending with
the appointed time or at a reasonable time the Sandiganbayan.
thereafter.  Public Character Exception –
3. It must be called by the proper person. the two-tiered test does not apply in
4. There must be a previous notice. cases involving funds of public
5. There must be a quorum. character. In such cases, the
 Whenever there is no person authorized to government is granted the authority to
call a meeting, the SEC, upon petition of a vote said shares, namely:
stockholder or member, and on the a. where the
showing of good cause, may issue an government shares are taken over
order to the petitioning stockholder or by private persons or entities
member directing him to call a meeting of who/which registered them in their
the corporation by giving proper notice. own names; and
 Even if the meeting be improperly held or b. where the
called, any business transacted at such capitalization of shares that were
meeting shall be valid if within the powers acquired with public funds
or authority of the corporation, and somehow landed in private hands.
provided that all the stockholders or 7. Pledgor, Mortgagor, or Administrator
members of the corporation are present or Shares: The pledgor or mortgagor shall
duly represented at the meeting. have the right to attend and vote at
 Unless otherwise provided for in the Code, meetings unless the pledge or mortgagee
a quorum shall consist of the stockholders is expressly given such right in writing
representing a majority of the outstanding which is recorded on the appropriate
capital stock or a majority of the members corporate books (Sec. 55).
in the case of non-stock corporations. 8. Executors, administrators, receivers, and
 A corporation may prescribe a greater other legal representatives duly appointed
voting requirement in its articles of by court may attend and vote in behalf of
incorporation or by-laws in order to protect the stockholders or members without need
the rights of the minority stockholders or of any written proxy (Sec. 55).
members. Such higher number is also the 9. Shares Jointly Owned: The consent of all
number necessary to constitute a quorum the co-owners shall be necessary, unless
 The president shall preside at all meetings there is a written proxy, signed by all the
of the directors or trustees as well as of co-owners, authorizing one or some or any
the stockholders or members, unless the other person to vote such share or shares.
by-laws provide otherwise. When the shares are owned in an “and/or”
capacity by the holders thereof, any one of
Rules Applicable to Certain Kinds of the joint owners can vote or appoint a
Shares: proxy thereof (Sec. 56)
1. Delinquent shares shall not be entitled to
vote. Rule on Teleconferencing or Video-
2. Treasury shares have no voting rights Conferencing
while they remain in the treasury.
3. Fractional shares shall not be entitled to Teleconferencing - interactive group
vote. communication (3 or more people in 2 or more
4. Escrow shares shall not be entitled to vote locations) through an electronic medium.
before the fulfillment of the condition
imposed thereon. Basic Types:
5. Unpaid shares, if not delinquent, are 1. VIDEO CONFERENCING – television-like
entitled to all the rights of a stockholder communication augmented with sound;
including the right to vote.
132 MEMORY AID IN
COMMERCIAL LAW
Corporation Law

2. COMPUTER-CONFERENCING-printed The right to vote by proxy may be

communication through keyboard exercised in any of the following instances:
terminals; and 1. Election of the board of directors or
3. AUDIO-CONFERENCING – verbal trustees;
communication via the telephone with 2. Voting in case of joint ownership of stock;
optional capacity for telewriting or 3. Voting by trustee under voting trust
telecopying. agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
ADVANTAGES DISADVANTAGES
Communication Technical failures with Note: Stockholders or members may attend
between the home equipments and vote in their meetings by proxy (Sec. 58);
office and field staff is BUT directors cannot do so. Directors must
maximized always act in person (Sec. 25).
People who would not Unsatisfactory for
normally attend a complex interpersonal
Extent of Authority
distant meeting can communication
participate 1. General Proxy – confers a general
Follow-up to earlier Impersonal, less easy to discretionary power to attend and vote at
meeting can be easily create an atmosphere of annual meeting.
done group rapport 2. Limited Proxy – restricts the authority to
Meetings are shorter Lack of participant’s vote to specified matters only and may
and more oriented to familiarity with the direct the manner in which the vote shall
the primary purpose equipment be cast
Some routine meetings Acoustical problem  Sec. 58 imposes no limitation as to who
are more effective within the may be proxy. A stockholder/member
teleconferencing rooms
may appoint any person he sees fit to
Severe climate and/or Difficulty in determining
unreliable the participant speaking
represent him, and by-laws restricting his
transportation may order, tendency for one right in this respect are likewise void.
necessitate person to monopolize  In non-stock corporations the right to vote
teleconferencing the whole meeting by proxy, or even the right to vote itself
Participants are Greater participant may be denied to members in the articles
generally better preparation time needed of incorporation or the by-laws as long as
prepared the denial is not discriminatory.
Particularly satisfactory Informal, one on one  The same person may act as proxy for
for simple problem interaction is not one or several stockholders or members.
solving, information, possible (Philippine
exchange and Corporate Law
procedural tasks Compendium, Timoteo
VOTING TRUST AGREEMENT (Sec. 59)
Aquino,2006 ed.) An agreement whereby one or more
Group members stockholders transfer their shares of stocks to
participate more a trustee, who thereby acquires for a period of
equally in well- time the voting rights (and/or any other rights)
moderated over such shares; and in return, trust
teleconferences certificates are given to the stockholder/s,
which are transferable like stock certificates,
PROXY (Sec. 58) subject, however, to the trust agreement.
A written authorization given by one person to
another so that the second person can act for Limitations:
the first. 1. Cannot be entered into for a period
Requirements for validity: exceeding 5 years at any one time except
1. Proxies shall be in writing; when it is a condition in a loan agreement
2. It shall be signed by the stockholder or however said contract shall automatically
member concerned; expire upon full payment of the loan;
3. It shall be filed before the scheduled 2. The agreement must not be used for
meeting with the corporate secretary; purposes of fraud
4. Unless otherwise provided in the proxy, it 3. It must be in writing and notarized and
shall be valid only for the meeting for specify the terms and conditions thereof
which it was intended. 4. A certified copy of the agreement must be
5. No proxy shall be valid and effective for a filed with the corporation and with the SEC
period longer than 5 years at any one 5. The agreement shall be subject to
time. examination by any stockholder of the
corporation
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6. Unless expressly renewed, all rights call purchase price at the time
granted in the agreement shall the shares are transferred
automatically expire at the end of the Subscriber cannot be The stockholders who
agreed period. released from his sells his shares can
obligation to pay the condone the obligation to
subscription price pay the purchase price

The Statute of Frauds The Statute of Frauds

does not apply to apply if the purchase
subscription contracts price is not less than P
500.00.
SUBSCRIPTION CONTRACT
VOTING TRUSTS PROXY  Any contract for the acquisition of
The trustee votes as The proxy holder unissued stock in an existing corporation
owner rather than as votes as agent or a corporation still to be formed shall be
mere agent deemed a subscription (Sec. 60).
The trust may vote in The proxy must vote  The subscribed shares need not be paid in
person or by proxy in person full in order that the subscription may be
unless the agreement
valid. The subscription contract is a
provides otherwise
consensual contract that is perfected upon
Trustee acquires legal Proxy has no legal the meeting of the minds of the parties.
title to the shares of the title to the shares of The name of the subscriber is recorded in
transferring stockholder the principal the stock and transfer book, and from that
The agreement must be Proxy need not be
time, such subscriber becomes a
notarized notarized
stockholder of record entitled to all the
The agreement is Revocable anytime
irrevocable except one with rights of a stockholder. Until the stocks are
interest fully paid, it continues to be a subsisting
Trustee is not limited to Proxy can only act at liability that is legally enforceable.
act at any particular a specified  The parties in a subscription contract are
meeting stockholder’s meeting the subscriber and the Corporation itself,
(if not continuing) since the subject matter of the contract,
A trustee can vote and A proxy can only vote i.e. shares of stocks to be subscribed, is
exercise all the rights of in the absence of the owned by the latter.
the stockholder even owners of the stock  It is not a contract between the
when the latter is present subscribers even if the other subscribers
entered into the agreement prior to
An agreement must not A proxy is usually of incorporation. Consequently, the
exceed 5 years at any shorter duration subscribers are not real parties in interest
one time except when the although under Sec. in a case for rescission of the subscription
same is made a condition 58 it cannot exceed 5
contract of another subscriber because
of a loan. years at any one time
The voting right is The right to vote is
they are not parties thereto (Ong Yong v.
divorced from the inherent in or Tiu GR No. 144626 April 6, 2003).
ownership of stocks inseparable from the
right to ownership of Kinds of Subscription Contract
stock 1. Pre-incorporation subscription -
one entered into before incorporation.
XIII. STOCKS AND STOCKHOLDERS  It constitutes a binding contract among the
subscribers.
Ways to Become a Stockholder of a  It shall be irrevocable for a period of at
Corporation least 6 months form the date of
1. Subscription contract with the corporation; subscription, unless:
2. Purchase or acquisition of shares from a. all of
existing stockholders; and the other subscribers consent to the
3. Purchase of treasury shares from the revocation, or
corporation. b. the
incorporation fails to materialize.
SUBCRIPTION PURCHASE  It shall likewise be irrevocable after the
Can be made before Can only be made after submission of the articles of incorporation
or after incorporation incorporation to the SEC (Sec. 61).
Generally, the The purchaser under a 2. Post incorporation subscription -
subscriber need not deed of assignment or entered into after the incorporation for the
pay unless there is a sale must fully pay the acquisition of unissued stock.
134 MEMORY AID IN
COMMERCIAL LAW
Corporation Law

 The subscriber becomes a stockholder  Intangible properties that may be used as

upon acceptance by the corporation of the consideration include patents or copyrights
subscriber’s offer or by the subscriber of and if intellectual property will serve as a
the corporation’s offer even though he has consideration, the corporation must submit
not paid for his shares unless the to the SEC a copy of the Certificate of
subscription agreement or charter Registration of the intellectual property
otherwise provides. right together with an appraisal report and
a Deed of Assignment (Philippine
Underwriting Agreement Corporate Law Compendium, Timoteo
An agreement between a corporation and a Aquino, 2006 ed.).
third person, termed the “underwriter”, by 3. Labor or services actually rendered to the
which the latter agrees, for a certain corporation;
compensation, to purchase a stipulated 4. Previously incurred corporate
amount of stocks or bonds, specified in the indebtedness;
underwriting agreement, if such securities are  The indebtedness involved is one that is
not puyrchased by those to whom they are first acknowledged by the board.
offered. 5. Amounts transferred from unrestricted
retained earning to stated capital,
UNDERWRITING STOCK 6. Outstanding shares in exchange for stocks
AGREEMENT SUBSCRIPTION in the event of reclassification or
AGREEMENT conversion.
The signers obligate The obligation of the Note: Shares of stock shall not be issued in
themselves to signer to the purchasers exchange for promissory notes or future
purchase the shares of and to the public is services. Note that there is no prohibition on
stock which cannot be absolute. the use of checks, bills or notes in payment of
sold. the “cash” consideration.
Underwriters are given There is no commission.
commission.
SHARES OF STOCK
The signer can refuse He becomes a
to become a stockholder of the  Interest or right which owner has in the
stockholder/ member company and is liable to management of the corporation, and its
of the company. pay the amount due on surplus profits, and, on dissolution, in all of
the stock. its assets remaining after the payment of
its debt.
Valid Considerations in Subscription  The ownership of share of stock confers
Agreements (Sec. 62) no immediate legal right or title to any of
1. Cash actually received; the property of the corporation. Each
2. Property, tangible or intangible, actually share merely represents a distinct
received AND necessary or convenient for undivided share or interest in the common
its use and lawful purposes; property of the corporation (18 Am. Jur. 2d
Requisites: 737.).
a. The property is actually  Shares of stock constitute property distinct
received by the corporation; from the capital or tangible property of the
b. The property is necessary or corporation and belong to the different
convenient for its use and lawful owners.
purposes;  They do not constitute and indebtedness
c. It must be subject to a fair of the corporation to the shareholder and
valuation equal to the par or issued are, therefore, not credits as to make the
value of the stock issued; stockholder a creditor of the corporation
d. The valuation thereof shall (Garcia vs. Lim Chu Sing, 59 Phil. 562).
initially be determined by the  A share of stock only typifies a
incorporators or the board of directors; proportionate or aliquot part of the
and corporation’s property, or the right to share
e. The valuation is subject to the in its proceeds to that extent when
approval by the SEC. distributed according to law.
 Where the consideration is other than
actual cash, OR consists of intangible Modes of Issuance of Shares
property, the valuation hereof shall initially 1. By subscription before and after
be determined by the incorporators or the incorporation to original, unissued stock;
board of directors, subject to approval by 2. By sale of treasury stock after
the SEC. incorporation for money, property or
service;
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3. By subscription to new issues of stock in Unit of interest in a Evidence of the holder’s

case of an increase in the capital stock; corporation ownership of the stock and
4. By making a stock dividend of his right as a
shareholder
CERTIFICATE OF STOCK Incorporeal or Concrete and tangible
 It is the paper representation or tangible intangible property
evidence of the stock itself and of the May be issued by the May be issued only if the
various interests therein. corporation even if subscription is fully paid.
 It is not essential to the ownership and/or the subscription is
existence of the share of stock. not fully paid.
 Where the certificate of stock reflects a
greater volume of shares than the actual TRANSFER OF STOCK
number of shares issued or to be issued, Requirements for its validity:
the following rules may be considered: 1. In case of shares represented by a
1. To the extent that there is an certificate, the transfer must strictly comply
overissue, the excess issuance (over with the following conditions:
the authorized capital stock or the a. There must be delivery of the
stated capital) shall be void as being certificate;
ultra vires. b. The share must be indorsed by the
2. If there is no overissue, but no owner or his agent; and
payment has been made to cover c. To be valid to the corporation and third
the par or stated value of the persons, the transfer must be duly
excess shares, the latter would recorded in the books of the
constitute “watered” stocks. corporation (Rural Bank of Lipa vs.
3. If there is no overissue and CA, G.R. No. 124535, September 28,
watering of stocks, the corporation 2001).
may be bound to honor the 2. Where no certificate has been issued or
certificate (if duly signed and for some reason it is not in the possession
released by its authorized officers) of the stockholder, it may be transferred by
in the hands of a holder in good faith, means of a deed of assignment but the
reserving a right of recourse that same must be duly recorded in the books
an aggrieved party may pursue of the corporation.
against the culpable or unjustly  However, as required in the case of Ponce
enriched party. v. Alsons Cement, GR No. 139802,
December 10, 2002, there must be a
Issuance of the Certificate of Stock special power of attorney executed by the
Requisites: registered owner of the share authorizing
1. The certificate must be signed by the transferor to demand transfer in the stock
president or vice-president, countersigned and transfer book.
by the secretary or assistant secretary;  The transferee must present the indorsed
2. The Certificate must be sealed with the certificate to the corporate secretary who
seal of the corporation; shall effect the transfer in the corporate
3. The certificate must be delivered; books, issue a new stock certificate in
4. The par value, as to par value shares or favor of the transferee and cancel the
full subscription as to no par value shares former certificate.
must first be fully paid;  If there is no indorsement in favor of the
Basis: Doctrine of Individuality of transferee, the transferee may file an
Subscription that espouses that the action to compel the transferor to make
subscription is one, entire, indivisible, and such indorsement. However, the same
whole contract, which cannot be divided cannot be considered as an intra-
into portions (SEC Opinion). corporate controversy because the
5. The original certificate must be transferee is not yet a shareholder
surrendered where the person requesting (Rivera, et al. vs. Florendo, et al., G.R. No.
the issuance of a certificate is a transferee L-57586, October 8, 1996).
from the stockholder (Bitong vs. CA, et al.,  Only absolute transfers need be
G.R. No. 123553, July 13, 1998). registered. The pledge or mortgage itself
need not be recorded in the stock and
SHARES OF CERTIFICATE OF transfer book, but a chattel mortgage must
STOCK STOCK comply with the Chattel Mortgage Law,
and a pledge would require the shares to
be placed in the possession of the
136 MEMORY AID IN
COMMERCIAL LAW
Corporation Law

creditor/pledgee. The agreement must balance due and payable with interest.
appear in a public instrument to take effect Thirty days therefrom, if still unpaid, the
against third persons (Chemphil vs. CA, shares become delinquent, as of the date
251 SCRA 257) of call, and subject to sale, unless the
board declares otherwise (Sec. 67).
Effects of Unregistered Transfer of Shares  A “call” is the resolution or formal
1. It is valid and binding as between the declaration of the board that the unpaid
transferor and the transferee subscriptions are due and payable.
2. It is invalid as to the corporation except
when notice is given to the corporation for Effects:
purposes of registration 1. Upon the stockholder
3. It is invalid as against corporate creditors a. Accelerates
and the transferor is still liable to the the entire amount of the unpaid
corporation subscription;
4. It is invalid as to the attaching or executing b. Subjects the
creditors of the transferor, as well as shares to interest, expenses and
subsequent purchasers in good faith costs;
without notice of the transfer. c. Disenfranchis
es the shares from any right that
Prescription of Right inheres to a shareholder, except the
Considering that the law does not prescribe, a right to dividends (but which shall be
period within which the registration of the applied to any amount due on said
transfer of shares should be effected, the shares or, in the case of stock
action to enforce the right does not accrue until dividends, to be withheld by the
there has been a demand and a refusal corporation until full payment of the
concerning the transfer (Ponce vs. Alson delinquent shares (Sec. 43).
Cement Corp., G.R. No. 139802, Dec. 1. 2. Upon the director owning delinquent
2002). shares
a. Automatic forfeiture of his position
COLLECTION OF UNPAID SUBSCRIPTION (SEC Opinion August 26, 1992).
1. Voluntary payment b. A delinquent stockholder seeking to be
a. Upon the date specified in the elected as director may not be a
subscription contract candidate for, nor be duly elected to,
b. Upon call by the Board of Directors the board.
2. Involuntary payment  No delinquency stock shall be voted for or
a. Extra-judicial be entitled to vote or representation at any
i. Delinquency sale stockholders meeting, nor shall the holder
ii. Application of dividends be entitled to any of the rights of a
b. Judicial action stockholder except the right to dividends in
Note: The prescriptive period in case of accordance with the provisions of this
subscription of shares begins to run only from Code until and unless he pays the amount
the time the board of directors declares that due on his subscription with accrued
the balance is due and payable. It does not interest, and the cost and expenses of
begin to run from the date of the subscription advertisement, if any (Sec. 71).
(Garcia vs. Suarez, 67 Phil. 441).
Procedure for the Sale of Delinquent
DELINQUENCY Stocks (Sec. 68)
1. If the subscription contract fixes the date Steps to be taken in a Delinquency Sale:
for payment, failure to pay on such date 1. Resolution. The board shall issue
shall render the entire balance due and resolution ordering the sale of delinquent
payable with interest. Thirty days stock.
therefrom, if still unpaid, the shares 2. Notice. Notice of said sale, with a copy of
become delinquent, as of the due date, the resolution, shall be sent to every
and subject to sale, unless the board delinquent stockholder either personally or
declares otherwise. by registered mail;
2. If no date is fixed in the subscription 3. Publication. The notice shall furthermore
contract, the board of directors can make be published once a week for 2
the call for payment, and specify the due consecutive weeks in a newspaper of
date. The notice of call is mandatory. A general circulation in the province or city
mere demand is insufficient. The failure to where the principal office of the
pay on such date shall render the entire corporation is located;
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4. Sale. The delinquent stock shall be sold at certificate of stock which has been lost,
the public auction to be held not less than stolen or destroyed;
30 days nor more than 60 days from the 4. One Year Waiting Period. There shall be
date the stocks become delinquent; a waiting period of 1 year from the date of
5. Transfer. The stock so purchased shall be the last publication during which a contest
transferred to such purchaser in the books can be interposed;
of the corporation and a certificate for such 5. Contest. If the contest has been
stock shall be issued in his favor; and presented to said corporation or if an
6. Credit Remainder. The remaining shares, action is pending in court regarding the
if any, shall be credited in favor of the ownership of said certificate of stock which
delinquent stockholder who shall likewise has been lost, stolen or destroyed, the
be entitled to the issuance of a certificate issuance of the new certificate of stock
of stock covering the same. (Philippine shall be suspended until the final decision
Corporate Law Compendium, Timoteo of the court regarding the ownership of
Aquino, 2006 ed.) said certificate of stock which has been
lost, stolen or destroyed; and
Highest Bidder in a Delinquency Sale 6. Replacement. If there is no contest within
1. The person participating in the the 1 year period, the corporation shall
delinquency sale who offers to pay the full then replace the certificate. The
amount of the balance of the subscription replacement of share can only be made
together with the accrued interest, costs of before the expiration of the 1 year period if
advertisement and expenses of sale, for a bond is posted. (Philippine Corporate
the smallest number of shares. In other Law Compendium, Timoteo Aquino, 2006
words, the amount of the bid does not vary ed.)
but only the number of shares to be  In an opinion, the SEC held that the
bought changes and determines the requirements under Section 73 of the
highest bidder. Corporation Code are not mandatory for
2. If there is no bidder as mentioned above, the same admits of certain exceptions.
the corporation may bid for the same, and The corporation may voluntarily issue new
the total amount due shall be credited as certificates in lieu of the originals provided
paid in full in the books of the corporation. that the corporation is certain as to the real
Such shares shall be considered as owner of the shares. This is because of
treasury shares. the fact that, unless proven otherwise, the
stock and transfer book of the corporation
Cancellation of Sale is the best evidence to establish stock
1. When delinquent shareholders pays to the ownership (Philippine Corporate Law,
corporation, on or before the date Cesar Villanueva, 2001 ed.).
specified for the sale of the delinquent  The prescribed procedure does not apply
stock, the balance due on his subscription, to a case where the certificates are in the
plus accrued interest, costs of company’s possession when mislaid which
advertisement and expenses of sale; or thereby obligates the corporation, not the
2. Upon order of the board. stockholder, to suffer the consequences
(SEC Opinion).
Procedure for Issuance of New Certificate
of Stock in lieu of Lost, Stolen or Destroyed RIGHTS OF STOCKHOLDERS (Pandect of
Ones (Sec. 73) Commercial Law and Jurisprudence, J. Vitug,
1. Affidavit. The registered owner shall 2006 ed.)
execute and file an affidavit regarding the 1. MANAGERIAL RIGHTS
share and the circumstances regarding its a. Voting rights; and
loss; b. Right to remove directors
2. Verification. The corporation shall verify 2. PROPRIETARY RIGHTS
the affidavit and other information and a. Right to dividends;
evidence with the books of the b. Right to issuance of stock certificate
corporation; for fully paid shares;
3. Publication. The corporation shall publish c. Proportionate participation in the
a notice in a newspaper of general distribution of assets in liquidation;
circulation published the place where the d. Right to transfer of stocks in corporate
corporation has its principal office, once a books;
week for 3 consecutive weeks at the e. Right to recover stocks unlawfully sold
expense of the registered owner of the for delinquent payment of subscription;
f. Preemptive right;
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g. Appraisal right; c. When shares are issued in good faith

h. Right to inspect books and records; with the approval of the stockholders
i. Right to be furnished the most recent representing 2/3 of the outstanding
financial statement/ financial report; capital stock in exchange for property
j. Right to file individual suit, needed for corporate purposes or in
representative suit and derivative suits payment of previously contracted debt.

Pre-emptive Right
The preferential right of shareholders to PRE-EMPTIVE RIGHT OF FIRST
subscribe to all issues or disposition of RIGHT REFUSAL
shares of any class in proportion to their May be exercised Arises only by virtue of
present shareholdings. even when there is no contractual stipulations
Purpose: To enable the shareholder to express provision of but is also granted
retain his proportionate control in the law under the provisions on
corporation and to retain his equity in the Close Corporation
surplus. Pertains to Exercisable against
unsubscribed portion another stockholder of
of the authorized the corporation of his
 Extends to treasury shares in case of their capital stock. A right shares of stock
reissuance. that may be claimed
 A stockholder who neither desires nor against the
intends to buy any of the stocks being corporation
offered may waive such right. The right,
however, to waive pre-emptive right is a
personal right which should be exercised
personally by the stockholder concerned
or by an authorized person in his behalf by 3. REMEDIAL RIGHTS
way of a special power of attorney. a. Individual suit – a suit instituted by a
 If the shares of a corporation are offered shareholder for his own behalf against
and not subscribed or purchased by the the corporation;
stockholders and the shares are being b. Representative suit – a suit filed by a
offered again, there is no pre-emptive right shareholder in his behalf and in behalf
with respect to the latter offer of shares likewise of other stockholders similarly
(Benito vs. SEC, G.R. No. L-56655, July situated and with a common cause
25, 1983). against the corporation; and
 In case of additional issues of originally c. Derivative suit – a suit filed in behalf
authorized shares: of the corporation by its shareholders
GENERAL RULE: There is no preemptive (not creditors whose remedies are
right. This is on the theory that when a merely subsidiary such as accion
corporation at its inception offers its first subrogatoria and accion pauliana)
shares, it is presumed to have offered all upon a cause of action belonging to
of those which it is authorized to issue. the corporation, but not duly pursued
EXCEPTION: When a corporation at its by it, against any person or against the
inception offers only a specified portion of directors, officers and/or controlling
its authorized capital stock for shareholders of the corporation.
subscription. If subsequently, it offers the Requisites:
remaining unsubscribed portion, there i. An existing cause of action in
would be preemptive right as to the favor of the corporation;
remaining portion thus offered for ii. The stockholder/member must first
subscription. make a demand upon the
 Unless there is an express restriction in corporation or the management to
the Articles of Incorporation, the pre- sue unless such a demand would
emptive right of the stockholder is be futile;
transferable. iii. The stockholder/member must be
 Instances when pre-emptive right is NOT such at the time of the
available: objectionable acts or transactions
a. When denied in the Articles of unless the transactions are
Incorporation; continuously injurious; and
b. When shares are used in compliance iv. The action must be brought in the
with law requiring stock offerings or name of the corporation.
minimum stock ownership by the
public;
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The Interim Rules of Procedure 2. List of Stockholders or Members; and

Governing Intra-Corprorate 3. Financial Records.
Controversies requires:
1. That he was a stockholder or The code requires that:
member at the time the acts or 1. The records must be kept at the principal
transactions subject of the action office of the corporation;
occurred and at the time the action 2. Any director, trustee, stockholder or
was file; member shall have the right to inspect the
2. He exerted all reasonable efforts, records of all business transactions and
and alleges the same with the minutes of any meetings;
particularity in the complaint, to 3. The stockholder may demand a copy of
exhaust all remedies available the excerpts of the records or minutes;
under the articles of incorporation, and
by-laws, laws or rules governing 4. The refusal to allow such right to inspect
the corporation or partnership to and to demand such copy shall subject the
obtain the relief he desires; erring officer or agent to civil and criminal
3. No appraisal rights are available liabilities and if such refusal is by virtue of
for the acts complained of; and a resolution or order of the board of
4. The suit is not a nuisance or directors or trustees, the liability shall be
harassment suit (Section 1, Rule imposed upon the directors or trustees
8). who voted therefor.
 The stockholder is only a NOMINAL
PARTY in a derivative suit. The real Basis of the Right to Inspection:
party in interest is the corporation. 1. The right of stockholders to inspect the
 The number of shares of the books of the corporation rests on the fact
stockholder is immaterial since he is of beneficial ownership of the corporate
not suing in his own behalf. property and assets through ownership of
 Note: The mere trustee of shares shares;
registered in his name cannot file a 2. The stockholders are entitled to inspect
derivative suit for he is not a the books and records of a corporation in
stockholder in his own right (Bitong vs. order to investigate the conduct of the
CA, 292 SCRA 304). management, determine the financial
condition of the corporation, and generally
LIABILITIES OF STOCKHOLDERS take an account of the stewardship of the
1. Liability to the corporation for unpaid officers and directors;
subscription; 3. The evident PURPOSE of the law in
2. Liability to the corporation for interest on granting stockholders of the right is to
unpaid subscription; protect small and minority stockholders
3. Liability to creditors of the corporation on from the power of the majority and from
the unpaid subscription mismanagement by its officers as well as
4. Liability for watered stock to ascertain, establish and maintain their
5. Liability for dividends unlawfully paid rights and intelligently perform their
6. Liability for failure to create corporation corporate duties; and
4. In the exercise of its power of supervision
and control over all corporations, the SEC
XIV. CORPORATE BOOKS AND RECORDS motu proprio or upon complaint by any
aggrieved party, undertake an inspection
Books required to be kept by the and examination of books and records of
corporation (Sec. 74; Gokongwei v. SEC, 89 any corporation.
SCRA 366)
1. Book of all business transactions; Extent of the Right of Inspection:
2. Book of Minutes of all meetings of 1. The right to inspect the books and records
stockholders or members; of the corporation includes, as an
3. Book of Minutes of all meetings of INCIDENT thereof, the right to make
directors or trustees; and copies, abstracts and memoranda of their
4. Stock and transfer book, in case of stock contents.
corporations. 2. The right of inspection is PERSONAL in
the sense that it may be exercised by the
Corporate records required by the SEC to director, etc. himself but the inspection
be kept and/or registered: and examination may be made by any
1. Books of Account; proper representative or attorney-in-fact
140 MEMORY AID IN
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and either with or without the attendance Vice-President and certified by the
of the director, etc. secretary or assistant secretary;
5. Four copies of the Articles of merger or
Limitations on the Right of Inspection Consolidation (together with favorable
1. The right must be exercised during recommendation of a pertinent
reasonable hours on business days; government agency in certain cases) shall
2. The person demanding the right has not be submitted to the SEC for approval; and
improperly used any information obtained 6. The SEC shall issue a certificate of merger
through any previous examination of the if it is satisfied that the merger or
books and records of the corporation; and consolidation of the corporations
3. The demand is made in good faith or for a concerned is not inconsistent with the
legitimate purpose (Sec. 74). provisions of this Code and existing laws
 The right extends, in consonance with (Philippine Corporate Law Compendium,
equity, good faith, and fair dealing, to a Timoteo Aquino, 2006 ed.).
foreign subsidiary wholly-owned by the
corporation.  If, upon investigation, the SEC has reason
to believe that the proposed merger or
Remedies if Inspection Denied consolidation is contrary to or inconsistent
1. Mandamus with the provisions of this Code or existing
2. Damages laws, it shall set a hearing to give the
3. Criminal Suit corporations concerned the opportunity to
be heard.
Defenses Available to Director, Trustee or  The plan may still be amended before the
Officer Held Liable same is filed with the SEC, however, any
1. The person demanding to examine has amendment thereto must be approved by
improperly used any information secured the majority vote of the board members or
through any prior examination of the trustees of the constituent corporations
records or minutes of such corporation or and affirmed by the vote of 2/3 of the
for any other corporation; or outstanding capital stockholders or
2. The one requesting to inspect was not members.
taking in good faith or for a legitimate
purpose in making his demand. Effects of Merger and Consolidation
1. The constituent corporations shall become
XV. MERGER AND CONSOLIDATION a single corporation which, in case of
merger shall be the surviving corporation
Concept of Merger and Consolidation and, in the case of consolidation, shall be
MERGER CONSOLIDATION the consolidated corporation;
A union whereby one The union of two or more 2. The separate existence of the constituent
or more existing existing corporations to corporation shall cease, except that of the
corporations are form a new corporation surviving corporation;
absorbed by another called the consolidated 3. The surviving or consolidated corporation
corporation which corporation. shall possess all rights, privileges,
survives and
immunities and powers and subject to all
continues the
combined business. the duties and liabilities of a corporation;
4. The surviving or consolidated corporation
Procedure for Merger and Consolidation shall thereafter possess all the rights,
1. The Board of each corporation shall draw privileges, immunities and franchises of
up a plan of merger or consolidation; each of the constituent corporations;
2. The plan of merger or consolidation shall 5. All property, real or personal, and all
be approved by majority vote of each receivables due to, and all other interest of
board of the concerned corporations at each constituent corporation, shall be
separate meetings; deemed transferred to and vested in such
3. The plan of merger or consolidation shall surviving or consolidated corporation
be approved by the majority vote of the 2/3 without further act or deed;
of the shareholders of the outstanding 6. The surviving or consolidated corporation
capital stock or members, in case of non- shall be responsible for all the liabilities
stock corporation; and obligations of each of the constituent
4. Articles of Merger or Consolidation shall corporations;
be executed by each of the constituent 7. Any claim, action or proceeding pending
corporations, signed by the President or by or against any of the constituent
corporations may be prosecuted by or
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against the surviving or consolidated 1. “ASSETS-ONLY” LEVEL (Property Only

corporations; and Purchase)
8. The rights of the creditors or lien upon the  The purchaser is interested only in the raw
property of any of each constituent assets and properties of the business. He
corporation shall not be impaired by such is not interested in the entity of the
merger or consolidation. corporate owner of the assets or on the
goodwill and other factors relating to the
GENERAL RULE: When one corporation buys business itself.
all the shares of another corporation, this will  The transferee would not be liable for the
not operate to dissolve the other corporation debts and liabilities of his transferor since
and as the two corporations still maintaining there is no privity of contract over debt
their separate corporate entities, one will not obligations between the transferee and the
answer for the debts of the other. transferor’s creditors.
EXCEPTIONS AS TO NON-ASSUMPTION 2. “BUSINESS-ENTERPRISE” LEVEL
OF LIABILITIES: (Purchase as On-Going Concern)
1. If there is an express assumption of  The transferee merely continues the same
liabilities; business of the transferor since he obtains
2. If there is a consolidation or merger; the earning capability of the venture.
3. If the purchase was in fraud of creditors;  The transferee is liable for the debts and
and liabilities of the transferor.
4. If the purchaser is merely a continuation of 3. “EQUITY” LEVEL (Share Purchase)
the seller.  The purchaser takes control and
ownership of the business by purchasing
De Facto Merger the shareholdings of the corporate owner.
One corporation acquiring all or substantially What the purchaser actually purchased is
all of the properties of another corporation in the ability to elect the members of the
exchange for shares of stock of the acquiring board of the corporation who run the
corporation. The acquiring corporation would business.
end-up with the business enterprise of the
selling corporation whereas the latter would
end up with basically its remaining assets XVI. APPRAISAL RIGHT
being the shares of stock of the acquiring
corporation and may then distribute it as Concept of Appraisal Right
liquidating dividend to its stockholders It is the right to withdraw from the corporation
(Philippine Corporate Law, Cesar Villanueva, and demand payment of the fair value of his
2001 ed.). shares after dissenting from certain corporate
acts involving fundamental changes in
MERGER and SALE OF ASSETS corporate structure.
CONSOLIDATION
1. Sale of assets is 1.merger/consolidation Instances of Appraisal Right (ASIM)
always involved is not always involved 1. An amendment to the articles that has the
2. There is automatic 2. Purchasing effect of—
assumption of liabilities corporation is not a. changing or restricting the rights of
generally liable for the shareholders or of authorizing
debts and liabilities of preferences over those of outstanding
the selling corporation shares; or
3. There is continuance 3. The selling b. changing the term of corporate
of the enterprise and of corporation ordinarily
existence;
the stockholders contemplates a
liquidation of the 2. Sale, encumbrance or other dispositions of
enterprise all or substantially all of the corporate
4. Title to the assets 4. Transfer of title is by property or assets
are transferred by virtue of contract 3. Merger or consolidations (Sec. 81);
operation of law 4. Investment of corporate funds in another
5. The constituent 5. The selling corporation or in a purpose other than the
corporations are corporation is not primary purpose (Sec. 42);
automatically dissolved dissolved by the mere 5. In a close corporation, a stockholder may,
transfer of all its for any reason, compel the corporation to
property
purchase his shares when the corporation
has sufficient assets in its books to cover
Types of Acquisitions: (Philippine Corporate its debts and liabilities exclusive of capital
Law, Cesar Villanueva, 2001 ed.) stock (Section 105).
142 MEMORY AID IN
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between him and the corporation or as

Procedure (Sec. 82) determined by the appraisers chosen by
1. The dissenting stockholder shall make a them.
written demand on the corporation within GENERAL RULE: A dissenting stockholder who
30 days after the date on which the vote demands payment of his shares is no longer
was taken for the payment of the fair value allowed to withdraw from his decision.
of his shares; EXCEPTIONS:
2. If the proposed corporate action is 1. The corporation consents to the
implemented or effected, the corporation withdrawal;
shall pay to such stockholder, upon 2. The proposed corporate action is
surrender of the corresponding certificate abandoned or rescinded by the
of stock within 10 days after demanding corporation;
payment of his shares; 3. The proposed corporate action is
3. Upon payment of the agreed or awarded disapproved by the SEC where its
price, the stockholder shall transfer his approval is necessary; and
shares to the corporation. 4. The Commission determines that such
stockholder is not entitled to appraisal right
Conditions for Exercise of Appraisal Right (Sec. 84).
1. Any of the instances set forth by law must
be present. Valuation Date
2. Dissenting stockholder must have voted The fair value of the shares of the dissenting
against the proposed action. stockholder is determined as of the day prior to
3. Demand for payment must be made within the date on which the vote was taken
30 days from the date vote is taken notwithstanding any appreciation or
thereon. Failure to make demand shall be depreciation in value of the shares in
deemed a waiver. anticipation of such corporate action.
4. Price must be based on fair value to as of
day prior to date on which vote was taken. Payment
5. Submission by withdrawing stockholder of Made only if the corporation has unrestricted
his shares to the corporation for notation retained earnings in its books to cover the
of being dissenting stockholder within 10 same.
days from written demand. XVII. NON-STOCK CORPORATIONS
6. Payment must be made only when the
corporation has unrestricted retained Concept and Purpose
earnings in its books;  A “non- stock corporation” is one where no
7. Stockholder must transfer his shares to part of its income is distributable as
the corporation upon payment by the dividends to its members.
corporation.  Even if there is a statement of capital
 If the corporation unjustifiably refuses to stock, for as long as there is no distribution
pay the dissenting stockholder despite the of retained earnings to its members, the
full compliance with all the requirements corporation is non-stock.
for a valid exercise of appraisal right and  Any profit which it may obtain as an
despite the fact that the corporation has incident to its operations shall, whenever
sufficient unrestricted retained earnings, necessary or proper, be used in
the aggrieved stockholder may file the furtherance of the purpose or purposes for
appropriate action before the proper which it was organized.
Regional Trial Court to compel the Requisites:
corporation to allow him to exercise his 1. It does not have capital stock divided
appraisal right (SEC Opinion, October 1, into shares;
2001). 2. No part of whose income is, during its
existence, distributable as dividends to
Effects of Exercise of Right of Appraisal its members, trustees, or officers,
(Sec. 83) 3. A non-stock corporation may be
1. All rights accruing to the such shares shall formed for any eleemosynary
be suspended from the time of demand for purposes such as charitable, religious,
payment of the fair value of the shares educational, professional, cultural,
until either the abandonment of the recreational, fraternal, literary,
corporate action. scientific, social, civic service, or
2. The dissenting stockholder shall be similar purposes, like trade, industry,
entitled to receive payment of the fair agricultural (Sec. 88).
value of his shares as agreed upon
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 They are governed by the same rules articles or by-laws

established for stock corporations, Officers are elected Officers may be directly
whenever pertinent, subject, however, to a by the Board of elected by the members
number of special features. Directors unless otherwise
provided in the articles or
by-laws
Rules on Conversion (SEC Opinion)
Stockholders and Members may be
1. Stock to non-stock corporation directors must act in allowed by the by-laws to
 Conversion may be made by mere a meeting, except vote by mail or other
amendment of the articles of incorporation. where a mere written similar means
 The effect of this is that after the assent is sufficient or
conversion, the stockholders now become a formal meeting
the members of the non-stock corporation unnecessary
and thus will no longer have any pecuniary
interest in the corporation. Neither are they XV. CLOSE CORPORATIONS
entitled to any share in the profit that may
be obtained out of the operations or Concept
activities of the non-stock corporation. A special kind of stock corporation:
Hence, there is in fact no distribution by 1. whose articles of incorporation should
the stock corporation, by conversion, of its provide that:
assets to its stockholders. a. the number of stockholders shall not
2. Non-stock to stock corporation exceed 20;
 A non-stock corporation cannot be b. issued stocks are subject to transfer
converted into a stock corporation by mere restrictions, with a right of preemption
amendments of its articles of incorporation in favor of the stockholders or the
because the conversion would change the corporation; and
corporate nature from non-profit to c. the corporation shall not be listed in
monetary gain. the stock exchange or its stocks
 What the corporation should do is to should not be publicly offered; AND
dissolve itself and its members may 2. whose stocks, at least 2/3 of the voting
decide to organize a stock corporation. stocks or voting rights of which are not
 The conversion without dissolving it first owned or controlled by another
would be tantamount to distribution of its corporation which is not a close
assets or income to its members inasmuch corporation (Sec. 96).
as after its conversion, the asset of the Note: Non-compliance with any of the
non-stock corporation would now be requirements shall not make the corporation a
treated as payment to the subscriptions of close corporation within the meaning of the
the members who will now become Corporation Code.
stockholders of the corporation.
Characteristics
Distinguished from Stock Corporation 1. Stockholders may act as directors without
STOCK NON-STOCK need of election and therefore are liable as
Has capital stock Does not have shares directors;
divided into shares and may not distribute 2. Stockholders who are involved in the
and with authority to profits to its members management of the corporation are liable
distribute dividends to in the same manner as directors are.
its stockholders 3. Quorum may be greater than mere
Stockholders may Members cannot transfer majority;
transfer their shares their membership unless
4. Transfers of stocks to others, which would
allowed by the articles or
by-laws increase the number of stockholders to
Cumulative voting is Cumulative voting not more than the maximum are invalid;
available in the available unless 5. Corporate actuations may be binding even
election of directors otherwise provided in the without a formal board meeting, if the
articles or by-laws stockholder had knowledge or ratified the
Directors cannot Trustees may exceed 15 informal action of the others;
exceed 15 in number in number 6. Preemptive right extends to all stock
The term of a director The term of a trustee is 3 issues;
is 1 year years; 1/3 of the Board 7. Deadlocks in board are settled by the
shall be elected annually SEC, on the written petition by any
Stockholders may Members may be stockholder; and
vote by proxy deprived of the right to
vote by proxy in the
8. Stockholder may withdraw and avail of his
right of appraisal.
144 MEMORY AID IN
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Corporation Law

directors.
Note: Special rules are provided for close The corporate officers Its articles may provide
corporations because it is essentially an and employees are that any or all of the
incorporated partnership (The Corporation elected by a majority corporate officers or
Code of the Philippines Annotated, Hector de vote of all the members employees may be
of the board of directors. elected or appointed by
Leon, 2002 ed.).
the stockholders.
The pre-emptive right is The pre-emptive right
subject to the is subject to no
exceptions found in Sec. exceptions unless
39. denied in the articles
The appraisal right may The appraisal right may
be exercised by a be exercised and
stockholder only in the compelled against the
cases provided in Secs. corporation by a
81 and 42 of the Code. stockholder for any
reason.
Except as regards In case of an arbitration
redeemable shares, the of an intra-corporate
purchase by the deadlock by the SEC,
corporation of its own the corporation may be
stock must always be ordered to purchase its
made from the own shares from the
unrestricted retained stockholders
earnings. regardless of the
availability of
unrestricted retained
earnings.
Arbitration of intra- Arbitration of intra-
corporate deadlock by corporate deadlock by
the SEC is not a remedy the SEC is an available
in case the directors or remedy in case the
stockholders are so directors or
divided respecting the stockholders are so
management of the divided respecting the
corporation. management of the
corporation.

Distinguished from Ordinary Stock  The following cannot be a close

Corporation corporation:
ORDINARY STOCK CLOSE a. mining companies;
CORPORATION CORPORATION b. oil companies;
Its articles of Its articles must contain c. stock exchanges;
incorporation need only the special matters d. banks;
contain the general prescribed by Sec. 97, e. insurance companies
matters enumerated in aside from the general f. public utilities;
Sec. 14 of the Code. matters in Sec. 14. g. educational institutions; and
Failure to do so h. other corporations declared to be
precludes a de jure vested with public interest (Sec. 96)
close corporation
status.
Note: A “close corporation” is different from a
Its status as an ordinary 2/3 of its voting stock
stock corporation is not or voting rights must “closed corporation” and a “closely held
affected by the not be owned or corporation.”
ownership of its voting controlled by another
stock or voting rights. corporation which is Restrictions on Transfer
not a close corporation.  It is mandatory for the Articles of
Its articles cannot Its articles may classify Incorporation of a close corporation to
classify its directors. its directors. provide that all of the issued stocks of all
Business of the Business of the classes be subject to one or more
corporation is managed corporation may be restriction.
by the board of managed by the
 The restriction on transfer is in the nature
directors. stockholders if the
articles so provide, but of a right of first refusal in favor of the
they are liable as stockholders which can be waived by the
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stockholder, if the latter fails to exercise 1. Educational Corporation

the option to purchase within the period  It is a stock or non-stock corporation
stated in the articles and by-laws. organized to provide facilities for teaching
 Any transfer made should not result in or instruction.
exceeding the number of stockholders as  A favorable recommendation of the DECS
allowed by the Code. is essential for the approval of its articles
 It is clear under Section 99 that good faith of incorporation and by-laws.
is not a defense because there is a  It is primarily governed by special laws
conclusive presumption of knowledge of and suppletorily by the provisions of the
the restriction. Code.

Effects of a situation where stockholders NON-STOCK EDUCATIONAL

are the managers EDUCATIONAL CORPORATION
1. No longer necessary to elect directors; CORPORATION
2. Stockholders concerned shall be deemed A non-stock A special corporation
the directors; corporation which may a stock or
3. The Stockholders shall have the same non-stock
liabilities as directors; Governed by the Governed by special
4. To the extent that the stockholders are provisions on non- laws and by the general
actively engaged in the management or stock corporations and provisions of the
suppletorily by the Corporation Code
operation of the business and affairs of a provisions on stock
close corporation, the stockholders shall corporations
be held to strict fiduciary duties to each The number of board The number of the
other and among themselves; and of trustees may be board of trustees should
5. The stockholders shall be personally liable more than 15 not be less than 5 but
for corporate torts unless the corporation not more than 15.
has obtained reasonably adequate liability The term of office of The term of office of the
insurance. the board of trustees board of trustees shall
shall be 3 years be 5 years
Deadlock in a Close Corporation
 “DEADLOCK” is when the directors or 2. Religious Corporations
stockholders are so divided respecting the  A corporation composed entirely of
management of the business and affairs of spiritual persons and which is organized
the corporation that the votes required for for the furtherance of a religion or for
any corporate action cannot be obtained perpetuating the rights of the church or for
and as a result, business and affairs can the administration of church or religious
no longer be conducted to the advantage work or property. It is different from an
of the stockholders generally. ordinary non-stock corporation organized
 In this case, the SEC shall have the power for religious purposes.
to arbitrate the dispute and in the exercise  The Corporation Code does not require
of such power, the SEC shall have any religious group to be registered as a
authority to— corporation BUT if it wants to acquire legal
1. Cancel or alter any provision in the personality, its members should
articles of incorporation or by-laws; incorporate under the corporation Code.
2. Cancel, alter or enjoin any resolution Kinds:
of the corporation; 1. Corporation sole - A special form of
3. Direct or prohibit any act of the corporation, usually associated with the
corporation; clergy, consisting of one person only and
4. Require the purchase at their fair his successors, who is incorporated by law
value of shares of any stockholder to give some legal capacities and
either by any stockholder or by the advantages (Section 110);
corporation regardless of the 2. Religious societies/Corporate aggregate -
availability of unrestricted retained A non-stock corporation governed by a
earnings; board but with religious purposes. It is
5. Appoint a provisional director; incorporated by an aggregate of persons,
6. Dissolve the corporation; or e.g. religious order, diocese, synod, sect,
7. Granting such other relief as the etc. (Section 116); and
circumstances may warrant. 3. Ordinary Non-Stock Religious Corporation
(Section 88)
XIX. SPECIAL CORPORATIONS
146 MEMORY AID IN
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XX. DISSOLUTION AND WINDING UP 4. Reincorporation of the dissolved

(LIQUIDATION) corporation by refilling new articles of
incorporation and by-laws;
DISSOLUTION 5. The corporation continues as a body
The extinguishment of the corporate franchise corporate for 3 years for purposes of
and the termination of corporate existence. winding up; and
6. Cessation of corporate existence for all
Modes: purposes upon the expiration of the
1. Voluntary winding up period of 3 years (The
a. Application for dissolution with the Corporation Code of the Philippines
SEC Annotated, Hector de Leon, 2002 ed.).
i. Where no creditors are affected
ii. Where creditors are affected LIQUIDATION
b. Shortening of the corporate term by The process by which all the assets of the
amending the articles of incorporation. corporation are converted into liquid assets
2. Involuntary (cash) in order to facilitate the payment of
a. Expiration of obligations to creditors, and the remaining
the corporate term; balance, if any, is to be distributed to the
b. Failure to organize stockholders or members.
and commence business within 2  A dissolved corporation continues to be a
years from the date of issuance of the body corporate for 3 years from the time it
certificate of incorporation is dissolved for the purpose of liquidation
Note: However, the SEC has opined that or winding up its corporate affairs.
the dissolution in this case is not
automatic. The corporation continues to Methods:
exist as such, notwithstanding its non- 1. By the corporation itself through its board
operational status until the SEC orders its of directors/trustees;
dissolution after notice and hearing. 2. By a trustee to whom the corporate assets
c. Legislative have been conveyed; and
dissolution; 3. By a management committee or
d. Quo warranto suit rehabilitation receiver appointed by the
against a de facto corporation; SEC.
e. Minority stockholders’ Note: The 3-year period of liquidation does not
suit for dissolution on justifiable apply to Methods 2 and 3 as long as the
grounds; or trustee or the receiver is appointed within the
f. SEC dissolution, upon said period.
complaint and after notice and
hearing, on the following grounds:  The termination of the life of a juridical
i. The corporation was illegally entity does not by itself cause the
organized; extinction or diminution of the rights and
ii. Continuous inactivity (subsequent liabilities of such entity nor those of its
to incorporation, organization and owners and creditors alike (see Sec. 145).
commencement of business) for at  The word “trustee” as used in the
least 5 years; corporation statute must be understood in
iii. Serious dissension in the its general concept which could include
corporation; or the counsel to whom was entrusted the
iv. Commission by the corporation of prosecution of the suit filed by the
illegal or ultra vires acts or corporation (Spouses Gelano vs. CA, 103
violations of the Code. SCRA 90).
 The question as to the right of priority of a
Effects: claimant against the assets of a
1. Transfer of legal title to corporate property corporation that is being dissolved and
to the stockholders who become co- liquidated becomes of importance only
owners thereof; when the assets of the corporation are not
2. Continuation of corporate business merely sufficient to pay all claims (19 Am. Jur.
as an association without juridical 2d).
personality;
3. Conveyance by the stockholders of their LIQUIDATION REHABILITATION
respective shareholdings toward the Connotes a winding Connotes a reopening or
creation of a new corporation to continue up or settling with reorganization
the business of the old; creditors and debtors
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Winding up process Contemplates a

so that assets may be continuance of corporate Grounds for Revocation of License
distributed to those life in an effort to restore 1. Failure to file annual reports required by
entitled the corporation to its the Code;
former successful
2. Failure to appoint and maintain a resident
operation
agent;
3. Failure to inform the SEC of the change of
XXI. FOREIGN CORPORATIONS
residence of the resident agent;
4. Failure to submit copy of amended articles
Concept
or by-laws or articles of merger or
 A “foreign corporation is one formed,
consolidation;
organized or existing under any law other
5. A misrepresentation in material matters in
than those of the Philippines and whose
reports;
laws allow Filipino citizens and corporation
6. Failure to pay taxes, imposts and
to do business in its own country or state
assessments;
(Section 123).
7. Engage in business unauthorized by SEC;
 The definition espouses the incorporation
8. Acting as dummy of a foreign corporation;
test and the reciprocity rule and is
and
significant for licensing purposes.
9. Not licensed to do business in the
 The rule that requires reciprocity before a
Philippines (Sec. 134).
foreign corporation can be recognized is a
reflection of the basic rule that a foreign
Test of “Doing or Transacting Business in
corporation is one which owes its
the Philippines
existence to the laws of another State and
 The Corporation Code does not define the
generally, it has no existence within a
phrase “doing or transacting business.”
State in which it is foreign.
 It is not permitted to “transact or do
1. Jurisprudential Tests (Philippine
business in the Philippines” until it has
Corporate Law, Cesar Villanueva, 2001
secured a license for that purpose from
ed.)
the SEC and a certificate of authority from
a. Twin characterization test
the appropriate government agency.
i. Whether the foreign corporation is
maintaining or continuing in the
Reasons why a license is necessary:
Philippines the body or substance
1. To place them under the jurisdiction of the
of the business for which it was
courts
organized or whether it has
2. To place them in the same footing as
substantially retired from it and
domestic corporations
turned it over another (Substance
3. Protection for the public in dealing with
Test); and
said corporations.
ii. Whether there is continuity of
commercial dealings and
Resident Agent
arrangements, contemplating to
 An individual, who must be of good moral
some extent the performance of
character and of sound financial standing,
acts or works or the exercise of
residing in the Philippines, or a domestic
some functions normally incident
corporation lawfully transacting business
to and in progressive prosecution
in the Philippines, designated in a written
of, the purpose and object of its
power of attorney by a foreign corporation
organization (Continuity Test).
authorized to do business in the
b. Contract Test
Philippines, on whom any summons and
 Whether the contracts entered into by
other legal processes may be served in all
the foreign corporation, or by an agent
actions or other legal proceedings against
acting under the control and direction
the foreign corporation (Sec. 127-128).
of the foreign corporation, are
 A resident agent cannot sign the certificate
consummated in the Philippines.
of non-forum shopping that is a
2. Statutory Tests
requirement for the filing of a initiatory
a. Foreign Investment Act of 1991
pleading in court because while a resident
(R.A. No. 7042)
agent may be aware of actions filed
 Acts constituting “doing business”:
against the principal, he may not be aware
i. Soliciting orders, service
of the actions initiated by the principal
contracts, opening offices,
(Expert Travel & Tours Inc. vs. CA, G.R.
whether called “liaison” offices or
No. 152392, May 26,2005).
branches;
148 MEMORY AID IN
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ii. Appointing representatives or b. In Pari Delicto Rule

distributors domiciled in the  In the case of Top-Weld
Philippines or who in any calendar Manufacturing vs. ECED, S.A. (G.R.
year stay in the country for a L-44944, August, 9, 1985), the Court
period or periods totaling 180 days denied the relief prayed for by
or more; petitioner when it ruled that the very
iii. Participating in the management, purpose of the law was circumvented
supervision or control of any and evaded when the petitioner
domestic business, firm or entity entered into the said agreements
or corporation in the Philippines; despite the prohibition contained in the
and questioned law. The parties were
iv. Any other act or acts that imply a considered as being in pari delicto
continuity of commercial dealings because they equally violated R.A.
or arrangements, and contemplate 5455.
to that extent the performance of c. Estoppel Rule
acts or works, or the exercise of  A party is estopped from questioning
some of the functions normally the capacity of a foreign corporation to
incident to, and in progressive institute an action in our courts where
prosecution of, commercial gain or it had obtained benefits from its
of the purpose of the business dealings with such foreign
organization. corporations and thereafter committed
b. Implementing Rules of R.A. No. a breach or sought to renege on its
7042 obligations (Merrill Lynch vs. CA, G.R.
 Acts not constituting “doing business”: No. 978160, July 24, 1992).
i. Mere investment as a shareholder
in a domestic corporation and/or Effects of Lack of License
the exercise of rights as such 1. On suits
investor; a. Foreign corporation doing business in the
ii. Appointing a representative or Philippines:
distributor domiciled in the i. may not sue or intervene in any action
Philippines which transacts in any court or administrative agency
business in its own name and for of the Philippines; but
its own account; ii. may be sued on any valid cause of
iii. Publication of a general action recognized in the Philippines
advertisement through any print or (under the doctrine of quasi-estoppel
broadcast media; by acceptance of benefits) (Sec. 133).
iv. Maintaining a stock of goods in the b. Foreign corporation not doing business in
Philippines solely for the purpose the Philippines:
of having the same processed by i. Generally, it may not sue and be
another entity in the Philippines; sued in any court or administrative
v. Consignment by the foreign agency of the Philippines;
corporation of equipment with a ii. However, it may sue and be sued
local company to be used in the for isolated transactions, as well
processing of products for export; as for those which are casual or
vi. Collecting information in the incidental thereto.
Philippines; and 2. On contracts
vii. Performing services auxiliary to an  The contracts contemplated are those that
existing isolated contract of sale satisfy the “contract test” or those that
which are not on a continuing make a foreign corporation as one “doing
basis. business in the Philippines.”
3. Jurisprudential Rules GENERAL RULE: The contracts are
a. Doctrine of Isolated Transactions unenforceable. They are enforceable only
 Foreign corporations, even unlicensed upon securing a license.
ones, can sue or be sued on a EXCEPTION: However, the contracts are null
transaction or series of transactions and void if they are contrary to law, morals,
set apart from their common business good customs, public order and public policy.
in the sense that there is no intention
to engage in a progressive pursuit of Instances when a Foreign Corporation may
the purpose and object of business Sue in the Philippines whether or not
transaction (Eriks Pte. Ltd vs. CA, 267 Licensed to do Business Thereat
SCRA 567).
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1. To seek redress for an isolated business notice of such revocation accompanied by

transaction; a copy of the certificate of revocation.
2. To protect its corporate reputation, name,
and goodwill; Withdrawal
3. To enforce a right not arising out of a Procedure: by filing a petition for withdrawal
business transaction, e.g. tort that of license
occurred in the Philippines; Requisites:
4. When the parties have contractually 1. All claims which have accrued in the
stipulated that Philippines is the venue of Philippines have been paid, compromised
actions; and or settled;
5. When the party sued is barred by the 2. All taxes, imposts, assessment, and
principle of estoppel and/or principle of penalties, if any, lawfully due to the
unjust enrichment from questioning the Philippine Government or any of its
capacity of the foreign corporation. agencies or political subdivisions have
6. recovery of misdelivered property been paid; and
3. The petition for withdrawal of license has
Revocation and Withdrawal of License been published once a week for three
Grounds for Revocation or Suspension of consecutive weeks in a newspaper of
License by SEC: general circulation in the Philippines.
1. Failure to file its annual report or pay any
fees as required by the Code; XXII. SECURITIES AND EXCHANGE
2. Failure to appoint and maintain a resident COMMISSION REORGANIZATION
agent in the Philippines as required by the DECREE (P.D. No. 902-A)
Code;
3. Failure, after change of its resident agent ORIGINAL AND EXCLUSIVE JURSDICTION
or his address, to submit to the SEC a OF THE RTC (Sec. 5 in relation to Sec. 5.2
statement of such change as required by OF RA 8799):
the Code; 1. Fraudulent devices and schemes
4. Failure to submit to the SEC an employed by directors detrimental to the
authenticated copy of any amendment to public interest and to other firms;
its articles of incorporation or by-laws or of 2. Intra-corporate disputes;
any articles of merger or consolidation 3. Disputes with the state in relation to their
within the time prescribed by the Code; franchise and right to exist as such;
5. A misrepresentation of any material matter 4. Controversies in election, appointment of
in ay application, report, affidavit or other directors or trustees;
document submitted by such corporation 5. Petition to be declared in a state of
pursuant to the provisions of the Code; suspension of payments;
6. Failure to pay any and all taxes, imposts, 6. Petition for rehabilitation; and
assessments or penalties, if any, lawfully 7. Appointment of rehabilitation receiver or
due to the Philippine Government or any management committee (provisional
of its agencies or political subdivision; remedies).
7. Transacting business in the Philippines  RA 8799 effectively amended Sec. 5 of PD
outside of the purpose or purposes for 902-A, jurisdiction over intra-corporate
which such corporation is authorized disputes is now vested in the RTCs.
under its license; However, while Sec. 5 was amended,
8. Transacting business in the Philippines as there is no repeal of Sec. 6 thereof
agent of or acting for and in behalf of any declaring that the fraudulent acts or
foreign corporation or entity not duly schemes, which the SEC shall exclusively
licensed to do business in the Philippines; investigate and prosecute, are those in
or violation of any law or rules and
9. Any other ground as would render it unfit regulations administered and enforced by
to transact business in the Philippines. the SEC alone. The filing of civil/intra-
corporate case before SEC does not
Procedure: preclude the simultaneous and
1. The SEC shall issue a corresponding concomitant filing of a criminal action
certificate of revocation, furnishing a copy before the regular courts; such that a
thereof to the appropriate government fraudulent act may give rise to liability for
agency in the proper case; violation of the rules and regulations of the
2. The SEC shall also mail to the corporation SEC cognizable by the SEC itself, as well
at its registered office in the Philippines a as criminal liability for violation of the
Revised Penal Code cognizable by the
150 MEMORY AID IN
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Corporation Law

regular courts, both charges to be filed corporation, partnership, or association of

and proceeded independently, and may be which they are stockholders, members, or
simultaneously with the other (Fabia vs. associates, respectively;
CA, G.R. No. 132684. September 11, 3. Controversies in the election or
2002). appointment of directors, trustees, officers,
Note: A corporate officer’s dismissal is always or managers of corporations, partnerships,
a corporate act and/or an intra-corporate or associations;
controversy. However, the corporate officers 4. Derivative suits; and
contemplated are those whose offices are 5. Inspection of corporate books.
created by the Corporation Code or the by-  The provisions of this rule shall also apply
laws. to election contests in stock and non-stock
corporations.
INTRA-CORPORATE DISPUTE  An election contest refers to any
Elements: controversy or dispute involving title or
1. Status or relationship of the parties – claim to any elective office in a stock or
controversy must be between and among non-stock corporation, the validation of
corporators, between corporators and the proxies, the manner and validity of
corporation elections, and the qualifications of
2. Nature of the question – intrinsic candidates, including the proclamation of
connection with the regulation or the winners, to the office of director, trustee or
internal affairs of the corporation other officer directly elected by the
Examples: stockholders in a close corporation or by
a. Action by a corporate officer to recover members of a non-stock corporation
compensation from the corporation where the articles of incorporation or by-
b. Action by a stockholder to compel laws so provide.
issuance of certificate of stocks  All actions covered by these Rules shall
c. Action for recovery of corporate funds be commenced and tried in the Regional
Note: Allegations in the complaint determines Trial Court which has jurisdiction over the
jurisdiction. principal office of the corporation,
partnership, or association concerned.
GROUNDS FOR SUSPENSION OR Where the principal office of the
CANCELLATION OF CERTIFICATE OF corporation, partnership or association is
REGISTRATION (Sec. 6[L]) registered in the Securities and Exchange
1. fraud in procuring registration; Commission as Metro Manila, the action
2. serious misrepresentation as to objectives must be filed in the city or municipality
of corporation; where the head office is located.
3. refusal to comply with lawful order of SEC;  Nuisance and harassment suits are
4. continuous inoperation for at least 5 years; prohibited. In determining whether a suit is
5. failure to file by-laws within required a nuisance or harassment suit, the court
period; shall consider, among others, the
6. failure to file reports; and following:
7. Others similar grounds. a. The extent of the shareholding
or interest of the initiating stockholder
XXIII. Interim Rules of Procedure for Intra- or member;
Corporate Controversies (A.M. No. b. Subject matter of the suit;
01-2-04), effective April 1, 2001 c. Legal and factual basis of the
complaint;
Cases Covered: d. Availability of appraisal rights
1. Devices or schemes employed by, or any for the act or acts complained of; and
act of, the board of directors, business e. Prejudice or damage to the
associates, officers or partners, amounting corporation, partnership, or
to fraud or misrepresentation which may association in relation to the relief
be detrimental to the interest of the public sought.
and/or of the stockholders, partners, or  In case of nuisance or harassment suits,
members of any corporation, partnership, the court may, moto proprio or upon
or association; motion, forthwith dismiss the case.
2. Controversies arising out of intra-  All decisions and orders issued under
corporate, partnership, or association these Rules shall immediately be
relations, between and among executory. No appeal or petition taken
stockholders, members, or associates; therefrom shall stay the enforcement or
and between, any or all of them and the implementation of the decision or order,
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unless restrained by an appellate court. b. stay all actions for claims against the
Interlocutory orders shall not be subject to debtor, which shall cover both secured
appeal. and unsecured creditors;
c. set an initial hearing for the petition (not
XXIV. Interim Rules of Procedure on earlier than 45 days but not later than
Corporate Rehabilitation, effective 60 days from filing of the petition); and
December 15, 2000 d. direct the creditors to file their verified
comment or opposition not later than 10
CORPORATE REHABILITATION days before the initial hearing; their
A process to try to conserve and administer failure to do so would bar them from
the corporation’s assets in the hope that it may any participation in the proceedings.
eventually be able to return from financial 4. Publication of the stay order in a
stress to solvency. newspaper of general circulation once a
Nature: in rem, summary, and non-adversarial week for 2 consecutive weeks;
Applicability: These Rules apply to petitions 5. Referral of rehabilitation plan to
for rehabilitation filed by corporations, rehabilitation receiver;
partnerships and associations pursuant to P.D. 6. Meetings between corporate debtor and
902-A creditors. Discussions on the
Venue: Petitions for rehabilitation pursuant to rehabilitation plan;
these Rules shall be filed in the RTC having 7. Submission of final rehabilitation plan to
jurisdiction over the territory where the debtor’s the RTC for approval;
principal office is located. 8. The petition shall be dismissed (which
Steps: results into the automatic lifting of the stay
1. Filing verified petition with the appropriate order unless RTC ordered otherwise) if no
RTC by: rehabilitation plan is approved after 180
a. corporate debtor who foresees the days from initial hearing;
impossibility of meeting its debts when 9. Approval or disapproval of the
they respectively fall due; or rehabilitation plan by RTC.
b. creditors holding at least 25% of the
debtor’s total liabilities; STAY ORDER
2. The following shall be annexed to the 1.  All claims against corporations,
petition: partnerships, or associations that are
a. audited financial statements at end of its pending before any court, tribunal, or
last fiscal year; board, without distinction as to whether or
b. interim financial statement; not a creditor is secured or unsecured,
c. schedule of debts and shall be suspended effective upon the
liabilities; appointment of a management committee,
d. inventory of assets; rehabilitation receiver, board, or body in
e. rehabilitation plan; accordance P.D. No. 902-A.
f. schedule of payments and 2.  This suspension shall not prejudice or
disposition of assets effected within 3 render ineffective the status of a secured
months preceding the filing of the creditor as compared to a totally
petition; unsecured creditor.   P.D. 902-A does not
g. schedule of cash flow for the state anything to this effect.  What it
last 3 months; merely provides is that all actions for
h. statement of possible claims; claims against the corporation, partnership
i. affidavit of general financial or association shall be suspended.   This
condition; should give the receiver a chance to
j. at least 3 nominations for rehabilitate the corporation if there should
rehabilitation receiver; still be a possibility for doing so.  However,
k. certificate under oath that in the event that rehabilitation is no longer
directors and stockholders have feasible and claims against the distressed
irrevocably approved/consented to all corporation would eventually have to be
actions/matters necessary under the settled, the secured creditors shall enjoy
rehabilitation plan. preference over the unsecured creditors,
3. The court shall issue the stay order not subject only to the provisions of the NCC
later than 5 days from the filing of the on Concurrence and Preferences of Credit
petition, which among others, shall: (RCBC vs. IAC, G.R. No. 74851,
a. appoint a rehabilitation receiver; December 9, 1999).
 The order prohibits the debtor from selling,
encumbering, transferring, or disposing in
152 MEMORY AID IN
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Corporation Law

any manner any of its properties except in 1. To take custody of, and control over, all
the ordinary course of business; and from the existing assets and property of such
making any payment of its liabilities entities under management;
outstanding as at the date of filing of the 2. To evaluate the existing assets and
petition. liabilities, earnings and operations of such
 The order likewise prohibits the debtor’s corporations, partnerships or other
suppliers of goods or services from associations;
withholding supply of goods and services 3. To determine the best way to salvage and
in the ordinary course of business for as protect the interest of the investors and
long as the debtor makes payments for the creditors;
services and goods supplied after the 4. To study, review and evaluate the
issuance of the stay order. feasibility of continuing operations and
 Upon motion or motu proprio, the court structure and rehabilitate such entities if
may declare void any transfer of property determined to be feasible by the RTC;
or any other conveyance, sale, payment, 5. To report and be responsible to the RTC
or agreement made in violation of its stay until dissolved; and
order or in violation of these rules. 6. May overrule or revoke the actions of the
 The stay order shall be effective from the previous management and board of
date of its issuance until the dismissal of directors of the entity under management,
the petition or the termination of the notwithstanding any provision of law,
rehabilitation proceedings. articles of incorporation or by-laws to the
 The petition shall be dismissed if no contrary.
rehabilitation plan is approved by the court  Mere disagreement among stockholders
upon the lapse of 180 days from the date as to the affairs of the corporation would
of the initial hearing. The court may grant not in itself suffice as a ground for the
an extension beyond this point only if it appointment of a management committee.
appears by convincing and compelling At least where there is no imminent
evidence that the debtor may successfully danger of loss of corporate property or of
be rehabilitated. any other injury to stockholders,
management of corporate business should
REHABILITATION RECEIVER not be wrested away from duly elected
 A person appointed by the RTC, in behalf officers, who are prima facie entitled to
of all the parties for the purpose of administer the affairs of the corporation,
preserving and conserving the property and placed in the hands of the
and preventing its possible destruction or management committee. However, where
dissipation, if it were left in the possession the dissension among stockholders is
of any of the parties. such that the corporation cannot
 He acts in a fiduciary capacity and with successfully carry on its corporate
impartiality towards all interested. functions the appointment of a
 He does not take over the management management committee becomes
and control from the debtor, but shall imperative (Ramon Jacinto and Jaime
closely oversee and monitor the Colayco vs. First Women’s Credit
operations of the debtor during the Corporation, G.R. No. 154049, August 28,
pendency of the proceedings. (Bar Review 2003).
Materials in Commercial Law, Jorge
Miravite, 2002 ed.) AUTOMATIC STAY
 He shall not be subject to any action, claim  Effect of appointment of a management
or demand in connection with any act committee or rehabilitation receiver
done or omitted by him in good faith in the  All actions for claims against the
exercise of his functions and powers corporation shall be suspended
conferred in the rules. accordingly.
 He may be dismissed by the court, upon Purpose/justification: To enable the
motion or motu proprio, on account of management committee or the
conflict of interest, or on any of the rehabilitation receiver to effectively
grounds for removing a trustee under the exercise its powers free from any judicial
general principles of trusts. or extrajudicial interference that might
unduly hinder or prevent the rescue of the
POWERS AND FUNCTIONS OF debtor company (Rubberworld v. NLRC,
MANAGEMENT COMMITTEE OR 175 SCRA 450).
REHABILITATION RECEIVER (Sec. 6[d],  No definite duration; deemed to apply
P.D. 902-A) during the entire period that the corporate
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debtor is under management committee or 6. Regulations of Securities Market

the rehabilitation receiver (BF Homes v. Professionals (Section 28);
CA, 118 SCRA 388). 7. Revocation, refusal or suspension of
registration of brokers, dealers and
EFFECTS OF THE REHABILITATION PLAN salesmen and associated persons
1. The plan and its provisions shall be (Section 29);
binding upon the debtor and all persons 8. Restrictions on “over-the-counter” markets
who may be affected by it, including the (Section 32);
creditors, whether or not such persons 9. Self-regulation of associations of securities
have participated in the proceedings or brokers, dealers and other securities
opposed the plan or whether or not their related organizations (Section 29);
claims have been scheduled; 10. Registration of clearing agencies (Section
2. The debtor shall comply with the 42);
provisions of the plan and shall take all 11. Limitations on margin trading or the
actions necessary to carry out the plan; amount of credit that may be extended on
3. Payments shall be made to the creditors in any security (Section 49);
accordance with the provisions of the plan; 12. Civil liabilities arising from false statement
4. Contracts and other arrangements in the registration statement (Section 56);
between the debtor and its creditors shall 13. Civil liabilities arising from false
be interpreted as continuing to apply to the statements or omissions in the prospectus,
extent that they do not conflict with the communications and reports (Section 57);
provisions of the plan; and 14. Protection against manipulation of security
5. Any compromises on amounts or prices, manipulative and deceptive
rescheduling of timing of payments by the devices (Section 59), fraud in pre-need
debtor shall be binding on creditors plans and commodities futures contracts
regardless of whether or not the plan is (Section 60), fraudulent transactions
successfully implemented. (Section 58), and insider trading (Section
61);
XXV. SECURITIES REGULATION CODE 15. Establishment of trust funds to
(R.A. No. 8799) compensate investors for extraordinary
losses or damage they may suffer due to
Purposes: business failure or fraud or
1. To establish a socially conscious, free mismanagement of the persons with
market that regulates itself; whom they transact (Section 36.5[a]).
2. To encourage the widest participation of
ownership in enterprises; Powers and Functions of the SEC
3. To enhance the democratization of wealth; 1. Supervision over corporations,
4. To promote the development of the capital partnerships, and grantees of primary
market; franchise;
5. To protect investors; 2. Approve, reject registration
6. To ensure full and fair disclosure about statements/licensing applications;
securities; and 3. Suspend, revoke, after notice and hearing
7. To minimize if not totally eliminate insider primary franchise on grounds;
trading and other fraudulent or 4. Regulate/supervise activities of persons to
manipulative devices and practices which ensure compliance;
create distortions in the free market (Sec. 5. Supervise monitor, suspend or take over,
2). exchanges, clearing agencies and other
SROs;
Features which are Intended to Protect the 6. Recommend policies, advise, propose
Investing Public legislation to Congress on securities
1. All securities are required to be registered market;
before they can be sold to the public 7. Prepare, approve, amend or repeal rules,
(Section 8); regulations, issue opinions
2. Rejection and revocation of registration of 8. Enlist the aid and support of and/or
securities (Section 13); deputize any and all enforcement
3. Regulation of pre-need plans (Section 16); agencies of the Government as well as
4. Protection of shareholder interests any private institution, corporation, firm,
(Section 19); association or person in the
5. Prohibition on fraud, manipulation and implementation of its powers;
insider trading (Sections 24, 25, 26 and 9. Issue cease and desist orders to prevent
27); fraud or injury;
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10. Punish for contempt of the Commission; 2. Warrants – rights to subscribe or purchase
11. Impose sanctions for violation of laws and new shares or existing shares in a
rules, regulations and orders; company, on or before a predetermined
12. Compel the officers of any registered date, called the expiry date, which can
corporation or association to call meetings only be extended in accordance with
of stockholders or members; Exchange rules. Warrants generally have
13. Issue subpoena duces tecum and a longer exercise period than options
summon witnesses to appear in any (SRC Rule 3.1-1).
proceedings of the Commission; and
14. Exercise such other powers as may be REGISTRATION OF SECURITIES
provided by law which are necessary or GENERAL RULE: A registration statement
incidental to the carrying out its express duly filed and approved by the SEC is
powers (Sec. 5). necessary before securities may be sold and
SECURITIES offered for sale or distribution within the
Shares, participation or interest in a Philippines. Prior to any sale, information on
corporation or in a commercial enterprise or the securities, in such form and substance
profit-making ventures and evidenced by a prescribed by the SEC, shall be made
certificate, contract, or instrument whether available to each prospective purchaser (Sec.
written or electronic in character (Sec. 3). 8).
EXCEPTIONS:
Kinds: 1. Exempt securities; and
1. Shares of stocks, bonds, debentures, 2. Exempt transactions.
notes, evidence of indebtedness, asset-
backed securities; EXEMPT SECURITIES (Sec. 9)
2. Investment contracts, certificates of 1. Any security issued or guaranteed by the
interest or participation in a profit-sharing Government of the Philippines, or by any
agreement, certificates of deposit for a political subdivision or agency thereof, or by
future subscription any person controlled by and acting as an
3. Fractional undivided interests in oil, gas, or instrumentality of said Government.
other mineral rights; 2. Any security issued or guaranteed by the
4. Derivatives like options and warrants; government of any country with which the
5. Certificates of assignments and Philippines maintains diplomatic relations,
participation, trust certificates, voting trust or by any state, province or political
certificates or similar instruments; subdivision or agency thereof on the basis
6. Proprietary or non-proprietary membership of reciprocity.
certificates in corporations; or 3. Certificates issued by a receiver or by a
7. Other instruments as may in the future be trustee in bankruptcy duly approved by the
determined by the SEC (Sec. 3). proper adjudicatory body.
4. Any security or its derivatives the sale or
Classes: transfer of which, by law, is under the
1. Exempt securities and securities covered supervision and regulation of the Office of
by exempt transactions; and the Insurance Commission, Housing and
2. Securities that are not exempt or the sale land Use Regulatory Board, or the Bureau
of which is not an exempt transaction. of Internal Revenue.
5. Any security issued by a bank except its
DERIVATIVE own shares of stock.
A financial instrument, including options and 6. Any securities added by the SEC by rule or
warrants, whose value depends on the interest regulation after public hearing.
in or performance of an underlying security,
but which does not require any investment of EXEMPT TRANSACTIONS (Sec. 10)
principal in the underlying security. 1. Judicial sale by executor, administrator,
guardian/receiver in insolvency or
Kinds: bankruptcy.
1. Options – contracts that give the buyer the 2. Sale of pledged or mortgaged security to
right, but not the obligation, to buy or sell liquidate a bona fide debt.
an underlying security at a predetermined 3. Sale on isolated transactions by owner.
price, called the exercise or strike price, on 4. Distribution of stock dividends.
or before a predetermined date, called the 5. Sale of capital stock exclusively to
expiry date, which can only be extended in stockholders where no commission is
accordance with Exchange rules. paid.
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6. The issuance of bonds or notes secured d. Has made any false or misleading
by mortgage upon real estate or tangible representation of material facts in any
personal property, where the entire prospectus concerning the issuer or its
mortgage are sold to a single purchaser at securities;
a single sale. e. Has failed to comply with any
7. Issuance of security in exchange of any requirement that the Commission may
security from same issuer pursuant to right impose as a condition for registration
of conversion. of the security for which the
8. Broker’s transactions registration statement has been filed;
9. Pre-incorporation subscription and or
subscription pursuant to an increase of the 2. The registration statement is on its face
ACS. incomplete or inaccurate in any material
10. Exchange of securities by issuer with respect or includes any untrue statement
existing security holders exclusively of a material fact or omits to state a
11. Sale to less than 20 persons during any material fact required to be stated therein
12- month period or necessary to make the statements
12. Sale of securities to banks, registered therein not misleading; or
investment house, insurance companies, 3. The issuer, any officer, director or
pension fund or retirement plan controlling person of the issuer, or person
maintained by the government or other performing similar functions, or any
persons authorized by the BSP to engage underwriter has been convicted, by a
in trust functions. competent judicial or administrative body,
upon plea of guilty, or otherwise, of an
 The securities listed are exempt either offense involving moral turpitude and/or
because the issuer is an entity that could fraud or is enjoined or restrained by the
be trusted not to deceive the investor or Commission or other competent judicial or
the issuer is regulated, supervised or administrative body for violations of
monitored by another government entity securities, commodities, and other related
who could be expected to protect the laws (Sec. 13.1).
interest of the investors in the same  A registration statement may be withdrawn
manner as the SEC (Catindig). by the issuer only with the consent of the
 The security involved in an exempt Commission (Sec. 13.6).
transaction is not in itself exempt but the
circumstances under which the security is TENDER OFFER
sold make the requirement of registration  A publicly announced intention by a
under the SRC unnecessary in the public person acting alone or in concert with
interest or for the protection of the other persons to acquire equity securities
investors (Catindig). of a “public company.”
 It is mandatory to make a tender offer for
REJECTION AND REVOCATION OF equity shares of a public company in an
REGISTRATION OF SECURITIES amount equal to the number of shares that
The Commission may reject a registration the person intends to acquire in the
statement and refuse registration of the following circumstances:
security thereunder, or revoke the effectivity of a. Any person or
a registration statement and the registration of group of persons acting in concert,
the security thereunder after due notice and who intends to acquire 15%) or more
hearing by issuing an order to such effect, of equity shares in a public company
setting forth its findings in respect thereto, if it pursuant to an agreement made
finds that: between or among the person and one
1. The issuer: or more sellers;
a. Has been judicially declared insolvent; b. Any person or group of persons acting
b. Has violated any of the provisions of in concert, who intends to acquire 30%
this Code, the rules promulgated or more of equity shares in a public
pursuant thereto, or any order of the company in one or more transactions
Commission of which the issuer has within a period of 12 months (Sec. 19).
notice in connection with the offering  However, under the Amended IRR of the
for which a registration statement has SRC, such tender offer is mandatory in the
been filed; following circumstances:
c. Has been or is engaged or is about to a. Any person or group of persons acting
engage in fraudulent transactions; in concert, who intends to acquire
thirty five percent (35%)or more of
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equity shares in a public company 3. By publishing all requests or

pursuant to an agreement made invitations for tender, or materials,
between or among the person and one making a tender offer or requesting or
or more sellers; inviting letters of such a security.
b. Any person or group of persons acting
in concert, who intends to acquire PUBLIC COMPANY
thirty five percent (35%) or more of 1. Any corporation with a class of equity
equity shares in a public company in securities listed on an Exchange; or
one or more transactions within a 2. Any corporation with assets in excess
period of twelve (12) months; or P50M and having 200 or more holders, at
c. If any acquisition of even less than least 200 of which are holding at least 100
thirty five percent (35%) would result shares of a class of its equity securities.
in ownership of over fifty one percent
(51%) of the total outstanding equity PROXY RULES ON PUBLICLY LISTED
securities of a public company. CORPORATIONS
Note: The threshold of 15% or more for a 1. Proxies must be in writing, signed by the
single transaction or 30% for creeping stockholder or his duly authorized
acquisition as provided for in Sec. 19 of the representative and filed before the
SRC are increased to 35%, pending the scheduled meeting with the corporate
passage of the proposed amendments to secretary.
the SRC. 2. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for
 The following are exempt from mandatory which it is intended. No proxy shall be
tender offer requirements: valid and effective for a period longer than
1. any purchase of shares from the 5 years at one time.
unissued capital stock provided that 3. No broker or dealer shall give any proxy,
the acquisition will not result to a fifty consent or authorization, in respect of any
percent (50%) or more ownership of security carried for the account of a
shares by the purchaser; customer, to a person other than the
2. any purchase of shares from an customer, without the express written
increase in authorized capital stock; authorization of such customer.
3. purchase in connection with 4. A broker or dealer who holds or acquires
foreclosure proceedings involving a the proxy for at least 10% or such
duly constituted pledge or security percentage as the SEC may prescribe of
arrangement where the acquisition is the outstanding share of the issuer, shall
made by the debtor or creditor; submit a report identifying the beneficial
4. purchases in connection with owner within 10 days from such
privatization undertaken by the acquisition, for its own account or
government of the Philippines; customer, to the issuer of the security, to
5. purchases in connection with the Exchange where the security is traded
corporate rehabilitation under court and to the SEC.
supervision;
6. purchases through an open market at UNLAWFUL ACTS
the prevailing market price 1. For any beneficial owner, director, or officer
merger or consolidation. to sell any security if the seller or his
(Implementing Rules and Regulation principal does not own or does not deliver it
of the SRC, as amended) within 20 days from sale (Sec. 23.3).
2. Manipulation of security prices (Sec. 24.1).
 Tender offer is made: 3. Employment of manipulative or deceptive
1. By filing with the SEC a declaration to device or contrivance in connection with
make a tender offer; purchase and sale of authorities. Execution
2. By furnishing the issuer or the of “short sale”, “stop-loss order” not in
originator of the security a statement accordance with SEC rules (Sec. 24.2).
containing such information required 4. For any member of Exchange directly or
under Sec. 17 of the SRC: indirectly endorse or guarantee the
a. Annual Report (includes balance performance of any “put”, “call”, “straddle”,
sheet, profit and loss statement); “option” or “privilege” in relation to any
and security registered (Sec. 25).
b. Periodical reports for interim fiscal 5. Fraudulent transactions in the sale of
periods; and securities (Sec.26).
6. Insider trading (Sec. 27)
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7. For an insider to communicate material 10. BOILER ROOM SALES – The use of high-
non-public information about the issuer or pressure sales tactics to promote
security (Sec. 27.3). purchases and sales of securities.
8. Unlawful Tender Offer (Sec 27.4). 11. “OVER THE COUNTER TRANSACTION”-
9. Use of Extensive Credit (Sec 48.1). Transactions which are not made at the
stock exchange, but directly between the
DEFINITION OF TERMS: broker and the customer.
1. SHORT SALE – A contract for sale of 12. “OVER-THE-COUNTER” MARKET - A
shares of stock which the seller does not market created other than a registered
own, or certificates which are not within his stock exchange for both the purchase and
control, so as to be available for delivery at sale of any security.
the time when delivery must be made.
2. STOP-LOSS ORDER – The direction by a INSIDER TRADING
customer to his broker that if the The selling or buying of a security by an
commodity touches the price named, the insider while in possession of material non-
broker shall close the trade at the best public information with respect to the issuer or
available price. the security. It is considered unlawful unless:
3. PUT – An option that, in consideration of a 1. The insider proves that the information
premium paid, gives the purchaser the was not gained from such
right to make the seller take from him a relationship, or
given number of shares of a named stock 2. If the other party selling to or buying from
between a given time at a stipulated price the insider (or his agent) is identified, the
which is usually below the prevailing insider proves:
market price of the stock at the time the a. that he disclosed the information to the
“put” is purchased. other party, or
4. CALL - An option that, in consideration of a b. that he had reason to believe that the
premium paid, entitles the buyer the right other party otherwise is also in
to compel the seller to deliver to him a possession of the information (Sec.
certain number of shares within a given 27.1).
time at a stipulated price which is usually
higher than the prevailing market price at INSIDER
the time the “call” is bought. “Call” is the A person who, with respect to a particular
reverse of “put.” security, may be any of the following:
5. STRADDLE – The double privilege of a 1. The issuer;
“put” and a “call,” and secures to the 2. The director or officer of, or a person
holder the right to demand of the seller at controlling the issuer;
a certain price within a certain time a 3. A person whose relationship or former
certain number of shares of specified relationship to the issuer gives him access
stock, or to require him to take, at the price to material information about the issuer or
within the same time, the same shares of the security that is not generally available
stock. to the public;
6. WASH SALE – The operation of 4. A government employee, or director, or
simultaneously buying and selling the officer of an exchange, clearing agency
same stock. It is any transaction in any and/or self-regulatory organization who
security which involves no change in the has access to material information about
beneficial ownership thereof. It is the an issuer or a security that is not generally
reverse of “MATCHED ORDERS” wherein available to the public; or
there is a change in the ownership of the 5. A person who learns such information by a
securities. communication from any of the foregoing
7. SHORT SWING TRANSACTION - One insiders (Sec. 3.8).
where a person buys securities and sells
the same within a period of six months. MATERIAL NON-PUBLIC INFORMATION
8. FLOOR TRADER - A professional trader (formerly Fact of Special Significance)
in securities who acts for himself and not 1. Information about the issuer or the security
for the account of others, hence, receives which has not been generally disclosed to
no commission at all. the public and would likely affect the market
9. HYPE AND DUMP – Engaging in buying price of the security after being
activity at increasingly higher prices and disseminated to the public and the lapse of
then selling securities in the market at a reasonable time for the market to absorb
higher securities. the information; or
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2. Information about the issuer or the security

which would be considered by a reasonable
person important under the circumstances
in determining his course of action to buy,
sell or hold security (Sec. 27.2).

SUITABILITY RULE
The rule states that in recommending to a
customer the purchase, sale or exchange of
any security, a broker or dealer shall have
reasonable grounds to believe that the
recommendation is suitable to such costumer
based on the facts disclosed by the latter as to
his other security holdings and his financial
situations and needs.

MARGIN TRADING
 A kind of trading that allows a broker to
advance for the customer/investor part of
the purchase price of a security and to
keep it as a collateral for such advance.
 The credit extended must be for an
amount not greater than whichever is
higher of:
a. 65% of current market price of
the security
b. 100% of the lowest market
price of security during the preceding
36 calendar months, but not greater
than 75% of the current market price.
(Sec. 48)

Margin
Sum of money, or its equivalent, placed in the
hands of a broker by principal or persons on
whose account the purchase is to be made, as
a security to the former against losses to which
he may be exposed by a subsequent
depression in the market value of the stock.