Created by operation of law:

5. 1. mere consent of the parties to form a

corp. is not sufficient: the State must give
CORPORATION LAW its consent either through a special law (in
the case of a gov’t corp.) or a general law
(for a private corp.)
2. the general law under w/c a private corp.
a. may be formed or organized is the Corpo-
ration Code
THE CORPORATION
CODE OF THE Has the right of succession:
PHILIPPINES 1. its continued existence during the term
(BATAS PAMBANSA BLG. stated in its articles of incorp. cannot be
affected by any change in the members or
68) stockholders
2. nor is it affected by the transfer of shares
by a stockholder to a 3rd person
Chapter I
INTRODUCTION Has the powers, attributes and properties
expressly authorized by law or incident to its
existence: as it is a mere creature of the law, it can
1. The Corporation as a Legal exercise only such powers as the law may choose
to grant it, either expressly or impliedly
Concept

1.3..Advantages of the Corporate

1.1 Corporation Defined Organizations
A Corporation is an artificial being created by 1) Separate juridical personality – personality
operation of law, having the right of succession separate and distinct from individual stock-
and the powers, attributes, and properties holders and members
expressly authorized by law or incident to its
existence. (§2) 2) Limited liability to investors – stockholders are
A corporation is a creature of: liable only to the extent of their contribution
 General rule: Where a corporation buys all
 A general enabling statute (require- the shares of another corporation, this will
ments of the law must be complied not operate to dissolve the other corpora-
with); and tion and as the two corporations still main-
 The agreement of individuals who seek tain their separate corporate entities, one
to incorporate (internal contractual ar- will not answer for the debts of the other.
rangements: articles of incorporation [Nell v Pacific Farms (15 SCRA 415), Nov.
and by-laws). 23, 1965]
 Exceptions:
o If there is an express assumption of li-
1.2 Four attributes of a corporation abilities;
An artificial being: o There is a consolidation or merger;
o If the purchase was in fraud of credi-
1. a juridical person capable of having tors;
rights and obligations, w/ a personality o If the purchaser becomes a continua-
separate and distinct from its members tion of the seller;
or stockholders o If there are unpaid subscriptions
2. hence, stockholders are not personally li- (stockholder is liable for the unpaid
able for corp. obligations and cannot be balance).
held liable to third persons who have
claims against the corp. beyond their 3) Free transferability of units of ownership –
agreed contribution to the corporate stockholders hold their shares as personal
capital (paid-up capital and unpaid sub- property with rights to dispose, assign or en-
scriptions) This is known as the doctrine cumber them as they may desire (§63)
of limited liability.
4) Centralized Management – all corporate pow- NDC v Phil Veterans Bank (1990)
ers are exercised by the board of directors
(§23) PD 1717 ordered the rehabilitation of the Agrix
Group of Companies to be administered by NDC.
1.4 Partnership vs. Corporation Sec 4(1) provides that all mortgages and liens
1. Extent of Liability—partners are person- presently attached be extinguished, and that all
ally liable for the debts of the partner- accrued obligations shall not bear interest.
ship; stockholders cannot be made to Among those ordered extinguished was a lien in
personally answer to corporate creditors favor of Phil Veterans Bank over prop in LB. NDC
2. Creation—mere agreement of the par- filed to foreclose the mortgage.
ties, w/c can be composed of just 2 per- HELD: New Agrix was created by special decree
sons, gives rise to the juridical personal- even if 1973 Consti mandates that Batasang
ity of the partnership, whether or not Pambansa, cannot, except by general law,
registered w/ the SEC (Art. 1768, NCC); a provide for formation, organization and
corp., w/ a minimum of 5 incorporators, regulation of private corps, unless for GOCCs.
derives its juridical personality from the
certificate issued by the SEC (§19) NDC was only mandated to extend loan and to
3. Management—In most cases, all the manage company. New Agrix was entirely
owners in a partnership actively partici- private and should have been organized under
pate in management, w/ capacity to bind Corp Law.
it by any usual contract (Art. 1818, NCC);
in a corp., management is centralized in
the board of directors w/c has exclusive
By the SEC
power to bind the corp. (§23)
4. Nature of Relationship—partnership is Basis: Sec. 3, PD 902-A and Sec 5.1(a), RA8799.
based on mutual trust and confidence The Commission shall have absolute jurisdiction,
(delectus personae) so that its existence supervision and control over all corporations,
is precarious because of the facility w/ partnerships or associations, who are the grantees
which it can be dissolved (i.e. through of primary franchises and/or licenses or permits
the death or unilateral act of a partner); granted by the government, to operate in the
a corp. has more stability as it enjoys the Philippines; xxx
right of succession and is not affected by
the death or insolvency of a stockholder;
also, dissolution before a corp.’s term re- Note: Under Sec. 5.2 of RA8799, SEC’s jurisdiction
quires a 2/3rds vote of the stock (Secs. over all cases enumerated under Sec. 5, PD 902-A
118 and 119, Corp. Code), always sub- was transferred to the Regional Trial Court which
ject to SEC intervention has jurisdiction over the principal office of the
5. Powers—a corporation has only such corporation, partnership or association concerned.
powers as are expressly granted to it
and such as are necessary to the exer-
cise of the powers so granted or fro the
According to the Interim Rules of Procedure for
accomplishment of its purpose(sec.2, 36
Intra-Corporate Controversies (A.M. No. 01-2-04-
(11), and 45); In a partnership, as long
SC), which took effect on April 1, 2001, the
as the parties have agreed to it, the
Regional Trial Court has jurisdiction over cases
partnership can perform any act as long
involving the following:
as it does not violate any law or right of
others. 1. Devices or schemes employed by, or any
act of, the BOD, business associates, offi-
1.5 Government Regulation of cers or partners, amounting to fraud or
Corporations misrepresentation which may be detri-
mental to the interest of the public and/or
By the Legislature of the stockholders, partners or members
of any corporation, partnership, or associ-
Basis: police power of the state (Northern Ry Co.
ation;
v. State of Washington, 300 U.S. 154) and the
2. Controversies arising out of intra-corpo-
fact that corporations owe their existence to the
rate, partnership, or association relations,
state
between and among stockholders, mem-
Manner: by amending or repealing the Corp. bers or associates; and between, any or
Code or any part thereof all of them and the corporation, partner-
ship, or association of which they are
stockholders, members or associates, re-
spectively;
 3. Controversies in the election or appoint-
ment of directors, trustees, officers, or prosecute in accordance with law and
managers of corporations, partnerships, rules and regulations issued by the
or associations; Commission and in appropriate cases,
4. Derivative suits; and the corresponding criminal or civil case
5. Inspection of corporate books. before the Commission or the proper
court or body upon prima facie finding
of violation of any laws or rules and
Morato v CA (2004) regulations administered and enforced
by the Commission; and to perform
Petitioners, stockholders of TF Ventures, Inc., such other powers and functions as
filed a petition with the SEC against private may be provided by law or duly dele-
respondents for the declaration of nullity of gated to it by the Commission.
stockholders’ and directors’ meetings and
damages. They assail the validity of the notice
and stockholders’ meeting of TF Ventures, Inc. Prosecution under this Decree or
and the organizational meeting of the members any Act, Law, Rules and Regulations
of the BOD. The petition was referred to the enforced and administered by the
Securities Investigation and Clearing Department Commission shall be without prejudice
(SICD) of the SEC for investigation and to any liability for violation of any pro-
resolution. vision of the Revised Penal Code.
Meanwhile, one of the private respondents
(Matsura, Chairman of the BOD), wrote a letter to Under the said provision, the SEC, through
the Examiners and Appraisers Dept of the SEC, the PED, is vested with authority to investigate,
requesting for an examination of the basis for the either motu proprio or upon complaint, any act or
capital increase of T.F. Ventures, Inc. from omission, fraudulent schemes, devices or misrep-
P10,000,000 to P100,000,000, alleging the resentations in violation of any law, rules or regu-
commission of devices, schemes and criminal lations, administered and enforced by the SEC,
acts. The letter was forwarded by the SEC to the and to file and prosecute appropriate civil or
Prosecution and Enforcement Dept (PED). criminal cases upon a prima facie finding of viola-
Petitioners contended that with the filing of the tion of such laws, rules or regulations. The peti-
letter-petition with the PED, Matsura resorted to tioners, in the SEC case, sought the nullification
forum shopping. of the Notice for the Annual Stockholders’ Meet-
ing, the stockholders’ meeting and organizational
HELD: Matsura is not guilty of forum shopping. meeting held on September 22, 1997, on their
There is no identity of causes of action or identity claim that the holding of the same was in viola-
of rights asserted by the parties in both cases. In tion of the Corporation Code and the By-Laws of
this case, SEC Case is pending before the SICD, the petitioner corporation. In his answer to the
which has exclusive jurisdiction to investigate petition, the respondent asserted the validity of
and resolve intra-corporate disputes. The re- the said meeting and prayed, by way of counter-
spondent’s letter-petition, on the other hand, was claim, for the nullification of the October 20,
referred by the SEC to the PED and is pending 1997 meeting of the petitioners, and for dam-
before the Prosecution and Enforcement Depart- ages. In contrast, the respondent alleged in his
ment of the SEC. letter-petition in the PED case that the petition-
ers were engaged in fraudulent schemes, devices
Section 8 of P.D. No. 902-A, as amended, or misrepresentations in violation of the law, and
provides: SEC rules and regulations. The complainant Mat-
suura asked the PED to investigate the complaint
and file the corresponding administrative, civil or
SECTION 8. The Prosecution and criminal cases before the SEC, the proper court
Enforcement Department shall have, or body, for violation of the laws, rules or regula-
subject to the Commission’s control tions administered and enforced by the SEC. The
and supervision, the exclusive author- fact that the SICD has not yet resolved the SEC
ity to investigate, on complaint or motu case does not constitute a bar to the resolution
propio, any act or omission of the of the PED case. The proceedings in the said
Board of Directors/Trustees of corpora- cases are independent and separate of each
tions, or of partnerships, or other asso- other and may thus proceed separately.
ciations, or of their stockholders, offi-
cers or partners, including any fraudu-
lent devices, schemes or representa- Note that while this case was pending in the SC,
tions, in violation of any law or rules RA 8799, Securities Regulation Code, took effect
and regulations administered and en- on August 8, 2000. Section 5.2 of the law pro-
forced by the Commission; to file and vides that SEC’s jurisdiction over all cases under
Sec 5 of PD 902-A is transferred to the RTCs.
Chapter II
Among the powers and functions of the SEC CLASSIFICATION OF PRIVATE
which were transferred to the RTC include the CORPORATIONS
following: (a) jurisdiction and supervision over all
corporations, partnerships or associations who
are the grantees of primary franchises and/or a 1. General Classification under
license or permit issued by the Government; (b) §3:
the approval, rejection, suspension, revocation or
requirement for registration statements, and reg- 1.1 Stock corporation
istration and licensing applications; (c) the regu-
lation, investigation or supervision of the activi-  One which has a capital stock divided into
ties of persons to ensure compliance; (d) the su- shares and is authorized to distribute to
pervision, monitoring, suspension or take over the holders of such shares dividends or al-
the activities of exchanges, clearing agencies lotments of the surplus profits (i.e., re-
and other SROs; (e) the imposition of sanctions tained earnings on the basis of the shares
for the violation of laws and the rules, regulations held (§3)
and orders issued pursuant thereto; (f) the is-  It is organized for profit.
suance of cease-and-desist orders to prevent  The governing body of a stock corporation
fraud or injury to the investing public; (g) the is usually the Board of Directors (Except in
compulsion of the officers of any registered cor- certain instances for close corporations)
poration or association to call meetings of stock-
holders or members thereof under its supervi-
sion; and, (h) the exercise of such other powers
as may be provided by law as well as those
1.2 Non-stock corporation
which may be implied from, or which are neces-
 All other corporations are non-stock corpo-
sary or incidental to the carrying out of, the ex-
rations (§3)
press powers granted the Commission to achieve
 One where no part of the income is dis-
the objectives and purposes of these laws.
tributable as dividends to its members,
trustees, or officers, subject to the provi-
However, Section 8 of P.D. No. 902-A, as sions of the Code on dissolution. Provided
amended, has already been repealed, as pro- that any profit which a non-stock corpora-
vided for in Section 76 of RA 8799. tion may obtain as an incident to its oper-
ation shall whenever necessary or proper
Thus, under the new law, the PED ceased to ex- be used for the furtherance of the purpose
ist. However, the SEC retains jurisdiction to con- or purposes for which the corporation was
tinue with its investigation of the letter-petition organized. (§87)
of respondent Matsuura.  Not organized for profit.
 Its governing body is usually the Board of
Trustees.
When RA 8799 took effect, the SEC case had not
yet been submitted for decision by the SEC.
Hence, the said case should be transferred to the CIR vs. Club Filipino, Inc de Cebu (1962)
RTC of Makati City, to be raffled to the appropri-
ate branch thereof assigned to try such cases. Club Filipino is a civic corporation organized to
Despite the repeal of Section 8 of P.D. No. 902-A develop and cultivate sport of all class and
and the abolition of the PED, the SEC may con- denomination for the healthful recreation and
tinue with its investigation of the letter-petition entertainment of its SH and members. Its AOI
of respondent Matsuura. and by-laws are silent as to dividends and their
distribution but it was provided that upon its
dissolution, the Club’s remaining assets after
paying debts shall be donated to a charitable
 The Sandiganbayan has jurisdiction over Phil. Institution.
presidents, directors or trustees, or man-
agers of government-owned or controlled HELD: Club Filipino is a non-stock corporation.
corporations organized and incorporated un- According to Section 3 of the Corporation Code,
der the Corporation Code for purposes of the there are two elements for a stock corporation to
provisions of RA 3019, otherwise known as exist: 1) capital stock divided into shares, and 2)
the Anti-Graft and Corrupt Practices Act. Ba- an authority to distribute to the holders of such
sis: Sec 4, RA 8249 (People v Sandigan- shares, dividends or allotments of the surplus
bayan, 2005) profits on the basis of shares held. Nowhere in
Club Filipino’s AOI or BL could be found an 6. Eleemosynary corporation – One organized for
authority for the distribution of its dividends or a charitable purpose
surplus profits. 7. Domestic corporation – A domestic corporation
is one formed, organized, or existing under the
laws of the Philippines
8. Foreign corporation – One formed, organized
2. Other kinds of corporations or existing under any laws other than those of
the Philippines and whose law allows Filipino
1. Public corporation - One formed or organized citizens and corporations to do business in its
for the government or a particular state. Its own country and state. (§123)
purpose is for the general good and welfare. 9. Corporation created by special laws or charter
2. Private corporation - One formed for some (§4)
private purpose, benefit, aim or end  Corporations which are governed primarily
3. Close corporation (§96) – One whose Articles by the provisions of the special law or
of Incorporation provide that: charter creating them (§4)
a) all of the corporation’s issued stock of all  Corporation Code is suppletory in so far as
classes, exclusive of treasury shares, they are applicable (Ibid)
shall be held of record by not more that 10. Subsidiary corporation – one in which control,
a specified number of persons, not ex- usually in the form of ownership of majority of
ceeding 20 its shares, is in another corporation (the par-
b) all of the issued stock of all classes shall ent corporation)
be subject to one or more specified re- 11. Parent corporation – its control lies in its power
strictions on transfer permitted by the to elect the subsidiary’s directors thus control-
Code ling its management policies
c) the corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class Chapter III
d) at least 2/3 of its voting stock must not
be owned or controlled by another cor- FORMATION AND
poration which is not a close ORGANIZATION OF
e) must not be a mining or oil company,
stock exchange, bank, insurance com-
CORPORATION
pany, public utility, educational institu-
tion or corporation vested with public in- 1. Who May Form a Corporation
terest
4. Educational corporation (§106) - Those cor-
porations which are organized for educa- 1.1 Incorporators
tional purposes. This type of corporation is
governed by Section 106 of the Corporation Any number of natural persons not less than five
Code (5) but not more than fifteen (15), all of legal age
5. Religious sole and aggregate (§110, 111 (2), and a majority of whom are residents of the
123) Philippines, may form a private corporation for any
 A corporation sole is one formed for the lawful purpose or purposes. Each of the
purpose of administering and managing, incorporators of a stock corporation must own or
as trustee, the affairs, property and tem- be a subscriber to at least one (1) share of capital
poralities of any religious denomination, stock of the corporation. (§10)
sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding el- 1) Natural persons
der of such religious denomination, sect  Corporations and partnerships cannot be
or church. (§110) incorporators, but may be stockholders.
 The corporation sole is an exception to This prevents “layering” which may har-
the general rule that at least five (5) bour criminals and will make the corpora-
members are required for a corporation to tion a tool for defrauding the public.
exist. Here, there is only one (1) incorpo-  Incorporators are those stockholders or
rator. This is applicable to religious com- members mentioned in the articles as
munities the regulations of which provide originally forming and composing the cor-
that the community’s properties are to be poration and who are signatories thereof.
placed in the name of the head and ad-  Corporators are stockholders or members
ministered by him. (§111(2)) who join the corporation after its incorpo-
 A corporation aggregate is a religious cor- ration.
poration incorporated by more than one  Original subscribers are persons whose
person. names are mentioned in the Articles, but
 not as incorporators. They do not sign 2.2 Mandatory Requirements of the
the Articles. Code:

2) At least five incorporators but not more than 1. Execution of constitutive documents
fifteen (AOI, By-laws);
 They must sign the articles of incorpora- 2. Payment/delivery of contributions –
tion. delivered to and held in trust by a
 GENUINE INTEREST: Each incorporator designated trustee;
must own or subscribe to at least one 3. Submission of constitutive documents
share of stock of the corporation. to SEC for review or evaluation; and
4. SEC action – issuance of certificate of
3) Majority of the incorporators must be resi- registration.
dents of the Philippines
 General rule: need not be a citizen Note that once contributions are made before
 Exceptions: public utilities (Art XII, Sec incorporation, such subscriptions are irrevocable
11. Consti), schools (Art XIV, Sec 4(2), for a period of 6 months (general rule).
Consti), banks (General Banking Act), re-  Exceptions:
tail trade (RA 1180), savings and loan 1. When all of the other subscribers consent
associations (RA 3799), investment to the revocation; or
houses (Sec 5, PD 129), and other areas 2. When the incorporation fails to materialize
of investment as congress may by law (Sec. 61)
provide (Art XII, Sec. 10, Consti).
 Even though there are no legal restric-
tions as to alien ownership, where > 3 Steps in the formation of a
40% of the outstanding capital stock will corporation
be owned and controlled by aliens, must
get written authorization from BOI before 3.1. PROMOTION
it can register with SEC. (purpose is to
enable BOI to determine whether such
 The “promoter” brings together persons
corporation wherein aliens own a sub-
interested in the business enterprise and
stantial number of shares would contrib-
sets in motion the machinery that leads to
ute to the sound and balanced develop-
the formation of the corporation.
ment of the national economy)
 “Promoter” is a person who, acting alone
or with others, takes initiative in founding
4) Incorporators must be of legal age
and organizing the business or enterprise
of the issuer and receives consideration
therefor.1
2. Conditions Precedent for
Incorporation 3.2. DRAFTING OF ARTICLES OF IN-
CORPORATION
2.1 Consent or agreement of at least
These constitute the charter of the corporation
5 natural persons with respect to:
1. CORPORATE NAME
1. Compliance with the Corp Code;  No corporate name may be allowed by
2. Contribution/pooling of resources – the SEC if the proposed name is iden-
delivered to and held in trust by a tical or deceptively or confusingly sim-
designated trustee; ilar to that of any existing corporation
3. Governance of: or to any other name already pro-
 Contributions; tected by law or is patently deceptive,
 Distribution of contributions; confusing or contrary to existing laws.
 Division of profits/sharing of (§18)
losses;  A corporate name is essential to the
 Pursuit of purpose/objec- corporation’s acquisition of juridical
tives; personality
 Corporate combination; and  Change of corporate name shall re-
 Transactions with third par- quire the approval of the SEC. SEC
ties; and will issue amended certificate of incor-
4. Continuity or termination of exis- poration under the amended name
tence. (Ibid)

1
Sec. 3.10, The Securities Regulation Code (RA 8799)
  A change in corporate name in- over name and
volves an amendment of the Arti- 2) proposed name is
cles, which requires a majority vote a) identical or
of the board and the vote or written b) deceptively or confusingly simi-
assent of stockholders holding 2/3 of lar or
the outstanding capital stock (§16) c) patently deceptive, confusing or
Note: Does not include the non-vot- contrary to existing law
ing stock. PEBV’s local companies were incorporated 26 yrs
 It is the sole means of identifying before Std Philips.
the corporation from its members or
stockholders, and from other entities TEST OF CONFUSING SIMILARITY IN CORP
and corporations NAMES: Whether similarity is such as to mislead
 Amendment in a corp’s AOI chang- a person using ordinary care and discrimination
ing its corporate name does not ex-
tinguish the personality of the origi- Philips is the dominant word. No need to prove
nal corporation. The corp upon such that there was actual confusion, as long as
change of its name, is in no sense a probable or likely to occur. Std Philips’ purpose,
new entity, nor the successor of the as per its articles of incorp also includes sale and
original corp. it is the same corp manufacture of electrical products, which is
with a different name, and its char- PEBV’s line of business. Even if SEC guidelines
acter is not changed. Consequently, mandate that a corp could add 2 other words to
the “new” corp is still liable for the proposed name, only one word “Std” was added.
debts and obligations of the “old” “Corp” not counted.
corp (Republic Planters Bank v CA, Note: A prior user can consent to the use of its
1992) name
 This is essential because through it,
corporation can sue and be sued
 SEC may allow incorporators to re- 2. PURPOSE CLAUSE
serve the name for a particular pe-  Where a corporation has more than 1
riod purpose, the AOI shall state which is
 To distinguish from partnerships and the primary purpose and which is sec-
other business orgs, the law requires ondary (§14(2))
corporations to append the word  A non-stock corporation may not in-
“Corporation” or “Inc” to its chosen clude those which contradict or
name change its nature (Ibid)
 A corporation should transact busi-  SEC can reject or disapprove the AOI if
ness only through its chosen name the stated purpose is patently uncon-
stitutional, illegal, immoral, contrary
to government rules and regulations.
Philips Export BV (PEBV) v CA (1992) (§17 (2))
 Purpose clause confers as well as lim-
PEBV is a foreign corp under the law of its the powers which a corporation
Netherlands, although not engaged in business in may exercise
the Phils. It is the registered owner of the Philips  A corporation only has such powers as
trademark, and owns two local companies with are expressly granted to it by law and
the name Philips also. by its AOI, those which may be inci-
PEBV asked the cancellation of the word Philips dental to such conferred powers (§45),
from Standard Philips, a local manufacturer, those reasonably necessary to accom-
alleging infringement of its exclusive right to use plish its purposes (Section 36 (11),
the same. SEC and CA ruled for Std Philips, and those which may be incident to its
saying there was no confusion (unlike in existence (§2).
Converse case).  Reasons for purpose clause:
o so that a stockholder contemplat-
Held: ing an investment will know what
lines of business his money is to
Corp’s right to use its corp and trade name is a be risked
property right, a right in rem. o so that management will know
General Rule: Corp must have a name by which it what lines of business it is autho-
is to sue and be sued and do all legal acts. rized to act
o so that anyone who transacts with
Accdg to Corp Code, no corp name may be the corporation may ascertain
allowed whether a transaction he is enter-
1) if complainant corp acquired a prior right
 ing is one with the general au-  Exception: Condominium corporations
thority of the management can be organized for a period of 200
 Under Sec 14(2) a corporation can years
have as many purposes as it wants  Extension involves an amendment of
provided: the AOI. Thus, the requisites under
o AOI specify the corporation’s pri- §16 must be complied with. Any dis-
mary and secondary purposes senting stockholder may exercise his
which need not be related to appraisal right (§37).
each other
o Corporation for which special 5. INCORPORATORS AND DIRECTORS; NUM-
provisions are made can only BER AND QUALIFICATIONS
have the purpose peculiar to  “Directors” is used for stock corpora-
them tions, while “trustees” is used for
o Purposes must be lawful stock corporations.
 If purpose is lawful, SEC is not au-  GENERAL RULE: not less than 5 but
thorized to inquire whether corpora- not more than 15
tion has hidden motives and man- EXCEPTIONS:
damus will lie to compel it to issue i) Non-stock corporations – articles
certificate or by-laws may provide for more
 PD 902-A, Sec 6(h) gives SEC, after than 15 trustees (§92).
consultation with BOI, NEDA, or  Exception: Educational non-
other appropriate government stock corporations – trustees
agency, the power to refuse or deny may not exceed 15. However,
the application for registration of the number of trustees shall
any corporation if its establishment, be in multiples of 5 (§108)
organization, operation will not be ii) Merger of banks – new board is al-
consistent with the declared national lowed to have such number of di-
economic policies rectors as is equivalent to the to-
 A corporation may not be formed for tal number of directors of the
the purpose of practicing a profes- merging banks, though it may ex-
sion ceed fifteen (General Banking Act,
as amended).
3. PRINCIPAL OFFICE  Incorporators and directors of a stock
 Must be within the Philippines (§14 corporation must own at least one
(3)) share of stock of the corporation. In a
 AOI must specify both province or non-stock corporation, a trustee must
city or town where it is located be a member thereof.
 Important in (1) determining venue  In nationalized industries, aliens may
in an action by or against the corpo- be directors of a corporation only in
ration (2) determining the province such number as may be proportional
where a chattel mortgage of shares to their allowable ownership of
should be registered (Chua Gan v shares,2 e.g. if the articles provide for
Samahang Magsasaka) 10 directors, and alien ownership is
 The statement of the principal office limited to 40% of the capital, then
establishes the residence of the cor- aliens may occupy a maximum of 4
poration board seats.

4. TERM OF EXISTENCE 6. CAPITAL STOCK; SUBSCRIPTION; PAYMENT

 When a corporation is organized, the
maximum life that can be stipulated Capital stock
in the AOI is 50 years. But during o Capital stock is the amount fixed in
the life of the corporation, the life or the AOI, to be subscribed and paid in
term can be extended to another 50 or secured to be paid in by the share-
years at any one instance (§11) holders of a corporation, either in
 But such extension of the life a cor- money or property, labor or services,
poration cannot be made earlier at the organization of the corporation
than 5 years before the end of its or afterwards and upon which is to
original term. Exception: where conduct its operation. (Fletcher)
there are justifiable reasons for an o The capital stock limits the maximum
earlier extension as may be deter- amount or number of shares that may
mined by the SEC. (Ibid) be issued by the corporation without

2
Sec. 2-A, CA 108 (Anti-Dummy Law) as amended by PD 716.
 formal amendment of the AOI. It re- share (assuming there is a binding
mains the same even though the ac- subscription agreement) is “outstand-
tual value of the shares as deter- ing,” an issued share may not have
mined by the assets of the corpora- the status of outstanding share (as in
tion is diminished or increased. the case of treasury shares)

Authorized capital stock Paid-up capital

o ACS is synonymous with capital o 25% of subscribed capital stock must
stock where the shares of the corpo- be paid-up for the purpose of incorpo-
ration have par value. If the shares ration, but in no case shall be less
of stock have no par value, the cor- than P 5000 (§13)
poration has no ACS, but it has capi- o Portion of the authorized capital stock
tal stock the amount of which is not which has been subscribed and paid.
specified in the AOI as it cannot be Not all funds or assets received by the
determined until all the shares have corporation can be considered paid-up
been issued. In this case, the two capital, for this term has a technical
terms are not synonymous (De signification in corporation law. Such
Leon) must from part of the authorized capi-
o State the authorized capital stock in tal stock of the corporation, sub-
lawful money of the Philippines, the scribed and then actually paid-up.
number of shares into which the ACS [MSCI-NACUSIP Local Chapter v. Na-
is divided, and the par value of each tional Wages and Productivity Com-
par value shares (§14(8), §15(7)) mission]
o Stock corporations are not required o Must be in the form of (a) cash de-
to have any minimum authorized posited in a bank or (b) property
capital stock except when special which may be used or actually needed
laws provide otherwise (§12) by the corporation in its operations
o Capital can’t consist or be invested in
Subscribed capital stock money market placement
o It is the amount of the capital stock o Corporations with more stringent capi-
subscribed whether fully paid or not. tal requirements:
It connotes an original subscription  Insurance corporations – must
contract for the acquisition by a sub- have paid-up capital stock of at
scriber of unissued shares in a cor- least P 5 M (Insurance Code, Sec
poration (§60,61) 188)
o At least 25% of authorized capital  Banks – monetary board fixes
stock must be subscribed (§13) minimum paid-up capital require-
o Subscription – mutual agreement of ments for the different classes of
the subscribers to take and pay for banks (Central Bank Act and Gen-
the stock of a corporation eral Banking Act).
o Pre-incorporation subscription –
amount which each incorporator or Unissued capital stock
stockholder agrees to contribute to a o It is that portion of the capital stock
proposed corporation that is not issued or subscribed. It
does not vote and draws no dividends
Outstanding capital stock
o It is the portion of the capital stock Legal capital
which is issued and held by persons o It is the amount equal to the aggre-
other than the corporation itself. gate par vale and/or issued value of
Under §137, it is the total shares of the outstanding capital stock. When
stock issued under the binding sub- par value shares are issued above
scription agreements to subscribers par, the premium or excess is not to
or stockholders, whether or not fully be considered as part of the legal cap-
or partially paid, except treasury ital (Cf§43). In the case of no par
shares. It is thus broader than “sub- value shares, the entire consideration
scribed” capital stock received forms part of legal capital
o The terms “subscribed capital stock” and shall not be available for distribu-
and “issued” or “outstanding” capi- tion of dividends (§6, par 3)
tal stock are used synonymously
since subscribed capital stock, as Capital
distinguished from the certificate of o It is used broadly to indicate the entire
stock, can be issued even if not fully property or assets of the corporation.
paid. But while every subscribed It includes the amount invested by the
 stockholders plus the undistributed  Non-stock corporations that intend to so-
earnings less losses and expenses. licit gifts, donations, and contributions
o In the strict sense, it refers to that from the public at large for the benefit of
portion of the net assets paid by the an indefinite number of persons must se-
stockholders as consideration for the cure a Certificate of Registration from the
shares issued to them, which is uti- Insurance Commissioner.
lized for the prosecution of the busi-  Failure to file AOI will prevent due incorpo-
ness of the corporation (De Leon) ration of the proposed corporation and will
not give rise to its juridical personality
7. TREASURER-IN TRUST (§19). It will not even be a de facto corpo-
The person elected by the subscribers as ration (§20)
Treasurer of the corporation at the time 1. Unless the certificate of incorpora-
of the incorporation, who is named as tion has been issued, there can be
such in the AOI and who has been no de facto corporation (Hall vs.
authorized to receive for and in the Piccio, 1950)
name and for the benefit of the 2. Campos—this statement should
corporation, all subscriptions, fees, not be taken as an absolute prin-
contributions or donations paid or given ciple, but in the light of the cir-
by the subscribers or members cumstances before the court.

8. TREASURER’S AFFIDAVIT 3.4 EXAMINATION OF ARTICLES BY

The sworn statement of the Treasurer SEC; APPROVAL OR REJECTION
elected by the subscribers stating at
least 25% of the authorized capital stock  The SEC may reject any AOI thereto if the
of the corporation has been subscribed same is not in compliance with the re-
and that at least 25% of the total quirements of this Code (§17)
subscription has been fully paid to him in  The SEC shall give the incorporators a rea-
actual cash and/or property, the fair sonable time within which to correct or
valuation of which is equal to at least modify the objectionable portions of the
25% of the said subscription, such paid- articles or amendment. (§ 17)
up capital being not less than 5,000.00
(§14)

9. OTHER MATTERS 4. Grounds for disapproving

 Classes of shares, as well as the articles of incorporation (§17)
preferences or restrictions on any
such class (§6)
 Denial or restriction of pre-emptive
right (§39) a) AOI does not substantially the form pre-
 Prohibition against transfer of stock scribed
which would reduce stock ownership b) Purpose is patently unconstitutional, ille-
to less than the required minimum gal, immoral, contrary to government
in the case of a nationalized busi- rules and regulations
ness or activity (§15(11)) c) Treasurer’s Affidavit concerning the
amount of capital subscribed and or paid
is false
3.3. FILING OF ARTICLES AND PAY- d) Percentage requirement of ownership of
MENT OF FEES Filipino citizens as required by the Consti-
tution not complied with.
 Corporations governed by special laws  After consulting with BOI, NEDA, appropri-
have to submit a recommendation from ate government agency, SEC may deny
the appropriate government agency to registration of any corporation if its estab-
the effect that such articles are in accor- lishment will not be consistent with de-
dance with law. clared national policies
a) banks, banking and quasi-banking  Certificate of authority required of the fol-
institutions, lowing:
b) building and loan associations, a) Insurance Companies- Insurance
c) trust companies and other financial Commission
intermediaries, b) Banks, Building and Loan Associa-
d) insurance companies, tions, Finance Companies- Mone-
e) public utilities, tary Board
f) educational institutions, and c) Educational Institutions- Secretary
g) other corporations governed by spe- of Education
cial laws (§17)
 d) Public Utilities- Board of Power,
Board of Transportation, Na- HELD: The Municipality of Balabagan was not a
tional Telecommunication Com- de facto corporation. The color of authority
mission, etc.. requisite to a de facto municipal corporation may
 Remedy in case of rejection of AOI: by be an unconstitutional law, valid on its face,
petition for review in accordance with which has either:
the Rules of Court (§6, last par., PD 902- a. Been upheld for a time by the
A) courts; or
b. Not yet been declared void; pro-
ISSUANCE OF CERTIFICATE OF INCORPORATION vided that a warrant for its creation
can be found in some other valid
 A private corporation formed or orga- law or in the recognition of its poten-
nized under this Code commences to tial existence in the general consti-
have corporate existence and juridical tution of the state.
personality and is deemed incorporated The mere fact that Balabagan was organized
from the date the Securities and Ex- before the statute was invalidated cannot make
change Commission issues a certificate it a de facto corporation because, independently
of incorporation under its official seal of the Administrative Code, there is no other
(§19) valid statute to give color of authority to its
 Thereupon the incorporators, stockhold- creation. This doesn’t mean that the acts done
ers/members and their successors shall by Balabagan in the exercise of its corporate
constitute a body politic and corporate powers are a nullity. The existence of EO 386 is
under the name stated in the articles of an “operative fact which cannot be justly
incorporation for the period of time men- ignored.”
tioned therein, unless said period is ex-
tended or the corporation is sooner dis-
solved in accordance with law. (Ibid)
 If incorporators are found guilty of fraud b) User of corporate powers – there has been
in procuring Certificate of Incorporation, some user of corporate powers, the trans-
SEC may revoke the same after proper action of business in some way as if it
notice and hearing (§6(I), PD 902-A) were a corporation
  not necessary that dealings between
the parties should have been on a cor-
porate basis
5. Defective Attempts to  election of directors and officers would
Incorporate not be user of corporate powers since
these acts are just indicative of a
5.1 DE FACTO CORPORATIONS – a mere association
corporation where there exists a flaw  taking subscriptions to and issuing
shares of stock, buying lot, construct-
in its incorporation ing, and leasing a building on it will
constitute sufficient user of corporate
Requisites of a de facto corporation powers to constitute a de facto corpo-
(Ballantine as cited in Campos) ration
c) Substantial or Colorable compliance -
a) Valid statute – there is an apparently there has been colorable compliance with
valid statue under which the corporation legal requirements in GOOD FAITH
with its purposes may be formed. There  while the corporation is still in the
can be no de facto corporation under a process of incorporation, it is quite
statue subsequently declared unconsti- clear that there can be no substantial
tutional or colorable compliance and therefore
it cannot be at such a stage a de facto
Municipality of Malabang vs. Benito (1969) corporation
 A corporation which has not yet been
The municipality of Balabagan was created by EO issued a certificate of incorporation
386 of President Garcia out of barrios and sitios cannot claim “in good faith” to be a
of Malabang. The petitioners seek to nullify the corporation. Thus, it cannot be a de
EO. They rely on the Pelaez ruling that the facto corporation [Hall v. Piccio 86 Phil
President’s power to create municipalities under 603]
Sec. 68 of the Administrative Code is Compliance with the above conditions would make
unconstitutional. Respondents argue that the the corporation de facto whose incorporation
Pelaez ruling is inapplicable because Balabagan cannot be attacked collaterally. It may only be
is a de facto corporation.
attacked directly by the State in a quo warranto corporated, there can be no resulting part-
proceeding nership among them, and the mere pas-
 Compliance with the above conditions sive investors cannot be held liable to
would make the corporation de facto share in the losses suffered by the busi-
whose incorporation cannot be attacked ness enterprise (Pioneer Surety v CA,
collaterally. It may only be attacked di- 1989)
rectly by the State in a quo warranto  When applicable:
proceeding (§20) 1. Persons assuming to act as corp are
 De facto doctrine grew out of the neces- liable as gen partners;
sity to promote the security of business
transactions and to eliminate quibbling 2. 3rd party who had dealt with an unin-
over irregularities corporated association as a corp may
 The de facto doctrine is the exception to be precluded from denying its corpo-
the general rule that when there is no rate existence on a suit brought by
corp entity to talk about, it is the natural the alleged corp – person deemed to
persons who are liable have admitted the existence of the
 Where corporations are neither de jure corp
or de facto, associates may be held li- 3. alleged corp that has entered into a
able as partners unless estoppel applies contract by virtue of which it has re-
(§ 21) ceived advantages and benefits
 No articles and no by-laws: no de facto  However, if business associates fraudu-
corp. There’s no colorable compliance at lently misrepresent the existence of a
all corp, 3rd party can sue them as gen part-
 De facto corp is like a de jure corp, has ners. 3rd party is not estopped from assert-
all the powers and liabilities of de facto ing their liability because he had recog-
corp nized the corporation’s existence. Ratio:
 THE ONLY DIFF: its incorporation can be They cannot profit by their own misrepre-
attacked by State in quo warranto action sentation.
Ratio: Only State can give it legal  Hence, if associates did not know of thee
existence, so only the State is defective incorp, they can’t be personally
wronged held liable by innocent 3rd party (Cf Sal-
vaierra v Garlitos, 1958)
 But if 3rd party knew of defects of incorp,
5.2 CORPORATION BY ESTOPPEL he is estopped from recovering from indi-
vidual associates, but must recover only
 It is a status acquired by persons who from corp assets
assume to act as a corporation knowing
it to be without authority. Such persons Lozano vs. delos Santos (1997)
shall be liable as general partners for all
debts, liabilities and damages incurred This case involved two incorporated drivers’
or arising as a result thereof. (§21) associations that decided to unite and elect one
 When such ostensible corporation is set of officers to be given authority to collect the
sued on any transaction entered by it as daily dues of the drivers who are members of the
a corporation or any tort committed by it consolidated association.
as such, it shall not be allowed to use as HELD: Doctrine of estoppel applies when persons
a defense as lack of corporate personal- assume to form a corporation and exercise
ity (§21) corporate functions and enter into business
 One who assumes an obligation to an os- relations with third persons. Where there are no
tensible corporation as such, cannot re- third persons involved and the conflict arises
sist performance thereof on the ground only among those assuming to form a
that there was in fact no corporation corporation, who therefore know that it has not
(§21) been registered, there is no corporation by
 Note that an unincorporated corporation estoppel.
is not barred from transacting business
before the commencement of corporate International Express Travel v. CA (2000)
existence. Limit: personal liability. Com-
plication: when the corporation did not The doctrine of corporation by estoppel may
come about apply to:
 Against whom will estoppel lie? Who o a third party - a 3rd party who
committed the active misrepresentation? had dealt with an unincorporated associa-
 Where a person convinces other parties tion as a corporation may be precluded
to invest money for the formation of a from denying its corporate existence on a
corporation, but which has never duly in- suit brought by the alleged corporation on
 the contract even if he did not know of the ceipt of official notice of the issuance
defective incorporation. 3rd party is consid- of its certificate of incorporation by
ered to have admitted the existence of a the SEC adopt a code of by-laws for its
corporation by the fact that he dealt with it government not inconsistent with this
as a corporation code.
o the alleged corporation - when a  May be adopted and filed prior to in-
third person has entered into a contract corporation, in such case, shall be ap-
with an association which represented itself proved and signed by all incorporators
to be a corporation, the association is submitted to SEC together with AOI
estopped from denying its corporate capac-
ity in a suit against it by such 3 rd person. It Failure to file By-laws on time:
cannot allege lack of personality to be sued
to evade responsibility on a contract it has Loyola Grand Villas Homeowners Assn v. CA
entered into and by virtue of which it has (1997)
received advantages and benefits
o associates as partners - when The Supreme Court held that although the
business associates fraudulently misrepre- Corporation Code requires the filing of by-laws
sents the existence of a corporation and within one month after the issuance of the
the 3rd party contacts with the association Certificate of Incorporation, it does not expressly
as a corporation without knowing the seri- provide for the consequences of non-filing within
ous defects in its incorporation, such 3rd the said period. Failure to file the by-laws within
party may sue associates as general part- that period does not imply the "demise" of the
ners. Where both the associates and the 3 rd corporation. By-laws may be required by law for
party were ignorant of the defective incoro- an orderly governance and management of
poration, 3rd party cant hold the associates corporations but they are not essential to
liable since they were in good faith. If 3 rd corporate birth. Therefore, failure to file them
party knew of defects in incorporation and within the period required by law by no means
still dealt with the corporation, he must be tolls the automatic dissolution of a corporation.
deemed to have chosen to deal with the
corporation as such and should be limited 3. How filed (§46)
in his recovery to the corporate assets.  Must be approved by the affirmative
vote of the stockholders representing
the majority of the outstanding capital
stock or majority of members (if filed
6. Internal Organization of the prior to incorporation, must be ap-
Corporation proved and signed by all incorpora-
tors)
 Must be signed by the stockholders or
6.1 APPROVAL OF BY-LAWS
members voting for it
 Must be filed with the SEC certified by
1. Definition of by-laws
the majority of directors/trustees and
 These are regulations, ordinances,
countersigned by the secretary of the
rules or laws adopted by an associa-
corporation which shall be attached to
tion or corporation or the like for its
original AOI
internal governance. By- laws de-
fine the rights and obligations of var-
4. Where kept (§46)
ious officers, persons or groups
 Must be kept in the principal office of
within the corporate structure and
the corporation; subject to inspection
provide rules for routine matters
of stockholder or member during of-
such as calling meetings.
fice hours (Cf §74)
 Every corporation under this code
shall have the power and capacity:
5. Effectivity of by-laws
to adopt by-laws not contrary to law,
 In all cases, the by-laws shall be effec-
morals, or public policy, and to
tive only from the issuance of SEC of
amend or repeal the same in accor-
certification that bylaws are not incon-
dance with this code (§36 (5))
sistent with the Code
 These are subordinate to the AOI,
 Cannot bind stockholders or corpora-
Corp Code, and other statutes.
tion pending approval
(Fleischer vs. Nolasco(1925))
 By-laws or any amendment thereto of
any bank, banking institution, building
2. When to adopt by-laws (§46)
and loan association, trust company,
 Every corporation formed under this
insurance company, public utility, ed-
code must within 1 month after re-
 ucational institution or other special i) In the case of stock corporations,
corporations governed by special the manner of issuing stock cer-
laws must be accompanied by a cer- tificates; and
tificate of the appropriate gov’t j) Such other matters as may be
agency to the effect that such by- necessary for the proper or con-
laws are in accordance with law venient transaction of its corpo-
 By-laws, like AOI are contracts of ad- rate business and affairs.
hesion. They will bind the corpora-  The contents may be subdivided into
tion and stockholders including two major headings:
those who vote against as well as a) Management and control of the
those who became members after corporate entity; and
approval b) Rights and obligations of stock-
 Contracts entered into without strict holders
compliance with by-laws may be
binding on the corporation due to 7. Amendment or repeal (§48)
long acquiescence and usage (Board  Majority vote of the members of the
of Liquidators vs. Kalaw (1967)) Board and majority vote of the out-
 By-laws are mere internal rules standing capital stock or majority of
among stockholders and cannot af- members, in a meeting duly called for
fect or prejudice 3rd persons who the purpose; or
deal with the corporation unless  2/3 of the outstanding capital stock or
they have knowledge of the same members may delegate to the BOD
(China Banking Corp v CA, 1997) the power to amend or repeal any by-
laws or adopt new by-laws (such
6. Contents (§47) power may be revoked by majority
 Subject to the provisions of the Con- vote only)
stitution, this Code, other special  In all other respects, the procedure for
laws, and the articles of incorpora- adopting the original by-laws shall be
tion, a private corporation may pro- the same in amending or repealing
vide in its by-laws for: by-laws or adoption of a new set of
a) The time, place and manner of by-laws
calling and conducting regular
or special meetings of the direc- 6.2 ELECTION OF DIRECTORS – dis-
tors or trustees; cussed in Chapter VII
b) The time and manner of calling
and conducting regular or spe-
6.3 COMMENCEMENT OF BUSINESS
cial meetings of the stockhold-
ers or members;
c) The required quorum in meet-
ings of stockholders or members 7. Effects of non-use of
and the manner of voting charter/continuous inoperation
therein;
d) The form for proxies of stock- (§ 22)
holders and members and the
manner of voting them; By laws
may not prohibit the use of 1. Non-user for 2 years (non-use of charter)-
proxies-Peoples’ Home Savings when the corporation does not formally or-
Bank vs. Superior Court, cited in ganize and commence the transaction of
Campos its business or the construction of its
e) The qualifications, duties and works within 2 years from the date of its
compensation of directors or incorporation, its corporate powers cease
trustees, officers and employ- and the corporation shall be deemed dis-
ees; solved (automatic)
f) The time for holding the annual  Formal organization – may consist in
election of directors of trustees the election of new board of directors
and the mode or manner of giv- or trustees and corporate officer
ing notice thereof;  Commencement of business – may
g) The manner of election or ap- take the form of contracting for lease
pointment and the term of office or sale of properties to be used as
of all officers other than direc- business site of the corporation and
tors or trustees; other preparatory acts geared towards
h) The penalties for violation of the fulfillment of the purpose for which
by-laws; the corporation was established
 2. Non-user for 5 years (continuous inoper-  Corporate entities are entitled to the following
ation)- when the corporation has com- constitutional rights: due process, equal pro-
menced the transaction of its business tection, and protection against unreasonable
but subsequently becomes continuously searches and seizures. However, a corp is not
inoperative for a period of at least 5 entitled to the privilege against self-incrimina-
years. The same shall be a ground for tion (Bataan Shipyard & Eng’g Co. v PCGG,
the suspension or revocation of its cor- 1987)
porate franchise or Certificate of Incor-  A corporation is not entitled to moral damages
poration (not automatic). Notice and (LBC Express, Inc v CA)
hearing before SEC is required.  Juridical personality of the corporation ends
3. Exception: cause or non-use or operation when liquidation ends (payment of debts and
was due to causes beyond the control of distribution of assets) and inchoate rights or
the corporation as determined by SEC expectancies of stockholders are realized. Un-
(ex. Mineral lands to be developed by til such conveyance is made, title over the as-
the corporation as per its purpose are sets remains with the corporation.
the object of court litigation and a court
injunction against the corporate activi-
ties has been issued) 2. Piercing the veil of
ANNUAL FINANCIAL STATEMENTS – filed with SEC corporate fiction
annually (SEC Rule, Nov. 20, 1980)
2.1 Nature of the piercing doctrine

 Piercing the veil of corporate entity re-

Chapter IV quires the court to see through the protec-
THE CORPORATE ENTITY tive shroud which exempts its stockhold-
ers from liabilities that ordinarily they
could be subject to, or distinguishes one
1. Doctrine of separate corporation from a seemingly separate
juridical personality one, were it not for the existing corporate
fiction [Lim v. CA, 2000]. But to do this,
 A corporation has a personality separate and the court must be sure that the corporate
distinct from that of its stockholders and fiction was misused, to such an extent
members and is not affected by the personal that injustice, fraud or crime was commit-
rights, obligations, and transactions of the ted upon another, disregarding, their, his,
latter. Since corporate property is owned by her or its rights. It is the protection of the
the corporation as a juridical person, the interests of innocent third persons dealing
stockholders have no claim on it as owners, with the corporate entity which the law
but have merely an expectancy or inchoate seeks to protect by this doctrine. [Traders
right to the same should any of it remain Royal Bank v. CA, 1997]
upon dissolution of the corporation after all  Whether the existence of the corporation
corporate creditors have been paid. Such should be pierced depends on questions of
right is limited only to their equity interest facts, appropriately pleaded. Mere allega-
(doctrine of limited liability). tion that a corporation is the alter ego of
 Although stockholder’s interest in the corp the individual stockholders is insufficient.
may be attached by his personal creditor, The presumption is that the stockholders
corp property cannot be used to satisfy his or officers are distinct entities. The bur-
claim (Wise & Co. vs. Man Sun Lung, 1940) den of proving otherwise is on the party
 General Rule: Separate personality is vested seeking to have the court pierce the veil of
to a corporate entity when it is issued the corporate entity. [Ramoso v. VA, 2000]
certificate of incorporation by the SEC. The  Piercing the veil of corporate entity is
exceptions are: merely an equitable remedy, and may be
a. de facto corporation awarded only in cases when the corporate
b. corporation by estoppel fiction is used to defeat public conve-
 As a separate juridical personality, a corpora- nience, justify wrong, protect fraud or de-
tion can be held liable for torts committed by fend crime or where the corporation is a
its officers for corporate purpose (PNB v CA, mere alter ego or business conduit of a
1978) person.
 It can’t be held criminally liable for a crime  When it comes to applying the doctrine,
committed by its officers (People v Tan Boon the first point to consider is the liability of
Kong, 1930) obligation of the individual (the one who is
being sought to be liable). Without such
liability, everything would have been in
 compliance with statutes (U.S vs. Mil- 2.4 Parent-subsidiary relationship
waukee, 1905; Umali vs. CA, 1990).  The mere fact that a corporation owns all
 In case of wholly-owned corporations, or substantially all of the stocks of another
corporations with common stockholders, corporation is not sufficient to justify their
or corporations having a parent-sub- being treated as one entity. If used to
sidiary relationship, the following are the perform legitimate functions, the sub-
“inevitable consequences”: sidiary’s separate existence may be re-
a) Control and management of the corpora- spected. However, to prevent abuses of
tion; the separate entity privilege, the court will
b) Interlocking directors; pierce the veil of corporate entity and re-
c) Common access to the use of resources, gard the two corporations as one.
services, and 3rd-party providers; and  Circumstances which if present in the
d) Intra-corporate dealings. proper combination renders the subsidiary
In the above consequences, there is no an instrumentality:
necessity for applying the doctrine of a) The parent corporation owns all or
piercing the corporate veil unless there is a most of the subsidiary’s capital stock
particular act by the corporation, b) The parent and subsidiary corpora-
stockholder, or BOD that gives rise to a tions have common directors or offi-
liability. If there’s a liability to speak of, such cers
consequences may be considered as a c) The parent corporation finances the
means of evading such thus the need for the subsidiary
piercing. d) The parent corporation subscribes to
all the capital stock of the subsidiary
 In applying the doctrine, determine:
or otherwise causes its incorporation
1. the rights and obligations of the
e) The subsidiary has grossly inadequate
parties.
capital
2. the possibility of non-enforce-
f) The parent corporation pays the
ment of such rights and obliga-
salaries and other expenses or losses
tions because of the shield or
of the subsidiary
veil.
g) The subsidiary has substantially no
3. look into the circumstances and
business except with parent corpora-
underlying purpose of putting up
tion or no assets except those con-
the corporation
veyed to or by the parent corporation
h) In the papers of the parent corpora-
2.2 Extent of the legal effects of tion or in the statements of its offi-
piercing cers, the subsidiary is described as a
department or division of the parent
corporation or its business or financial
 The application of the piercing doctrine responsibility is referred to as the par-
to a particular case does not deny the ent corporation’s own
corporation of legal personality for any i) The parent corporation uses the prop-
and all purposes, but only for the partic- erty of the subsidiary as its own
ular transaction or instance for which the j) The directors or executives of the sub-
doctrine was applied. [Koppel Phil. Inc. sidiary do not act independently in the
v. Yatco] (1946) interest of the subsidiary but take
 Piercing is not allowed unless the rem- their orders from the parent corpora-
edy sought is to make the officer or an- tion in the latter’s interest
other corporation pecuniarily liable for k) The formal ledger requirements of the
corporate debts subsidiary are not observed (PNB v Ri-
tratto Group, 2001).
2.3 Illustrative Cases where piercing  The subsidiary cannot be considered a
the veil is allowed mere instrumentality of the parent corpo-
 If done to defraud the government of ration just by the combination of the 11
taxes due it signs listed above. For the veil of corpo-
 If done to evade payment of civil liability rate entity of the subsidiary to be pierced
 If done by a corporation which is merely so that it is considered just an instrumen-
a conduit or alter ego of another corpo- tality, the act questioned must have an il-
ration legal or unfair purpose which results to
 If done to evade compliance with con- prejudice to third persons who may seek
tractual obligations redress from the corporate entity
 If done to evade financial obligation to
its employees De Leon vs. NLRC (2001)
FACTS: FISI contracted with FTC for security
services. Subsequently, the stockholders of FISI 3.2 Nationality of the Corporation as
sold all their participation in the corporation to a determined by the “Control Test”
new set of stockholders which renamed the  Exploitation of Natural Resources - Section
corporation MISI. Afterwards, FTC preterminated 2, Art. XII CONST. “only Filipino Citizens or
its contract of security services with MISI causing Corporations whose capital stock are at
petitioner security guards to lose their least 60% owed by Filipinos can qualify to
employment and file ULP case against FTC, FISI exploit natural resources.”
and MISI.  Public Utilities - Sec. 11, Art XII, CONST.
HELD: There was ER-EE relationship between “xxx no franchise, certificate or any other
FTC and petitioners. It was shown that FISI was a form of authorization for the operation of a
mere adjunct of FTC. Records show that FISI and public utility shall be granted except to cit-
FTC have the same owners and business izens of the Philippines or to corporations
address, and FISI provided security services only or associations organized under the laws
to FTC. The purported sale of the shares of the of the Philippines at least 60% of whose
former stockholders to a new set of stockholders capital is owned by such citizens. “
who changed the name of the corporation to MISI  War-time Test - If the controlling stock-
appears to be part of a scheme to terminate the holders are enemies, then the nationality
services of FISI's security guards posted at the of the corporation will be base on the citi-
premises of FTC and bust their newly-organized zenship of the majority stockholders in
union which was then beginning to become times of war (Filipinas Compania de Se-
active in demanding the company's compliance guros v Christian Huenfeld, 1951) .
with Labor Standards laws. Under these  Investment Test - Sec. 3(a) and (b), For-
circumstances, the Court cannot allow FTC to use eign Investments Act of 1991 (RA7042). It
its separate corporate personality to shield itself considers for purpose of investment a
from liability for illegal acts committed against its “Philippine National” as a corporation or-
employees. ganized under the laws of the Philippines
of which at least 60% of the capital stock
Francisco vs. Mejia (2001) outstanding and entitled to vote is owned
and held by citizens of the Philippines, or a
With specific regard to corporate officers, the trustee of the funds for pension or other
general rule is that the officer cannot be held employee retirement or separation bene-
personally liable with the corporation, whether fits, where the trustee is a Philippine na-
civilly or otherwise, for the consequences of his tional and at least 60% of the fund will ac-
acts, if he acted for and in behalf of the crue to the benefit of Philippine nationals.
corporation, within the scope of his authority and
in good faith. In such cases, the officer's acts are 3.3 Grandfather rule
properly attributed to the corporation. However, Used to determine the nationality of a
if it is proven that the officer has used the corporation by which the percentage of Filipino
corporate fiction to defraud a third party, or that equity in corporations engaged in nationalized
he has acted negligently, maliciously or in bad and/or partly nationalized areas of activities,
faith, then the corporate veil shall be lifted and provided for under the constitution and other
he shall be held personally liable for the nationalization laws, is computed, in cases
particular corporate obligation involved. where corporate shareholders are present in
the situation, by attributing the nationality of
the second or even subsequent tier of
ownership to determine the nationality of the
3. Nationality of the corporate stockholder. (Villanueva, 2003)
Corporation
 SEC formula: SEC Letter Opinion
3.1 The place of incorporation test. “Shares belonging to corporations or
 The corporation is a national of the coun- partnerships at least 60% of the capital of
try under whose laws it is organized or which is owned by Filipino citizens shall be
incorporated(§123): considered as of Philippine nationality, but
Domestic corporations – organized and if the percentage of Filipino ownership in
governed under and by Philippine laws the corporation or partnership is less than
 Foreign corporations – organized under 60% only the number of shares
laws other than those of the Philippines corresponding to such percentage shall be
an can operate only in the territory of considered as of Philippine nationality.”
the state under whose laws it was
formed. However, they may be licensed
to do business here.
 Chapter V it & then discard the part that is
burdensome.
PROMOTERS’ CONTRACTS
* The contract to be capable of adoption or
PRIOR TO INCORPORATION ratification, must be one within the powers
of the corp. to enter.
1. Functions of Promoters b. Acceptance of benefits under the contract
with knowledge of the terms thereof
 Organize and establish corporation
 Solicit or pool capital contributions
 Exercise/identify/consummate opportunities 4. Personal Liability of
 Make available capital contributions/invest-
ments (underwrite) Promoter on Pre-Incorporation
 Manage/control Contracts
 Note: may be done prior or after incorpora-
tion. Complications arise if performed prior There are three possible situations intended by the
to incorporation. For whom was the pro- promoter and the other party in pre-incorp.
moter acting in behalf of? (no juridical entity contracts:
yet)
1. Promoter takes a continuing OFFER on behalf
of the corp, which if accepted by the corp. be-
2.What are Promoter’s Contracts? comes a contract  Promoter does not as-
sume any personal liability, whether or not the
offer is accepted by the corp.
 Contracts prior to existence of corporation 2. Promoter makes a contract at the time binding
thus the corporation could not have been a himself with the UNDERSTANDING that if the
party to it. corp., once formed, accepts or adopts the con-
 However, the corporation may make the con- tract, the promoter will be relieved of all re-
tracts its own and may become bound on sponsibilities
such contracts if after incorporation, it 3. Promoter binds himself PERSONALLY & as-
adopts or ratifies the same, or accepts its sumes the responsibility of looking to the pro-
benefits with knowledge of the terms posed corp. for reimbursement
thereof.
 Adoption or ratification need not be by ex-
press resolution of the board and may be In the absence of any express or implied
implied from the acts of responsible officers agreement to the contrary, the 3rd situation will be
of the corporation. presumed and the promoter will be considered
personally liable for the contracts. Thus, the corp.’s
adoption or ratification of the contract will not
3. Liability of Corporation for release the promoter from personal liability unless
a novation was intended. (Wells vs. Fay & Egan
Promoter’s Contracts Co., 143 Ga. 732, 87 S.E 873, 1915) Exception:
Quaker v Hill case. In this case, Quaker looked to
the uincorporated entity when making the
Rules on the liability of the corp. on promoters’
contract. Thus, the promoter was not liable.
contracts:
(Quaker Hill Inc. vs. Parr, 148 Colo. 45, 364 P. 2d
3.1 General Rule 1056, 1961)
Corp. is not bound by the contract – Since
the corp. did not yet exist at the time of the con-
tract, it could not have had an agent who could
legally bind it. 5. Compensation of Promoters
3.2 Exception: Gen rule – the corporation is not liable to pay
compensation because this would be an imposition
Corp. may be bound by the contract if it makes on innocent investors. (Ballantine)
the contract its own: How?
a. Adoption or ratification Exceptions:
 By express resolution  if after it is formed, corporation expressly
 Implied from the acts of responsible promises to do so (Ballantine; Indianapolis
officers of the corp. Blue Print & Manufacturing Co. v. Kennedy et.
* The corp. cannot adopt only the part of al., 215 Ind. 409, 19 N.E 2d 554, 1939)
the contract which may be beneficial to
 Services done partly before and partly after the limitations prescribed by law and the Con-
incorporation and the corporation takes the stitution;
benefits thereof h. To enter into merger or consolidation with
other corporations as provided in this Code;
The Corp. Code does not contain any provision as i. To make reasonable donations, including those
to the compensation of promoters. But the for the public welfare or for hospital, charita-
Securities Act authorizes a promotion fee IF it is ble, cultural, scientific, civic, or similar pur-
provided for in the registration statement of the poses: Provided, That no corporation, domestic
securities involved. or foreign, shall give donations in aid of any
political party or candidate or for purposes of
6. Fiduciary Relationship partisan political activity;
j. To establish pension, retirement, and other
between Corporation & plans for the benefit of its directors, trustees,
Promoter officers and employees; and
k. To exercise such other powers as may be es-
The promoters, being responsible for the sential or necessary to carry out its purpose or
financing & organization of the corp., are under purposes as stated in the articles of incorpora-
duty to exercise good faith & fairness in all their tion. (in the purpose clause)
acts & transactions.
 Sources of express power (Villanueva)
Example: Promoters often have to take options o Section 36 (Corp Code and other applica-
or title to property in their name but for the ble statutes)
benefit of the corp. In such cases, they should o Purpose clause (AOI, supplemented by by-
not make secret profits in passing title to the laws)
corp. If they do, they would have to account for  Sec 38 par 11 grants such power as are essen-
all such profits to the corp. when formed. (Old tial or necessary to carry out its purpose or
Dominion Mining and Smelting Corp., 203 Mass. purposes as stated in the AOI. A corporation is
159, 89 N.E 193, 1909) presumed to act within its powers and when a
contract is not on its face necessarily beyond
its authority, it will, in the absence of proof to
the contrary, presumed valid
Chapter VI  The general powers are to be exercised by the
CORPORATE POWERS BOD. However, the power to amend AOI is to
be exercised by the stockholders or members
 2 general restrictions on the power of the cor-
poration to acquire and hold properties:
1. General powers of o that the property must be reasonably and
corporations (§36) necessarily required by the transactions of
its lawful business
a. To sue and be sued in its corporate name; o that the power shall be subject to the limi-
b. Succession by its corporate name for the pe- tations prescribed by other special laws
riod of time stated in the articles of incorpo- and the constitution (corporation may not
ration and the certificate of incorporation; acquire more than 30% of voting stocks of
c. To adopt and use a corporate seal; a bank; corporations are restricted from
d. To amend its articles of incorporation in ac- acquiring public lands except by lease of
cordance with the provisions of this Code; not more than 1000 hectares)
e. To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or re- 2. Specific Powers - TCB PDA
peal the same in accordance with this Code;
f. In case of stock corporations, to issue or sell
IDM (DIP CAB MDT)
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in ac-  Extend or shorten the corporate Term (§ 37)
cordance with the provisions of this Code;  Increase or decrease Capital stock (§ 38)
and to admit members to the corporation if it  Incur, create or increase Bonded indebtedness
be a non-stock corporation; (§ 38)
g. To purchase, receive, take or grant, hold,  Deny Preemptive right (§ 39)
convey, sell, lease, pledge, mortgage and  Sell or otherwise Dispose of substantially all its
otherwise deal with such real and personal assets
property, including securities and bonds of  Acquire its own shares (§ 41)
other corporations, as the transaction of the  Invest in another corporation or business (§
lawful business of the corporation may rea- 42)
sonably and necessarily require, subject to  Declare dividends (§ 43)
 Enter into Management contracts (§ 44)
3. Implied Powers
NAPOCOR v Vera (1989)
These implied powers are deemed to exist
because of the following provisions: NAPOCOR has a pier at its coal plant in
1. except such as are necessary or incidental to Batangas. It did not renew its stevedoring
the exercise of the powers so conferred (§36) contract at the plant, but instead, took over the
2. such powers as are essential or necessary to services itself. RTC Judge issued preliminary
carry out its purpose or purposes as stated in injunction against NAPOCOR, saying that it was
the AOI – catch-all phrase (§45) not empowered by its Charter to engage in
stevedoring and arrastre services.
Remember: (Coleman vs. Hotel de France Co., 29
Held:
Phil. 323, 1915)
1. A corporation is presumed to act Under its Charter, NAPOCOR can exercise
within its powers. powers as may be reasonably necessary to carry
2. When a contract, entered into by the out its business of constructing, operating and
corporation, is not on its face necessarily be- maintaining power plants, or which, from time to
yond its authority, it will be presumed valid. time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to
4. The Ultra Vires Doctrine accomplish said purpose.
(§45) If act is lawful, and not prohibited, and for the
purpose of serving corporate ends, and
Definition – These are acts which a corporation is reasonably contributes to the promotion of those
not empowered to do or perform because they ends in a substantial sense, it may be
are not based on the powers conferred by its AOI considered within the corporation’s charter
or by the Corporation Code on corporations in powers.
general, or because they are not necessary or Stevedoring services are incidental and
incidental to the exercise of the powers so indispensable to unload the coal shipments.
conferred.

Rule – No Corporation under this Code shall

possess or exercise any corporate powers except Republic of the Philippines vs. Acoje Mining
those conferred by this Code or by its articles of Co. (1963)
incorporation and except such as are necessary
or incidental to the exercise of the powers so Acoje Mining requested the Director of Posts to
conferred. open a post office in its mining camp for the
benefit of its employee and their families. In a
An ultra vires act, if not illegal, can be remedied resolution, Acoje agreed to be directly
(by ratification) responsible for the “dishonesty, carelessness, or
negligence of the employee it assigns”. Acoje’s
employee, Sanchez, was designated as the
postmaster but he later disappeared with 13K of
Atrium v. CA (2001) post office funds. Acoje denied liability on the
ground that the resolution was ultra vires-BOD
Atrium Management Corporation filed with RTC had no authority to act on the matter.
an action for collection of the 4 postdated
checks issued by the Hi-cement Corporation, HELD: The company is estopped from denying
though its signatories de Leon, treasurer, and liability on the ground that the board resolution
delas Alas, chairman of the corporation to a is ultra vires. Assuming arguendo that the
certain ET Henry, and Co, which the latter resolution is an ultra vires act, the same is not
endorsed to Atrium for rediscounting. void for it was approved not in contravention of
law, customs, public order and public policy.
HELD: The act of issuing was well within the The term ultra vires should be distinguished
ambit of a valid corporate act, for it was for from an illegal act for the former is merely
securing a loan to finance the activities of voidable which may be enforced while the latter
the corporation, hence, not an ultra vires is void and cannot be validated.
act. An ultra vires act is distinguished from
illegal act, the former being voidable which Pirovano v De la Rama Steamship (1954)
may be enforced by performance,
ratification, or estoppel, while the latter is Stocks are owned by Don de la Rama, his 2
void and cannot be validated. SC however, daughters, and their EEs with nominal shares.
held de Leon negligent. One of the daughters was married to the
company president, Enrico Pirovano. While the General consequences of ultra vires acts
business grew, the father distributed his stocks 1. On corporation itself-Corporation
among his 5 daughters and his wife. NDC was May be dissolved under a quo warranto proceeding
also represented in the BoD because the corp but in most cases, the court merely enjoins the
had a debt to it. To secure the debt, all assets corporation from commission of the ultra vires acts
were mortgaged to NDC. Debt was later (Campos)
converted to stock, such that NDC now held 4 of -Certificate of Registration may be suspended or
9 seats in BoD. Such conversion released the revoked by SEC
mortgaged assets. 2. On immediate parties- Parties to the ultra
vires contract, if executory on both sides,
Enrico Pirovano died, so the BOD passed a neither party can ask for specific perfor-
resolution converting insurance proceeds on his mance. Will be left as they are if the con-
life to stocks for each of his minor children. tract has been fully executed on both
Approved by SHs. sides. If one party has performed his part,
the contract will be enforced provided it is
However, the other SHs realized that they would not illegal
actually be donating 1.44 M. instead of the 400K - Contract proceeding from an ultra
they intended (since the value of the stocks vires act is voidable (Republic v. Acoje Mining
increased), and that Mrs. Pirovano would now Co., GR L-18062, Feb. 28, 1963; 7 SCRA 361) )
have 2x voting power as her sisters. 3. On the rights of stockholders- Any stockholder
BOD later changed donation into cash, but would may bring either an individual or derivative
be retained by the company as a loan, and the suit to enjoin a threatened ultra vires act or
interest payable to the children, both amounts to contract. If act or contract has already been
be paid to the children after debt to NDC paid, performed, a derivative suit for damages may
and later, when company is in position to meet be filed against the directors, but their liability
obligations. Mrs. Pirovano formally accepted the will depend on whether they acted in good
donation. BOD later approved release of some faith and with reasonable diligence in entering
funds held in trust for Mrs. Pirovano to buy into contracts. When based on tort, cannot
house in NY. SHs formally ratified the donation. set-up the defense of ultra vires against in-
jured party who had no knowledge that such
SEC later gave opinion that donation was void was ultra vires
bec it was beyond the scope of the corp’s May become binding by the ratification of all
powers. SHs later voted to revoke the donation stockholders unless third parties are prejudiced
to the Pirovano children. thereby or unless the acts are illegal (Pirovano v.
de la Rama Steamship Co. 96 Phil. 335; 1954)
Held:
1) Donation was remunerative- for services
rendered by Enrico Pirovano.
2) Donation was already perfected. Ratified by Chapter VII
SHs, and agreed to by NDC, the only credi-
tor. CONTROL AND MANAGEMENT
3) Donation is within scope of the AOI. It is pro- OF CORPORATIONS
vided that corp can invest and deal with
moneys not immediately required, in such
manner as from time to time may be deter-
mined, and that corp can aid in any other 1. Allocation of power and
manner any person of which any obligation control (Campos)
or in which any interest is held by this corp,
or in the affairs of prosperity of which this 3 levels of control in the corporate hierarchy:
corp has a lawful interest.
Corp has given donations to EEs in the past, 1. the Board of Directors or Trustees
and to political campaigns. - responsible for corporate policies and the
general management of the business and
Assuming donation was ultra vires, donation
affairs of the corporation
was ratified, making the act valid and
enforceable.
2. the Officers
Ultra vires act: outside scope of powers - in theory, execute the policies laid down
granted to it by its articles of incorp. Not by the board
necessarily illegal, because ultra vires acts - in practice, often have wide latitude in de-
can become valid by ratification and termining the course of business opera-
estoppel. tions

3. The stockholders or members

 - have residual power of fundamental cor- Orientalist Co. et. al., 38 Phil. 634;
porate changes 1918); Wolfson v. Manila Stock Ex-
change, 72 Phil. 492; 1941)
NOTE: BOD can delegate its function to the  “Unless Otherwise Provided” – may
officers and also to committees appointed by it pertain to instances where a manage-
(Executive Committee, § 35) ment contract is entered hence corpo-
rate powers are exercised by the man-
aging company and not the board
2. Who Exercises Corporate  Authority of BOD can be delegated to
agents/ officers/ committees (AOI,
Powers statutes, by-laws, resolutions) (YU
Chuck v Kong Li Po, 46 Phil 608). Del-
2.1 BOARD OF DIRECTORS egation may be explicit, implicit, or
based on exigencies of the business
1) Authority; repository of corporate powers (cf. Board of Liquidators v Kalaw)
 The board of directors or trustees  The BOD may delegate its corporate
are responsible for corporate poli- powers to either an executive commit-
cies and general management of the tee or officials or contracted man-
business affairs of the corporation agers. The delegation, except for the
 Directors have a fiduciary duty to executive committee, must be for spe-
the corp and to the SHs cific purposes. The delegation makes
 General Rule: once elected, SHs the officers agents of the corporation.
have no right to interfere with the For such officers to be deemed fully
BOD. Exceptions: removal of direc- clothed by the corporation to exercise
tor (§28), amendments of AOI (§16), a power of the BOD, the latter must
fundamental changes (§6), declara- specially authorize them to do so.
tion of stock dividends (§43), enter- (ABS-CBN Broadcasting Corp v CA,
ing into management contracts 1999)
(§44), fixing of consideration of no-  The directors or trustees shall not act
par shares (§62), and fixing of com- individually nor separately but as a
pensation of directors (§30) body in a lawful meeting. Contracts
 Unless otherwise provided in the entered into without a formal board
Corp Code, the Board of Directors resolution does not bind the corpora-
control and exercise: tion except when majority of the
o the corporate powers of cor- board has knowledge of the contract
poration and the contract benefited the corpo-
o all business conducted, ration. (ratification)
o all property of such corpora-  Directors owe their duties to corpora-
tion (§23) tion as a whole rather than to individ-
 The board exercises almost all cor- ual shareholders of classes of share-
porate powers, lays down all busi- holders
ness policies and is responsible for  Business Judgment Rule
the efficiency of management. The - Sec 23 embodies the essence of the
stockholders have no right to inter- “business judgment rule,” that unless
fere with the board’s exercise of its otherwise provided in the Code, all
powers and functions except where corp powers and prerogatives are
the law expressly gives them the fi- vested directly in the BOD.
nal say, like in cases of removal of a Consequently, the rule has two
director, amendment of articles of consequences:
incorporation, and other major  The resolution, contracts and
changes (Cf §6, 42, 43). transactions of the BOD, cannot
 Limitations on the BOD’s authority be overturned or set aside by the
or powers: SHs or members and not even by
1. Action by SHs in order to elect a the courts under the principle that
BOD the business of the corp has been
2. Certain act of the corp that re- left to the hands of the BOD; and
quire joint action of the SHs and  Directors and duly authorized offi-
BOD cers cannot be held personally li-
 Their resolutions on matters other able for acts or contracts done
than the exceptions are legally not with the exercise of their business
effective nor binding and may be judgment.
treated as merely advisory or may Exceptions:
be totally disregarded. (Ramirez v.
 o When the Corp Code ex- ness activities totally closed to
pressly provides otherwise; aliens
o When the directors or officers o Disqualification of directors,
acted with fraud, gross negli- trustees or officers (§27):
gence or in bad faith; and  Convicted by final judgment
o When directors or officers act of an offense punishable by
against the corp in conflict-of- imprisonment for a period ex-
interest situation ceeding six (6) years, or
 Violation of this Code commit-
1) Requirements ted within five (5) years prior
 Qualifying share (§23)- Every direc- to the date of his election or
tor must own at least one (1) share appointment
of the capital stock of the corpora-  By-laws may provide for addi-
tion of which he is a director, which tional qualifications/disqualifi-
share shall stand in his name on the cations as long as such addi-
books of the corporation. Any direc- tional qualifications/disqualifi-
tor who ceases to be the owner of at cations shall not modify re-
least one (1) share of the capital quirements as prescribed in
stock of the corporation of which he the corporation code or be in
is a director shall thereby cease to conflict with such prescribed
be a director. requirements (§47(5))
o Note: To sit on the BOD is not a
vested right. Ownership of shares
Lee vs. CA (1992) does not automatically equate to
a seat in the BOD
Summons was served upon Lee and Lacdao,
o In widely-held corporations, SEC
president and vice president of ALFA. The two,
mandates the presence of at least
however contended that they are no longer
2 or 20% of its board size, which-
corporate officers of the corporation because of
ever is lesser, independent direc-
the voting trust agreement executed to DBP,
tors (Securities Regulation Code,
hence, not authorized to receive summons.
§38 and Guidelines on the Nomi-
Summons must be served upon DBP
nation and Election of Indepen-
dent Directors, Memo Circ No. 16,
HELD:
2002)
Execution of a voting trust creates a dichotomy
between equitable or beneficial ownership of the
 Term: Directors shall hold office for 1
corporate shares of a stockholder and legal title
year. However, incumbent directors
thereto. The change from the old code to the
shall continue to be directors/trustees
new code with respect to qualifying shares of
until their successors have been
directors is the omission of the phrase “in his
elected and qualified (§23)
own right” pertaining to beneficial ownership of
shares. In the new corpo code, persons may be
2) How elected (§24)
directors if they are stockholders although not
 Manner of election:
“in their own right” hence includes trustees.
o There must be present in person
There is clear indication that to be a director,
or by representative majority of
what is material is legal title and not beneficial
the outstanding capital stock /
ownership. With the execution of the voting trust
member
agreement, Lee and Lacdao were divested of
o In any form; or must be by ballot
their legal title to their shares hence can no
when requested by any voting
longer be directors and are no longer corporate
stock holder or member
officers. Because of this, they are not authorized
o Voting may be in person or by
to receive summons
proxy
 At all elections of directors or trustees,
 Requirements/Disqualifications: there must be present owners of a
o Residence (§23) - a majority of majority of the outstanding capital
the directors or trustees of all stock, or if there be no capital stock, a
corporations organized under majority of the members entitled to
this Code must be residents of vote.
the Philippines  Every stockholder entitled to vote
o Nationality – no requirement for shall have the right to vote the num-
citizenship of a director or ber of shares of stock outstanding, at
trustee so even an alien may be the time fixed in the by-laws, in his
elected as such excepts in busi- own name on the stock books of the
 corporation, or where the by-laws elected but may not cast more
are silent, at the time of the election than one vote for one candidate.
 Time to determine voting right  Candidates receiving the highest num-
o As per share standing in one’s ber of votes shall be declared elected.
name at the time fixed by the  Any meeting of the stockholders or
By-Laws members called for an election may
o Where By-laws silent, at time of adjourn from day to day or from time
election to time but not sine die or indefinitely
 Cumulative voting – A system of vot- if:
ing designed to increase the voting o For any reason, no election is
power of minority stockholders in held, or
the election of corporate directors o If there are SHs not present or
when more than one director is to be represented by proxy at the meet-
elected. ing, the owners of a majority of
o A stockholder shall have as the outstanding capital stock, or if
many votes as he has number of there be no capital stock, a major-
shares times the number of di- ity of the member entitled to
rectors up for election vote.
o Cumulative voting is allowed for  Since the provision requires presence,
election of members of the meeting of stockholders is required
Board in a stock corporation.
Members of the Board in a Non- 3) How Removed (§28)
stock Corporation shall not be  Any director or trustee of a corpora-
voted cumulatively unless tion may be removed from office by a
specifically provided for in the vote of the stockholders holding or
By-laws. representing 2/3 of the outstanding
o The total number of votes cast capital stock, or if the corporation be a
by a stockholder shall not ex- Non-stock Corporation, by a vote of
ceed the number of shares 2/3 of the members entitled to vote
owned by him as shown in the (with or without cause).
books of the corporation multi-  Note: Such removal shall take place
plied by the whole number of di- either at a regular meeting or at a
rectors to be elected special meeting called for the purpose
o Gives the minority an opportu- of removal of Directors or Trustees,
nity to elect a representative to with previous notice of the time and
the BOD. Cannot itself give the place of such meeting, as well as the
minority control of corporate af- intention to propose such removal. If
fairs but may affect and limit the the officers refuse to call a meeting to
extent of majority’s control consider the removal of the Director,
o Theoretically, this allows the mi- it may be called at the instance of any
nority block to dominate the stockholder or member, but with due
election of BOD. However, the notice.
minority still needs the majority  Removal without cause may not be
in order to constitute a quorum. used to deprive minority stockholders
o By-laws cannot provide against or members of the right of representa-
cumulative voting since this tion to which they may be entitled to
right is mandated in §24 under Section 24
(mandatory in a stock corpora-  The board cannot remove a director or
tion – statutory right of SHs) trustee as member of the board
o In determining how many shares
are needed to vote for the de- Roxas v Dela Rosa (1926)
sired # of directors (necessary
when one campaigns for prox- Binalbagan Estate Inc is engaged in the mfg of
ies), the following formula may raw sugar from canes. Possessors of majority of
be followed: [ (outstanding shares formed a voting trust composed of 3
shares) x (desired # of direc- trustees. Trustees now controlled 3,000 out of
tors) + 1 ] / [ (total # of direc- 5,500 shares.
tors) + 1 ]
o Unless otherwise provided in the Voting trust was able to vote BOD, without
AOI or in the by-laws, members opposition from minority.
of corporations which have no
capital stock may cast as many Trustees soon wanted to remove the directors
votes as there are trustees to be they had elected, even if their terms had not yet
expired. Voting trust caused SEC to issue notice tion, the directors shall not receive
for a special gen mtg to elect a new BOD. any compensation, except for reason-
able per diems.
Held: Under the law, directors can only be  Any such compensation (other than
removed by vote of SHs representing at least 2/3 per diems) may be granted to the di-
of the subscribed capital stock entitled to vote. rectors by the vote of the stockholders
When the purpose is to remove directors, it must representing at least a majority of the
be stated in call for meeting. But vacancies in outstanding capital stock at a regular
BOD can be filled by mere majority vote. or special stockholder’s meeting.
 Limit: In no case shall the total yearly
Trust does not have clear 2/3 majority. Voting compensation of directors, as such di-
trust should have stated in notice that purpose rectors, exceed 10% of the net in-
was to remove present BOD. Meeting called by come before income tax of the corpo-
trustees enjoined. ration during the preceding year.
In this case, removal was sought to be done by 
replacing directors
BUT can’t remove thru election of new officers Western Institute of Technology v Salas
bec directors have fixed term of office (1997)

In a meeting of the Board of Trustees of Western

Institute of Technology, a resolution was passed
Note: §28 need not be resorted to in all
granting monthly compensation to officers
instances. If removal is for cause
respondents who are members of the Board. The
(mismanagement or abuse of powers, the
resolution is valid. The prohibition with respect
remedy of SHs shall be:
to granting compensation to corporate
a) Receivership;
directors/trustees under Section 30 of the
b) Injunction if the act has not yet been
Corporation Code is not violated since the
done;
compensation is being given to private
c) Dissolution if abuse amounts to a
respondents in their capacity as officers of WIT
ground for quo warranto but Sol Gen
and not as board members.
refuses to act;
d) Derivative suit or complaint filed with
the RTC; 6) How corporate powers exercised – Board
e) Criminal action must act as a body in a meeting

4) Vacancies (§29) Requisites of board meetings

Vacancies in the Board of Directors or  Meeting of the Board duly assembled
Trustees MAY be filled by a vote of at  Existence of quorum
least a majority of the remaining  Decision of the majority of the quorum
directors or trustees; if still constituting a duly assembled (EXCEPTION: Election
quorum of directors – requires a vote of major-
ity of all the members of the board)
In the following cases, the stockholders
or members shall fill the vacancy WHEN? (§53)
(REAQ):  Regular meetings of directors or
a. When the remain- trustees shall be held monthly, unless
ing directors or trustees do not con- the by-laws provide otherwise.
stitute a quorum;  Special meetings of the board of di-
b. If the vacancy is rectors or trustees may be held at any
caused by the removal of a director time upon the call of the president or
or trustee as provided in the by-laws.
c. If the vacancy is
caused by the expiration of term; WHERE? (§53)
and Meetings of directors or trustees of
d. In case of in- corporations may be held anywhere in or
crease in the number of directors or outside of the Philippines, unless the by-
trustees as a result of an amend- laws provide otherwise.
ment of the articles authorizing such
increase WHO MAY ATTEND?
The members of the Board themselves;
5) Compensation (§30) directors in Board meetings cannot be
 In the absence of any provision in represented or voted by proxies.
the By-laws fixing their compensa-
 WHO PRESIDES? (§54) Ongkingco v. NLRC (1997)
The president shall preside at all
meetings of the directors or trustee, Where the By-laws of the condominium
unless the by-laws provide otherwise. corporation specifically includes the position of
“Superintendent/Administrator” in a roster of
NOTICE REQUIREMENTS (§53) corporate officers, then such position is clearly a
 Notice of regular or special corporate officer position and issues of
meetings stating the date, time and reinstatement would be within the jurisdiction of
place of the meeting must be sent to the SEC and not the NLRC.
every director or trustee at least one
(1) day prior to the scheduled meet- Tabaug v. NLRC (1997)
ing, unless otherwise provided by
the by-laws. When the By-laws of the corporation provide that
 A director or trustee may waive one of the powers of the Board of Trustees is “to
this requirement, either expressly or appoint a Medical Director,
impliedly Comptroller/Administration, Chief of Services,
and such other officers as it may deem
QUORUM REQUIREMENTS (§25) necessary and prescribe their powers and duties”
Unless the articles of incorporation or then such specifically designated positions
the by-laws provide for a greater should be considered “corporate officers”
majority, a majority of the number of positions….
directors or trustees as fixed in the
articles of incorporation shall constitute 2. Disqualifications (§27)
a quorum for the transaction of No person convicted by final judgment of
corporate business, and every decision an offense punishable by imprisonment for
of at least a majority of the directors or a period exceeding six (6) years, or a
trustees present at a meeting at which violation of this Code committed within
there is a quorum shall be valid as a five (5) years prior to the date of his
corporate act, except for the election of election or appointment, shall qualify as a
officers which shall require the vote of a director, trustee or officer of any
majority of all the members of the board. corporation.

2.2 CORPORATE OFFICERS 3. Authority of corporate officers

 The authority of corporate officers to
AND AGENTS bind the corporation is usually not
considered inherent in their office but
1. Minimum set of officers and Qualifi- is derived from law, the corporate by-
cation (§25) laws or by delegation from the BOD
 Immediately after their election, the either expressly or impliedly by habit,
directors of a corporation must for- custom, or acquiescence in the gen-
mally organize the election of: eral course of business
a. A president, who shall be a di-  Gen rule: A person dealing with a cor-
rector porate officer is put on inquiry as to
b. A treasurer who may or may not the scope of the latter’s authority but
be a director (SEC opinion that an innocent person cannot be preju-
the treasurer must be a resident diced if he had the right to presume
and citizen of the Phil.) under the circumstances the authority
c. A secretary who shall be a resi- of the acting officers.
dent and citizen of the Philip-
pines, and
d. Such other officers as may be
People’s Aircargo vs. CA (1998)
provided for in the By-laws
 Any two (2) or more positions may
Corporate President Punsalan solicited a proposal
be held concurrently by the same
from respondent Sano for the preparation of a
person, except that no one shall act
feasibility study. Sano prepared feasibility study
as president and secretary or as
and was paid for it. Another proposal for the
president and treasurer at the same
preparation of operations manual was solicited
time.
from Sano and was accepted by Punsalan.
 Additional qualifications of officers
Manual was prepared and approved by
may be provided for in the by-laws
Commissioner of Bureau of Customs, seminar-
(§47(5))
workshops conducted but payment was not
made
  Must be provided in the by-laws and
HELD: Corporation is liable to Sano for services must be composed of not less than 3
rendered. General rule is that absent the members of the board
authority from the Board of Directors, no person,  Essential the executive committee
not even its officers, can bind the corporation. acts by majority vote of all the members
However, acts of person in behalf of the
corporation may be ratified. When corporation
previously allowed First Contract, it gave 2.4 STOCKHOLDERS OR MEM-
president apparent authority to execute in its BERS
behalf the other contract, and is estopped from
denying such authority. Corporation accepted
Stockholders action is needed in major
operations manual and the seminars and have
changes(§6) in the corporation which would
already benefited from the contract. This ratifies
affect their contract with the corporation and
the act of the president and makes it binding
although such action is usually initiated by the
upon the corporation. President is presumed to
board, it is not sufficient to give them effect.
have authority to act within the domain of the
Stockholders or members approval expressed
general objectives of the corporation
in a meeting duly called and held for the
purpose is still necessary. Exception:
Rural Bank of Milaor vs. Ocfemia (2000)
 Corporations may be bound by
unanimous agreement of its stockholders
When a bank, by its acts and failure to act, has
although expressed elsewhere than at a
clearly clothed its manager with apparent
meeting
authority to sell an acquired asset in the normal
course of business, it is legally obliged to confirm
7) Requirements of stockholders’ or
the transaction by issuing a board resolution to
members meeting (notice and quo-
enable the buyers to register the property in
rum)
their names. It has a duty to perform necessary
and lawful acts to enable the other parties to
WHEN? (§50)
enjoy all benefits of the contract which it had
Regular meetings of stockholders or
authorized.
members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on
any date in April of every year as
2.3 BOARD COMMITTEES determined by the board of directors or
trustees.
(SEC opinion-requirin all members must be mem-
bers of the board) WHERE?
 The by-laws of a corporation may  Stockholder's or member's meet-
create an executive committee, com- ings, whether regular or special, shall
posed of not less than three members of be held in the city or municipality
the board, to be appointed by the board. where the principal office of the corpo-
(§35) ration is located, and if practicable in
 Said committee may act, by majority the principal office of the corporation:
vote of all its members, on such specific Provided, That Metro Manila shall, for
matters within the competence of the purposes of this section, be consid-
board, as may be delegated to it in the ered a city or municipality. (§51)
by-laws or on a majority vote of the  Members of non-stock corpora-
board, except with respect to: tions may provide in by-laws that
o Approval of any action for which meetings may be held any place even
shareholders' approval is also re- outside the place where the principal
quired; office is located provided proper no-
o The filling of vacancies in the board; tice is sent and that it is within the
Philippines (§93)
o The amendment or repeal of by-laws
or the adoption of new by-laws;
WHO MAY ATTEND AND VOTE?
o The amendment or repeal of any
Stockholders may attend and vote in
resolution of the board which by its
person, or by proxy.
express terms is not so amendable
a. Pledgors, mortagors, executors, re-
or repealable; and
ceivers and administrators (§55)
o A distribution of cash dividends to
 In case of pledged or mortgaged
the shareholders.
shares in stock corporations, the
 Cannot go as far as to render the
pledgor or mortgagor shall have
BOD powerless and free from all respon-
sibilities imposed on it by law (Campos)
 the right to attend and vote at sen one of their number as presiding
meetings of stockholders officer. (§50)
o UNLESS, the pledgee or mort-
gagee is expressly given by the NOTICE REQUIREMENTS (§50)
pledgor or mortgagor such right  Written notice of regular meetings
in writing which is recorded on shall be sent to all stockholders or
the appropriate corporate members of record at least two (2)
books. weeks prior to the meeting, unless a
 Executors, administrators, re- different period is required by the by-
ceivers, and other legal repre- laws
sentatives duly appointed by the  Written notice of special meetings
court may attend and vote in shall be sent at least one (1) week
behalf of the stockholders or prior to the meeting, unless otherwise
members without need of any provided in the by-laws.
written proxy.  Notice of any meeting may be
b. Joint owner of stocks (§56) waived, expressly or impliedly, by any
The consent of all the co-owners stockholder or member
shall be necessary in order to vote,  Failure to give notice would ren-
UNLESS there is a written proxy, der a meeting voidable at the instance
signed by all the co-owners, of an absent stockholder, who was not
authorizing one or some of them or notified of the meeting (Board v. Tan,
any other person to vote such share 105 Phil. 426(1959).
or shares PROVIDED, That when the  Attendance to a meeting despite
shares are owned in an "and/or" want of notice will be deemed implied
capacity by the holders thereof, any waiver. (Campos)
one of the joint owners can vote said  All proceedings had and any busi-
shares or appoint a proxy therefor. ness transacted at any meeting of the
c. Treasury shares (Cf §41, 57. 68) stockholders or members, if within the
 Definition (§9): These are powers or authority of the corporation,
shares of stock which have been shall be valid even if the meeting be
issued and fully paid for but sub- improperly held or called, provided all
sequently re-acquired by the is- the stockholders or members of the
suing corporation by purchase, corporation are present or duly repre-
redemption, donation or through sented at the meeting. (§51)
some other lawful means. Such
shares may again be disposed of QUORUM REQUIREMENTS (§52)
for a reasonable price fixed by  Unless otherwise provided for in
the BOD. the Code or in the by-laws, a quorum
 Treasury shares shall have no shall consist of the stockholders repre-
voting rights as long as such senting a majority of the outstanding
shares remain in the Treasury. capital stock or a majority of the
(§57) members in the case of non-stock cor-
porations.
WHO PRESIDES?  By-laws may provide for a greater
 The president shall preside at all or lesser quorum (§47(3))
meetings of of the stockholders or  Where quorum is present at the
members, unless the by-laws pro- start of a lawful meeting, stockholders
vide otherwise. (§ 54) present cannot without justifiable
 When there is no person authorized cause break the quorum by walking
to call a meeting, the SEC, upon pe- out from said meeting so as to defeat
tition of a stockholder or member on the validity of any act proposed and
a showing of good cause therefor, approved by the majority (Johnston v
may issue an order to the petition- Johnston, 1965 CA decision)
ing stockholder or member directing
him to call a meeting of the corpora- WHY ATTEND MEETINGS?
tion by giving proper notice required  To make substantial changes
by this Code or by the by-laws. (§  To exercise control
50)  To be apprised of events
 The petitioning stockholder or mem-  To elect BOD
ber shall preside thereat until at  To confirm actions requiring confirma-
least a majority of the stockholders tion
or members present have been cho-
8) Corporate Acts Requiring Approval plish its primary purpose as
of ALL Stockholders (including non- stated in the AOI. Rules in case a
voting shares) corporation will invest its funds in
another corporation
a. AMENDMENT OF ARTICLES OF INCOR- o If it is the same purpose or in-
PORATION – discussed in Chapter XIV cidental or related to its pri-
mary purpose, the board can
b. EXTEND OR SHORTEN CORPORATE invest the corporate fund
TERM – discussed in Chapter XIV without the consent of the
stockholders. What is re-
c. INCREASE OR DECREASE OF CAPITAL quired is only the vote of the
STOCK – discussed in Chapter XIV majority of the BOD. No ap-
praisal right
d. INCURRING, CREATING OR INCREAS- o If the investment is in another
ING BONDED INDEBTEDNESS – discussed corporation of different busi-
in Chapter XI ness or purpose, the affirma-
tive vote of majority of the
e. SALE, LEASE, MORTGAGE OR OTHER board consented by 2/3 OS
DISPOSITION OF SUBSTANTIALLY ALL capital stock is required
CORPORATE ASSETS – discussed in o Apparent conflict: §36(7) lim-
Chapter XVII its corp powers to those rea-
sonably and necessarily re-
f. INVESTMENT OF FUNDS IN ANOTHER quired. But §42 implies that
CORPORATION OR BUSINESS (§42) can invest in another busi-
 A private corporation ness as long as there’s 2/3
may invest its funds in any other vote. Campos says that §42
corporation or business or for should be subject to §36.
any purpose other than the pri- o Accdg to Campos, if articles
mary purpose for which it was of incorp provide that can in-
organized vest in another business, only
 Approval, voting and 2/3 vote needed. Otherwise,
notice requirement should amend articles first.
1) Majority of the board of di-
rectors or trustees and 2. ADOPTION, AMENDMENT AND REPEAL
2) Ratified by the stockholders OF BY-LAWS (§48)
representing at least two-  Voting Requirement: BOD or BOT
thirds (2/3) of the outstand- by a majority vote and the own-
ing capital stock, or by at ers of at least a majority of the
least two thirds (2/3) of the outstanding capital stock, or ma-
members in the case of non- jority of the members of a non-
stock corporations, at a stock corporation, at a regular or
stockholder's or member's special meeting duly called for the
meeting duly called for the purpose, may amend or repeal
purpose. any by-laws or adopt new by-laws
3) Written notice of the pro-  Delegation of power to amend the
posed investment and the BOD: The owners of two-thirds
time and place of the meet- (2/3) of the outstanding capital
ing shall be addressed to stock or two-thirds (2/3) of the
each stockholder or mem- members in a non-stock corpora-
ber at his place of residence tion may delegate to the board of
as shown on the books of directors or trustees the power to
the corporation and de- amend or repeal any by-laws or
posited to the addressee in adopt new by-laws
the post office with postage  Revocation of the delegation of
prepaid, or served person- power to amend: Any power dele-
ally gated to the board of directors or
 Appraisal right - any dis- trustees to amend or repeal any
senting stockholder shall have by-laws or adopt new by-laws
appraisal right shall be considered as revoked
 When SH approval not whenever stockholders owning or
necessary- where the invest- representing a majority of the out-
ment by the corporation is rea- standing capital stock or a major-
sonably necessary to accom- ity of the members in non-stock
 corporations, shall so vote at a ing capital stock entitled to
regular or special meeting vote of the managing corpo-
 Whenever any amendment or ration; or
new by-laws are adopted, such o Where a majority of the mem-
amendment or new by-laws bers of the BOD of the man-
shall be attached to the original aging corporation also consti-
by-laws in the office of the cor- tute a majority of the mem-
poration, and a copy thereof, bers of the BOD of the man-
duly certified under oath by the aged corporation
corporate secretary and a ma- Term of management contract: not
jority of the directors or longer than five years
trustees, shall be filed with the
SEC the same to be attached to c. F
the original articles of incorpora- IXING CONSIDERATION OF NO-PAR
tion and original by-laws. SHARES (§62) – The issued price of no-
 The amended or new by-laws par value shares may be fixed in the
shall only be effective upon the AOI or by the BOD pursuant to author-
issuance by the Securities and ity conferred upon it by the AOI or the
Exchange Commission of a certi- by-laws, or in the absence thereof, by
fication that the same are not the stockholders at a meeting duly
inconsistent with this Code. called for the purpose representing at
least a majority of the outstanding
3. MERGER AND CONSOLIDATION – dis- capital stock.
cussed in Chapter XVII
d. F
4. DISSOLUTION OF THE CORPORATION IXING COMPENSATION OF DIRECTORS
– discussed in Chapter XVI (§30) – Any such compensation (other
than per diems) may be granted to
5. Other instances requiring stockhold- the directors by the vote of the stock-
ers’ action (voting shares only) holders representing at least a major-
ity of the outstanding capital stock at
a. DECLARATION OF STOCK DIVIDENDS – a regular or special stockholder’s
discussed in Chapter XIII meeting.

b. MANAGEMENT CONTRACTS (§44) – any 6. Appraisal right

contract whereby a corporation un- One of the ways to get out of the corporation.
dertakes to manage or operate all or It is an exception to the trust fund doctrine.
substantially all of the business of The other way is to sell the shares of stock.
another corporation, whether such
contracts are called service con-
tracts, operating agreements or oth- a. Definition (§81)
erwise This is a remedy available to a
stockholder who dissented and voted
Approval and Voting Requirement: against certain extraordinary matters
(§44) to withdraw or get out of the
 Approval by the board corporation by demanding payment of
of directors, and the value of his shares, as provided in
 Approval by stockhold- the code.
ers owning at least the majority
of the outstanding capital stock, b. Instances of appraisal right (§81)
or by at least a majority of the a) In case any amendment to the ar-
members of both the managing ticles of incorporation which has
and the managed corporation the effect of (cf §16):
(at meeting duly called) - changing or restricting the
 2/3 vote required of the rights of any stockholder or
managed corporation when: class of shares, or
o Where a stockholder or - authorizing preferences in
stockholders representing any respect superior to
the same interest of both those of outstanding shares
the managing and the man- of any class, or
aged corporations own or - extending or shortening
control more than one-third the term of corporate
(1/3) of the total outstand- existence (cf §37)
b) In case of sale, lease,
 exchange, transfer, mortgage, price, the stockholder shall forth-
pledge or other disposition of all or with transfer his shares to the cor-
substantially all of the corporate poration.
property and assets as provided in
the Code (cf §40); and d. Effect of demand and termination of
c) In case of merger or consolida- right (§83)
tion From the time of demand for payment
d) In case of investment of corpo- of the fair value of a stockholder's
rate funds in another corpora- shares until either (1) the
tion or business or for any other abandonment of the corporate action
purpose (§42) involved or (2) the purchase of the
said shares by the corporation, all
c. What are the requirements for the rights accruing to such shares,
successful exercise of appraisal including voting and dividend rights,
right? (Section 82 and 86) shall be suspended,
 By making a written demand on EXCEPT the right of such
the corporation within thirty (30) stockholder to receive payment of the
days after the date on which the fair value thereof, PROVIDED, if the
vote was taken for payment of dissenting stockholder is not paid the
the fair value of his shares value of his shares within 30 days
o Failure to make the demand after the award, his voting and
within such period shall be dividend rights shall immediately be
deemed a waiver of the ap- restored.
praisal right.
 By surrendering the certificate e. When right to payment of fair value of
or certificates of stock, the cor- the shares ceases (§84)
poration shall pay the fair value
thereof as of the day prior to the  No demand for payment may be
date on which the vote was withdrawn unless the corporation
taken, excluding any apprecia- consents thereto.
tion or depreciation in anticipa-  Instances when right to payment
tion of such corporate action ceases:
(provided that the proposed 1) If such demand for payment
corp action is implemented or is withdrawn with the consent
affected). of the corporation
 If within a period of sixty (60) 2) If the proposed corporate ac-
days from the date the corpo- tion is abandoned or re-
rate action was approved by the scinded by the corporation
stockholders, the withdrawing 3) If the proposed corporate ac-
stockholder and the corporation tion disapproved by the SEC
cannot agree on the fair value of where such approval is neces-
the shares, it shall be deter- sary,
mined and appraised by three 4) If the SEC determines that
(3) disinterested persons such stockholder is not enti-
o One of whom shall be tled to the appraisal right
named by the stockholder,  In such instances, his status as a
another by the corporation, stockholder shall be restored, and
and the third by the two all dividend distributions which
thus chosen would have accrued on his shares
 The findings of the majority of shall be paid to him.
the appraisers shall be final
 The award shall be paid by the f. Who bears costs of appraisal (§85)
corporation within thirty (30)  Generally, it shall be borne by the
days after such award is made corporation
 No payment shall be made to  Exception: by the SH, when the
any dissenting stockholder un- fair value ascertained by the ap-
less the corporation has unre- praisers is approximately the
stricted retained earnings in its same as the price which the cor-
books to cover such payment poration may have offered to pay
(Cf §41). Ratio: to protect the the SH,
creditors and the remaining SHs  In the case of an action to recover
 Upon payment by the corpora- such fair value, all costs and ex-
tion of the agreed or awarded penses shall be assessed against
 the corporation, unless the re-  Unless otherwise provided in the proxy, it
fusal of the SH to receive pay- shall be valid only for the meeting for
ment was unjustified. which it is intended. No proxy shall be
valid and effective for a period longer than
g. Notation on certificates; rights of five (5) years at any one time (continuing
transferee (§86) proxy).
 Within ten (10) days after de-  Right of proxy can be waived only for
manding payment for his close corporations (§89)
shares, a dissenting SH shall  Senses of proxy:
submit the certificates of stock a. Person duly authorized by stock-
representing his shares to the holder or member to vote in his behalf
corporation for notation thereon in a SHs’ or members’ meeting. Proxy
that such shares are dissenting is an agent for a special purpose thus
shares. the general rules of agency would nor-
 His failure to do so shall, at the mally apply to the relationship created
option of the corporation, termi- by proxy
nate his rights. b. Formal authority given by the
 Effect of transfer of certificates holder of the stock who has the right
bearing notation: to vote it to another to exercise the
1) The rights of the transferor voting rights of the former.
as a dissenting stockholder Instrument or document which evi-
shall cease; dences the authority of the agent.
2) The transferee shall have all  Failure to comply with requirements will
the rights of a regular stock- render proxy void and ineffective.
holder; and  To what extent does the proxy holder ex-
3) All dividend distributions ercise his discretion? Extent of authority
which would have accrued given by the SH
on such shares shall be paid  Proxy is revocable even when it is ex-
to the transferee. pressly provided to be irrevocable unless
it is coupled with an interest. The
Note: right to vote is lost only if stock Supreme Court has held that a proxy in fa-
becomes delinquent (§71) vor of the pledge of the shares subject of
the proxy as sufficient interest to render
such proxy irrevocable. (Alejandrino vs. De
3. Devices Affecting Control Leon, 1943)
 Revocation may be made orally, in writing
or implied:
General Rule: Extent of control is proportional to
a. Appearance of the stockholder at
the number of shares owned by the SH
the meeting will terminate the proxy
Exceptions: proxy device, voting trust
b. Death of the stockholder will also
agreements, pooling and voting agreements,
terminate the proxy
cumulative voting, classification of shares,
restriction on transfer of shares, additional
qualifications for directors, founder’s shares, 3.2 VOTING TRUST AGREEMENT(§59)
management contracts, and unusual quorum and  Definition: An arrangement created by
voting requirements one or more stockholders for the purpose
of conferring upon a trustee or trustees
the right to vote and other rights pertain-
3.1 PROXY (§58, cf §20, Sec Regula-
ing to the shares for a period not exceed-
tion Code) ing five (5) years at any time (Villanueva).
 Stockholders and members may vote in The arrangement is embodied in a docu-
person or by proxy in all meetings of ment called a voting trust agreement
stockholders or members. (VTA)
 Requirements of proxies:  A voting trust, which is specifically re-
a. In writing (oral proxies are not quired as a condition in a loan agreement,
valid) may be for a period exceeding five (5)
b. Signed by the stockholder or years but shall automatically expire upon
member full payment of the loan
c. Filed before the scheduled  Essence: separation of real ownership
meeting with the corporate secre- and voting rights
tary  Requirements of a VTA:
 By-laws can also impose additional re- a. In writing
quirements (ex. Must be notarized) b. Notarized
 c. Shall specify the terms and condi- for a majority group of shareholders to dis-
tions thereof pose of a beneficial interest in a large pro-
d. Certified copy of such agreement portion of their shares and still retain con-
shall be filed with the corporation trol of the corporation through the voting
and with the SEC trustee
o OTHERWISE, said agreement is in-  Under the prevailing view, a voting
effective and unenforceable trust should have a legitimate business
 Procedure: purpose to promote the best interests of
a. The certificate or certificates of the corporation, or even to protect the le-
stock covered by the voting trust gitimate interests of others in the corpora-
agreement shall be cancelled and tion (Ballantine, cited in Campos)
new ones shall be issued in the  No principal-agent relationship
name of the trustee or trustees stat-  The trustee has unlimited authority.
ing that they are issued pursuant to The only limitation is that he should act for
said agreement. the benefit of the SH (fiduciary obligation)
b. In the books of the corporation,  Voting trust certificates – issued by
it shall be noted that the transfer in the trustees (not the corp). These certifi-
the name of the trustee or trustees cates confirm (1) that a trustee has been
is made pursuant to said voting trust constituted, (2) the extent of shares, and
agreement. (3) the participation of the SH in the VTA
c. The trustee or trustees shall ex-  The trustee can’t dispose of the block
ecute and deliver to the transferors of shares/ receive dividends. Can only
voting trust certificates, which shall vote
be transferable in the same manner  The SH can revoke the VTA on the
and with the same effect as certifi- ground of breach of fiduciary obligations
cates of stock.  Status of transferee and transferor:
 Right to inspect VTA: The voting a. Voting trustee is only a share
trust agreement filed with the corpora- owner vested with apparent legal title
tion shall be subject to examination by for the sole purpose of voting upon
any stockholder in the same manner as stocks that he does not own
any other corporate book or record. The b. Transferring stockholder retains
transferor and the trustee or trustees the right of inspection of corporate
may exercise the right of inspection of books which he can exercise concur-
all corporate books and records in accor- rently with the voting trustee
dance with the provisions of this Code.
 Any other stockholder may transfer  Powers and rights of voting trustees:
his shares to the same trustee or a. Right to vote and other rights pertain-
trustees upon the terms and conditions ing to the shares in their names sub-
stated in the voting trust agreement, ject to terms and conditions of and for
and thereupon shall be bound by all the the period specified in the agreement
provisions of said agreement. b. Vote in person or by proxy unless
 Restriction: No VTA shall be entered agreement provides otherwise
into for the purpose of circumventing the c. Rights of inspection of corporate
law against monopolies and illegal com- books and records
binations in restraint of trade or used for d. Legal title holder – qualified to be a di-
purposes of fraud. rector
 Automatic expiration of rights under The clear intent is that in order to
the VTA: Unless expressly renewed, all be eligible as director, what is ma-
rights granted in a voting trust agree- terial is the legal title to, not the
ment shall automatically expire at the beneficial ownership of, the stock
end of the agreed period. The voting as a[appearing on the books of a
trust certificates as well as the certifi- corporation. Therefore, a director
cates of stock in the name of the trustee who executes a voting trust
or trustees shall thereby be deemed can- agreement over all his shares, re-
celled and new certificates of stock shall mains only a beneficial owner,
be reissued in the name of the transfer- and therefore is automatically dis-
ors. qualified from his directorship.
 The voting trustee or trustees may (Lee v. CA, 1992)
vote by proxy unless the agreement pro-  Limitations on voting trust agree-
vides otherwise. ments:
 Purpose – to make possible a unified a. should not exceed 5 years except
control of the affairs of the corporation if a condition in a loan agreement,
and consistent policy; to make possible
 shall automatically expire upon full shares. Batjak executed a 1st mortgage on all its
payment of the loan properties to PNB in exchange for a credit facility etc.
b. must not be for purposes of cir- Next, a Voting Trust Agreement was executed in
cumventing the law against monop- favor of NIDC by SHs representing 60% of Batjak.
olies and illegal combinations in re- Period of 5 years, irrevocable. During this time, all
straint of trade dividends to be paid to SHs. When Batjak became
c. must not be used for purposes insolvent, PNB foreclosed the mortgaged properties.
of fraud When Batjak failed to redeem, it transferred
d. must be in writing, notarized, ownership to NIDC.
specify the terms and conditions Batjak later sued NIDC, asking for the turn-over of all
thereof the assets and in the alternative, asked for
e. certified copy must be filed with receivership.
corporation and SEC otherwise un- Held:
enforceable *Receiver is appointed if applicant has interest in
f. agreement is subject to exami- property. But title of properties is now with NIDC.
nation by stockholder *Batjak did not impugn validity of the foreclosure
g. shall automatically expire at the sales. Also, no evidence that prop is in danger of loss,
end of the agreed period removal or material injury if receiver not appointed.
h. vote in person or by proxy un- What was assigned to NIDC was only power to vote
less agreement provides otherwise shares of stock of Batjak. Such power includes
i. rights of inspection of corporate authority to execute any agreement or doc necessary
books and records to express consent or assent to any matter by SHs.
Voting trust did not provide for transfer of assets.
Distinction between proxy and voting trust What was stipulated to be returned were only certifs
of stock. Voting trust transfers only voting or other
Proxy VTA rights pertaining to shares or control over the stock.
Legal title No legal title Acquires legal title
Revocability Revocable unless Irrevocable if
coupled with validly executed 3.3 POOLING AND VOTING AGREEEMENTS
interest BUT SH can  Agreement between 2 or more stockhold-
revoke if there’s a ers to vote their shares in the same way
breach of  There must be a valuable consideration for
fiduciary each party
obligation  Usually relate to election of directors
Extent of Can only act at a Not limited to any  Parties often provide for arbitration in case
power specified particular meeting of disagreement. Note: arbitrator is not
stockholder’s or like a trustee. The former has no voting
member’s rights
meeting  Valid as long as they do not limit the dis-
When to Absence of the Even when owner cretion of the BOD in the management of
vote owner is present corporate affairs or work any fraud against
Capacity to stockholders not party to the contract.
Can’t be voted as Can be voted as a
be a Thus, it is void if it provides that directors,
a director, unless director.
director once elected, should vote for certain per-
he is also a SH of Considered as the
sons as officers. (McQuade v. Stoneham,
record (owns SH of record in
263 NY 323 (1934)) EXCEPTION: Close corps
other shares) the books of the
may provide that a VTA can interfere with
corp
Subject
discretion of the BOD
Voting rights Shares + voting
Matter  Does not involve a transfer of stocks but is
rights
merely a private agreement
Duration Usually shorter Usually longer but  No transfer of ownership and voting rights
but can’t exceed 5 can’t exceed 5  Agreements by stockholders in close cor-
years years except in porations (§100):
loan agreements o Agreements by and among stock-
holders executed before the formation
and organization of a close corpora-
Natl Investment & Dev’t Corp v Aquino (1988) tion, signed by all stockholders, shall
survive the incorporation of such cor-
Batjak, a Fil-Am corp, owed money to PNB. Its oil mills poration and shall continue to be valid
were also mortgaged to other banks. They further and binding between and among such
borrowed money from NIDC, a wholly owned stockholders, if such be their intent, to
subsidiary of PNB, to pay off the mortgages. In return, the extent that such agreements are
NIDC got preferred shares, convertible into common not inconsistent with the articles of in-
 corporation, irrespective of where notarized required
the provisions of such agreements
are contained, except those required Copy must Copy must be Merely a
by this Title to be embodied in said be filed with filed with SEC contract
articles of incorporation. corp sec between SHs
o An agreement between two or Transfer of
more stockholders, if in writing and legal title to
signed by the parties thereto, may trustee
provide that in exercising any voting
rights, the shares held by them shall Regular Absolute Owner still
be voted as therein provided, or as voting rights voting exercises voting
they may agree, or as determined in rights, subj rights
accordance with a procedure agreed Another only to
upon by them. person fiduciary
o No provision in any written exercises duty
agreement signed by the stockhold- voting rights
ers, relating to any phase of the cor- only for a Another
porate affairs, shall be invalidated as specific mtg person
between the parties on the ground (unless exercises
that its effect is to make them part- otherwise voting
ners among themselves. provided) rights
o A written agreement among continuousl
some or all of the stockholders in a y
close corporation shall not be invali- Proxy cannot Trustee can be
dated on the ground that it so re- be director director
lates to the conduct of the business
and affairs of the corporation as to Revocable at Irrevocable, as Revocable by
restrict or interfere with the discre- will, in any long as no consent or
tion or powers of the board of direc- manner misconduct or mutual
tors: Provided, That such agreement fraud termination. If
EXC if unilateral
shall impose on the stockholders
coupled with termination,
who are parties thereto the liabilities
an interest liable for
for managerial acts imposed by this
Code on directors. damages
o To the extent that the stock-
holders are actively engaged in the Max of 5 yrs Max of 5 yrs at
management or operation of the at a time a time (unless
business and affairs of a close corpo- coterminus
ration, the stockholders shall be held with loan)
to strict fiduciary duties to each SEC can pass on validity
other and among themselves. Said
stockholders shall be personally li-
able for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance.
Chapter VIII
PROXY TRUSTEE POOLING AND
VOTING DUTIES OF DIRECTORS AND
AGREEMENTS CONTROLLING STOCKHOLDERS
Principal – Trustee- Consensual
agent beneficiary
1. Duties and Liabilities of
Proxy can’t The only limit Merely an
exceed to his agreement to
Directors
delegated authority: vote in the
authority must be for same way 1.1 Duties In General
benefit of
trustee Duty Violation under §31
(fiduciary Obedience - Willfully and knowingly
obligation) vote for or assent to
Must be in Must be in No formalities patently unlawful acts of
writing writing and the corporation
 Diligence - Guilty of gross
negligence or bad faith in Board of Directors has authority to modify the
directing the affairs of the proposed terms of the contracts of the
corporation corporation for the purpose of making the
terms more acceptable to the other
Loyalty - Acquire any personal or contracting parties…The test to be applied is
pecuniary interest in whether the act in question is the direct and
conflict with their duty as immediate furtherance of the corporation’s
such directors or trustees business, fairly incidental to the express
powers and reasonably necessary to their
 Extent of liability: Directors or trustees exercise. If so, the corporation has the power
shall be liable jointly and severally for all to do it; otherwise not. [Montelibano v.
damages resulting therefrom suffered by Bacolod Murcia Milling Co. (1962)]
the corporation, its stockholders, or
members and other persons Steinberg vs. Velasco
 Directors act as a body in formulating
corp policies and exercise all powers of Steinberg is the receiver of Sibugay Trading.
management. Hence, they are fiducia- Velasco (Pres) and other directors, approved and
ries of the corp. It does not matter who authorized unlawful purchases of company’s stock
elected them. Once elected, they must from Ganzon et al. Accdg to Steinberg, this
represent the interests of all SHs and of diverted funds supposed to be paid to creditors.
the corp as a whole.
 Directors must act only within the corp Ganzon et al resigned as directors before the BoD
powers. If not, they will be liable for approved the purchase of stocks from them, worth
damages, unless they acted in GF and 3,300. At that time, corp owed 13K. The corp also
with due diligence declared dividends in favor of SHs, to be paid in
installments so as “not to affect financial condition
of the corp.” A/R’s which appeared on books were
1.2 Duty of diligence
worthless, because receiver could not collect
 What are required and expected of
them.
directors:
o To possess at least ordinary knowl-
edge and skill to enable them to HELD: If directors dispose of corp prop or pay
make sound business decision away its money without authority, they will be
o To attend directors meetings with required to make good the loss out of their private
reasonable regularity estates.
o To exercise reasonable care in the
management of the corporation Directors are not liable for loss to corp from want
o To keep themselves sufficiently in- of knowledge, or for mistakes of judgment,
formed about the general condition provided they were honest and fairly within the
of the business scope of the powers and discretion confided to
 The degree of care and diligence re- mgt.
quired is usually that which men But acceptance of office of director implies a
prompted by self-interest, generally ex- competent knowledge of the duties assumed, and
ercise in their own affairs. In determin- directors cannot excuse imprudence bec of their
ing whether reasonable diligence has ignorance or inexperience. If they commit error of
been exercised, the particular circum- judgment through mere recklessness or want of
stances of each case must be consid- ordinary prudence or skill, they may be held liable
ered. The nature of the business is an for consequences.
important factor.
Creditors of corp have right to assume that so long
Business judgment rule as there are outstanding debts and liabilities, BoD
GEN RULE: Directors cannot be held liable for will not use assets of corp to purchase its own
mistakes or errors in the exercise of their stock, and that it will not declare dividends to SHs
business judgment if they acted in good when corp is insolvent.
faith, with due care & prudence. Contracts
Directors held liable.
intra vires entered into by the board of
directors are binding upon the corp. & courts  Stock purchases and dividends were
will not interfere. funded out of remaining assets. But
assets < liabilities.
EXCEPTION: If the contracts are so  Ganzon et al were favored bec they
unconscionable & oppressive as to amount were able to get money ahead of
to a wanton destruction of the rights of the creditors
minority.
  Recipients of dividends can be held li-  Exception: When AOI, by-laws, or an
able by receiver. Ratio: SHs are acces- advance contract provides for com-
sories. Remember, they were the ones pensation
who chose directors.  Assuming compensation is intended,
only SHs can fix the amount. In fact,
the SHs should approve the granting
1.3 Duty of loyalty of compensation because this entails
a reduction of the amount that could
The determination as to whether, in a given be distributed to them as dividends
case, the duty of loyalty has been violated SH’s resolution to grant compensation can only
has ultimately to be decided by the court on refer to future services (Barreto v La Previsora
the case’s own merits. The ff. are more Filipina (1932))
common situations involving such conflict of 
interests:
Western Institute of Technology v. Salas
a. Self-dealing director (§32) (1997)
 A contract of the corporation with
one or more of its directors or The position of being chairman and Vice-
trustees is voidable, at the option of Chairman, like that of treasurer and secretary,
such corporation, unless all the fol- are not considered directorship positions but
lowing conditions are present: officership positions that would entitle the
o That the presence of such direc- occupants to compensation. Likewise, the
tor or trustee in the board meet- limitation placed under Sect. 30 of the
ing in which the contract was Corporation Code that directors cannot receive
approved was not necessary to compensation exceeding 10% of the net income
constitute a quorum for such of the corporation would not apply to the
meeting; compensation given to such positions since it is
o That the vote of such director or being given in their capacity as officers of the
trustee was not necessary for corporation and not a board members.
the approval of the contract;
o That the contract is fair and rea-
sonable under the circum- Barreto v La Previsora Filipina (1932)
stances; and
o That in case of an officer, the Barreto, et al. are directors of La Previsora
contract has been previously au- Filipina, a mutual building and loan assoc. By-
thorized by the board of direc- laws provide compensation of 1% of profits to
tors. each director. Compensation to apply
 Where any of the first two conditions retroactively.
set forth in the preceding paragraph
is absent, in the case of a contract Held: By-laws do not create a legal obl to pay life
with a director or trustee, such con- gratuity or pension out of its net profits =>
tract may be ratified by the vote of beyond powers of mutual bldg and loan assoc.
the stockholders representing at
least two-thirds (2/3) of the out- Corp Law authorizes compensation only for
standing capital stock or of at least future services, and cannot authorize continuous
two-thirds (2/3) of the members in a compensation to particular directors after their
meeting called for the purpose employment has terminated for past services
 Full disclosure of the adverse inter- rendered gratuitously by them to the corp.
est of the directors or trustees in- Building and loan associations are founded on
volved must be made at such meet- strict mutuality and equality of benefits and
ing provided, however, that the con- obligations. Any contract or by-law in
tract is fair and reasonable under contravention of a statute is ultra vires and void.
the circumstances There is an implied contract with members that it
 The contract is voidable whether the shall not divert funds or powers to purposes
corporation suffered damages or not other than for which it was created. All members
 The burden of proving fairness is on must participate equally in profits and bear
the director losses. Any diversion of funds to unauthorized
purposes violates principle of mutuality between
b. Fixing compensation of directors and members.
officers (§30)
 General rule: Directors are only en- Also, there was no valid consideration bec the
titled to per diems, which are rea- past services were rendered gratuitously.
sonable
 o Hence, a majority SH can actually
c. Interlocking directors (§33) compete with the corporation if
 A contract between two or more cor- he owns 2/3 of the OCS
porations having interlocking direc- o This provision shall be applicable,
tors shall not be invalidated on that notwithstanding the fact that the
ground alone, except cases of fraud. director risked his own funds in
 The contract is fair and reasonable the venture.
under the circumstances. o Requires prejudice. If there’s no
 If the interest of the interlocking di- prejudice to the corporation, the
rector in one corporation is substan- director or officer can still be held
tial and his interest in the other cor- liable under §31.
poration or corporations is merely o §34 covers only directors. How-
nominal, he shall be subject to the ever, according to Campos, offi-
provisions of the preceding section cers can be held liable under §31
(§32) insofar as the latter corpora- (2nd par.).—“When a director,
tion or corporations are concerned. trustee or officer attempts to ac-
 Stockholdings exceeding twenty quire or acquires, in violation of
(20%) percent of the outstanding his duty, any interest adverse to
capital stock shall be considered the corporation in respect of any
substantial for purposes of interlock- matter which has been reposed in
ing directors. him in confidence, as to which eq-
 Requisites of a valid contract be- uity imposes a liability upon him
tween the corporation and one or to deal in his own behalf, he shall
more of its directors, trustees or offi- be liable as a trustee for the cor-
cers (§32): poration and must account for the
1. That the presence of such direc- profits which otherwise would
tor or trustee in the Board meet- have accrued to the corporation.”
ing in which the contract was  The last paragraph of Section 31 and
approved was not necessary to Section 34 contain the doctrine of cor-
constitute a quorum for such porate opportunity. In case of such
meeting conflict of interests, and the director
2. That the vote of such director or acts against the good of the corpora-
trustee was not necessary for tion, he shall be accountable for the
the approval of the contract profits he obtained, even if he had
3. That the contract is fair and rea- risked his own funds.
sonable under the circum-  Corporate right , opportunity or ex-
stances pectancy arises only when: (a) direc-
4. That in case of an officer, the tors were negotiating on behalf of the
contract with the officer has corporation; (b) the corporation was in
been previously authorized by need of the particular business oppor-
the Board of Directors tunity to the knowledge of the direc-
tors, or (c) the business opportunity
d. Seizing corporate opportunity; Disloyalty was seized and developed at the ex-
(§34) pense and with the facilities of the
 Where a director, by virtue of his corporation. (Litwin v Allen)
office, acquires for himself a busi-
ness opportunity which should be- e. Using inside information (Cf §3.8, 23.2, 27,
long to the corporation, thereby ob- 61, 71.2, Securities Regulation Code)
taining profits to the prejudice of  The fiduciary position of insiders 3, di-
such corporation, he must account rectors, and officers prohibits them
to the latter for all such profits by re- from using confidential information re-
funding the same (§34) UNLESS his lating to the business of the corpora-
act has been ratified by a vote of the tion to benefit themselves or any com-
stockholders owning or representing petitor corporation in which they may
at least two-thirds (2/3) of the out- have a mere substantial interest.
standing capital stock.  The liability of a director or officer
guilty of using inside information is to

3
“Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling
the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material infor -
mation about the issuer or the security that is not generally available to the public; (d) a government employee, or director,
or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about
an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a com -
munication from any of the foregoing insiders (§3.8, Sec Regulations Code)
 the corporation and not to any indi- case of mismanagement or
vidual stockholder
 Since loss and prejudice to the cor- abuse of powers
poration is not a requirement for lia-
bility, the corporation has a cause of  Receivership
action as long as there is unfair use  Injunction if the act has not been done
of inside information  Dissolution if the abuse amounts to a
 It is inside information if it is not ground for quo warranto but the Solicitr Gen-
generally available to others and is eral refuses to act
acquired because of the close rela-  Derivative suit a complaint filed with
tionship of the director or officer of the RTC
the corporation
 General rule: (Majority view) Direc- Uichico, et al. vs. NLRC (1997)
tors owe no fiduciary duty to stock-
holders but they may deal with them The petitioners, who are officers and directors of
at arm’s length. No duty to disclose Crispa, Inc., assailed the decision of the NLRC
facts known to the director or officer holding them solidarily liable with Crispa for the
 Special facts doctrine (Strong v payment of separation pay and backwages to the
Repide, 1909) – Conceding the ab- private respondents. It was the contention of the
sence of a fiduciary relationship in petitioners that the award of separation pay and
the ordinary case, courts neverthe- backwages is a corporate obligation and must
less hold that where special circum- therefore be assumed by Crispa alone.
stances o facts are present which
make it inequitable for the director HELD: While the general rule is that obligations
to withhold information from the incurred by a corporation, acting through its
stockholder, the duty to disclose directors, officers and employees, are its sole
arises and concealment is fraud. liabilities, there are times when solidary liabilities
may be incurred such as in this case where it is
2. Duties and Liabilities of undisputed that petitioners had a direct hand in
the illegal dismissal of respondent employees.
Officers They were the ones, who as high-ranking officers
and directors of Crispa, signed he Board
The provisions on seizing corporate opportunity resolution retrenching the private respondents
and disloyalty (§31¶1 and §34) shall also apply to on the feigned ground of serious business losses
corporate officers that had no basis apart from an unsigned and
unaudited profit and loss statement which had no
Note: Members of the BOD who are also officers evidentiary value whatsoever. This is indicative
are held to a more stringent liability because of bad faith on the part of petitioners for which
they are in-charge of day-to-day activities they can be held jointly and severally liable with
(Campos). Crispa for all the money claims of the illegally
terminated respondent employees.

3. Duty of controlling interest

 A majority stockholder is subject to Tramat Mercantile, Inc. vs. CA (1994)
the duty of good faith when he acts by voting
at a stockholders’ meeting with respect to a Personal liability of a corporate director, trustee
matter in which he has a personal interest or officer along (although not necessarily) with
 Controlling stockholders may dis- the corporation may so validly attach, as a rule,
pose of their shares at any time and at such only when:
price as they choose provided they do not o He assents (a) to a patently unlawful act
pervert these prerogatives by transferring of the corporation, or (b) for bad faith or
office to persons who are known as intending gross negligence in directing its affairs,
to raid the corporate treasury or otherwise or (c) for conflict of interest, resulting in
improperly benefit themselves. damages to the corporation, its stock-
 It is fraudulent for a stockholder to holders or other persons;
buy from another stockholder without dis- o He consents to the issuance of watered
closing his identity stocks or who, having knowledge
 Principal stockholders are likewise thereof, does not forthwith file with the
prohibited from using inside information in corporate secretary his written objection
the purchase and sale of equity security thereto;
o He agrees to hold himself personally and
soidarily liable with the corporation; or
4. Remedies of stockholder in
 o He is made, by a specific provision of
law, to personally answer for his corpo- Minutes of meetings without the signature of the
rate action corporate secretary have no probative value
Reiterated in Atrium Management Corp. v. (NATU v Sec of Labor, 1981)
CA, 2001
What is a stock transfer agent?
o A stock transfer agent is one engaged
principally in the business of registering
transfers of stocks in behalf of a stock cor-
Chapter IX poration. No stock transfer agent shall be
THE RIGHT OF INSPECTION allowed to operate in the Philippines un-
less he secures a license from the SEC and
pays a fee as may be fixed by the Com-
1. Basis of right mission, which shall be renewable annu-
ally
Reason of the law for granting stockholders the o A stock corporation is not precluded
right to inspect the records of the corporation: As from performing or making transfer of its
the beneficial owners of the business, the own stocks, in which case all the rules and
stockholders have the right to know regulations imposed on stock transfer
1. The financial condition of the corporation; agents, except the payment of a license
and fee herein provided, shall be applicable.
2. How the corporate affairs are being man-
aged by their elected directors.  Financial statements (§75)
o Within ten (10) days from receipt of a writ-
PURPOSE: ten request of any stockholder or member,
the corporation shall furnish to him its
So that if they find the conditions unsatisfactory, most recent financial statement, which
they may be able to take necessary measures to shall include a balance sheet as of the end
protect their investment. of the last taxable year and a profit or loss
statement for said taxable year, showing
The right of inspection is in reasonable detail its assets and liabili-
ties and the result of its operations
1. Preventive – to a limited extent may serve o At the regular meeting of stockholders or
as a deterrent to an ill-intentioned man- members, the BOD or BOT shall present to
agement to know that its acts may be such stockholders or members a financial
scrutinized report of the operations of the corporation
for the preceding year, which shall include
2. Remedial – a dissatisfied stockholder may financial statements, duly signed and cer-
resort to the right of inspection as a pre- tified by an independent certified public
liminary step to seeking more direct accountant.
remedies against abuses committed by o However, if the paid-up capital of the cor-
management (removal of directors or a poration is less than P50,000.00, the fi-
derivative suit). nancial statements may be certified under
oath by the treasurer or any responsible
The right of inspection goes hand-in-hand with officer of the corporation.
the right to vote. Through the former, the SH
can gather information on how to vote. Torres et al v CA (1997)

It is the corporate secretary's duty and obligation

2. What records covered; to register valid transfers of stocks and if said
corporate officer refuses to comply, the
records required to be kept by transferor-stockholder may rightfully bring suit to
corporation (§74) compel performance.

 Books that record all business transactions of

the corporation which shall include contract,
memoranda, journals, ledgers, etc;
3. Extent of and limitations on
 Minute book for meetings of the SHs/mem- right
bers;
 Minute book for meetings of the board/ 3.1 Limitations as to time and place
trustees;
 Stock and transfer book.
a. Only at reasonable hours on business days
  By-laws cannot limit inspection to
merely a few days during the year  Burden of proving that the purpose is
chosen by the directors [Pardo vs. improper or illegal is on corporation and
Hercules Lumberm, 1924] its officers.
 By-laws cannot provide that the in-  Good purposes: to investigate acts of
spection shall only be upon authority management; to investigate financial
of the President of the corporation conditions; fix value of shares; mailing
previously obtained in each case list for proxies; information for litigation
(Veraguth v. Isabela Sugar Co.,  Not good and honest purposes: obtain
1932) corporate secrets (e.g., formula); nui-
 However, inspection should be made sance suit; to embarrass the company
in such a manner as not to impede TEST to determine whether the purpose as
the efficient operations of the corpo- proved by the corporation or as admitted by
ration (Duff v. Mutual Brewing Co., the stockholder is a legitimate one or not? – A
NYLJ, Oct. 3, 1892) legitimate purpose is one which is germane to
 By-laws can adopt policies with re- the interests of the stockholder as such and
spect to right to inspect (§47(10)- not contrary to the interests of the corporation
Such other matters as may be nec- (Gokongwei v. SEC, 1979).
essary for the proper or convenient
transaction of its corporate business
and affairs) 4. Who may exercise right
 Director, trustee, stockholder, member, per-
sonally or through an agent
b. Inspection shall be done in the place
o The right to inspect corporate books
where the corporation keep all its
may be done with the assistance of
records, which, as enjoined by law, is in
technical men (e.g., lawyers and ac-
the principal office
countants) and it may be delegated.
 Stockholder cannot demand that he The right includes the right to copy or to
be allowed to take the corporate take notes. (W.G. Philpotts v Phililppine
books outs of the corporation’s prin- Mfg Co., 1919)
cipal office for the purpose of in-  The transferor of shares and the voting
specting them (Veraguth, Supra) trustee, in accordance with Section 59
 Stockholders of a parent corporation with re-
spect to subsidiary:
3.2 Limitation as to purpose o If two are legally separate and in-
dependent entity, no right of inspection.
Is the stockholder’s purpose material? – YES. However, the SH of the parent corp can
There is however a presumption that his look at the books of the latter with respect
purpose is a proper one and the corporation to its investments to the subsidiary.
cannot refuse to grant him the right on its o If they are practically one and the
mere belief that his motive is improper. same in so far as management and control
is concerned, and inspection is demanded
 Otherwise, such refusal may open its because of gross mismanagement of sub-
guilty officers or directors to liability sidiary by the parent’s directors who are
for damages, UNLESS they can suc- also directors of subsidiary, who are also
cessfully prove in their defense: directors of the subsidiary, then the latter
o that the stockholder was will be treated as a mere agent or instru-
not acting in good faith mentality of the respondent parent corpo-
o that he improperly used the ration and the latter may be compelled to
information obtained in the open the subsidiary’s books to its stock-
past holders (Gokongwei v. SEC, Supra)
o that he used the information
for an illegitimate purpose
5. Remedies available if
inspection refused
Gonzales v. PNB (1983)  Mandamus
o The writ should be directed
Section 74 of the Corporation Code has been inter- against the corporation, but the
preted by the Supreme Court as no longer allowing secretary thereof may be joined
the unqualified right of inspection of stockholder of as party defendant since he is
corporate records and that the person making the customarily charged with the cus-
demand has to show that he is acting in good faith tody of all corporate records and
and for a legitimate purpose.
 is presumably the parson Derivative suit – suits of stockholders based on
against whom the order of the wrongful or fraudulent acts of directors or other
court will be made affective in persons
case mandamus is granted.
o And even the president of the Nature and basis/distinguish from other
corp. may be made respondent suits:
if necessary to the effectuation
of the court’s order (Philpotts v.  INDIVIDUAL suit if wrong done
Phil. Manufacturing Co., 1919) is personal to SH
 Injunction  CLASS suit if wrong done is to
 Action for damages – any officer or a group of SH
agent of the corporation who shall refuse to  DERIVATIVE suit if wrong
allow any director, trustees, stockholder or done is to the corporation itself
member of the corporation to examine and o In a derivative suit, the
copy excerpts from its records or minutes, in cause of action belongs to the corporation
accordance with the provisions of this Code, and not the stockholders but since the di-
shall be liable to such director, trustee, rectors who are charged with mismanage-
stockholder or member for damages ment are the ones who will be sued or
 File an action to impose a penal of- may not be willing to sue, then the corpo-
fense by fine and/or imprisonment ration is left without redress, hence, SH is
o Any officer or agent of the cor- given the right to sue on behalf of the cor-
poration who shall refuse to allow any di- poration
rector, trustees, stockholder or member
of the corporation to examine and copy
excerpts from its records or minutes, in 2. Requirements relating to
accordance with the provisions of this
Code x x x and in addition, shall be derivative suit
guilty of an offense which shall be pun-
ishable under Section 144 of the Corpo- 1. The stockholder or member bringing the suit
ration Code must have exhausted his remedies within the
o If such refusal is made pursuant corporation (Angeles v. Santos, 1937) (ex. He
to a resolution or order of the board of has made a demand on the directors or
directors or trustees, the liability under trustees and they have failed or refused to act
this section for such action shall be im- on such demand. Note: demand is not neces-
posed upon the directors or trustees who sary if it will be futile)
voted for such refusal 2. The stockholder or member must have been
o It shall be a defense to any ac- one at the time the transaction or act com-
tion that the person demanding to exam- plained of took place, or in the case of a stock-
ine and copy has improperly used any in- holder, the shares must have devolved upon
formation secured through any prior ex- him since by operation of law, unless such
amination of the records, or is not acting transaction or act continues and is injurious to
in good faith or for a legitimate purpose the stockholder (Pascual v. Orozco, 1911)
in making his demand (§74, par 3) Bonafide ownership by stockholder of stock in
o Other valid grounds for denying his own right suffices to invest him with stand-
access to books or records: immediately ing to bring a derivative action for the benefit
prior to the annual SHs’ meeting; holder of the corporation. The number of shares
of books is unavailable; the books are owned by the SH is immaterial since he is not
being audited; on-going inventory count; suing in his own behalf or for the protection or
computerization; moving out or change vindication of his own particular right or the re-
of business address dress of a wrong committed against him indi-
vidually but in behalf and for the benefit of the
corp. (San Miguel Corp. v. Khan, 1989)
Heirs of a SH can bring a derivative suit
Chapter X provided that the transaction took place
during the lifetime of the SH (Denison v.
DERIVATIVE SUITS Berderger, 1941)
3. Any benefit recovered by the stockholder or
member as a result of bringing the derivative
1. Nature and Definition of a suit, whether by final judgment, by judicial
Derivative Suit compromise or by extra-judicial settlement,
must be accounted for to the corporation, who
is the real party in interest
Definition
4. If the suit is successful, the plaintiff is enti-
tled to reimbursement from the corporation
for the reasonable expenses of litigation, in-
cluding attorney’s fees
Chapter XI
FINANCING THE CORPORATION,
Bitong v CA (1998) CAPITAL STRUCTURE
In the absence of a special authority from the
board of directors to institute a derivative suit for
and in its behalf, the managing officer is 1. Sources of Financing
disqualified by law to sue in her own name. The
power to sue and be sued in any court by a 3 main sources:
corporation even as a stockholder is lodged in 4. Contributions by stockholders (Eq-
the BOD that exercises its corporate powers and uity)
not in the president or officer thereof. But where 5. Loans or advances from creditors
corporate directors are guilty of a breach of trust, (Borrrowing)
not of mere error of judgment or abuse of 6. Profits that the business may earn
discretion, and intra-corporate remedy is futile or
useless, a SH may institute a derivative suit in
behalf of himself and other SHs and for the 2. Classification of Shares (§6)
benefit of the corporation, to bring about a
 Shares of stock of stock corporations
redress of the wrong inflicted directly upon the
may be divided into classes or series of shares
corporation and indirectly upon the stockholders.
or both
 Each class or series of shares may
Lim vs. Lim-Yu (2001) have rights, privileges, restrictions, stated in
The suit of respondent cannot be characterized the AOI
as derivative, because she was complaining only  No share may be deprived of voting
of the violation of her preemptive right under rights, except:
Section 39 of the Corporation Code. She was o Preferred or
merely praying that she be allowed to subscribe o Redeemable shares,
to the additional issuances of stocks in o unless otherwise provided by the Code
proportion to her shareholdings to enable her to  There shall always be a class/series of
preserve her percentage of ownership in the shares which have a COMPLETE VOTING
corporation. She was therefore not acting for the RIGHTS
benefit of the corporation. Quite the contrary,  EACH SHARE SHALL BE EQUAL IN ALL
she was suing on her own behalf, out of a desire RESPECTS TO EVERY OTHER SHARE, except as
to protect and preserve her preemptive rights otherwise provided in the AOI and as stated in
the certificate of stock

2.1 Common
3. Requirements under the  A stockholder, owner of at least one
Interim Rules of Procedure for common share, has the following rights:
Intra-Corporate Controversies o right to vote at meetings
o right to dividends
(Rule 8) o right to examine corporate books
 Most commonly issued
1. He was a stockholder or member at the time  Entitles owner to equal pro-rata divi-
the acts or transactions subject of the action sion of profits after preference
occurred and the time the action was filed;
2. He exerted all reasonable efforts, and alleges 2.2 Preferred
the same with particularity in the complaint,  Stocks which are given preference by the
to exhaust all remedies available under the issuing corporation in dividends and the
AOI, by-laws, laws or rules governing the distribution of assets of the corporation in
corporation or partnership to obtain the relief case of liquidation or such other prefer-
he desires. ences as may be stated in the AOI which
3. No appraisal rights are available for the are not violative of the Corporation Code.
act(s) complained of; and (§6)
4. The suit is not a nuisance or harassment suit.  Limitations on preferred shares:
o Preferred shares can only be is-
Derivative suits are within the jurisdiction of the sued with par value
RTC (§5.2, Securities Regulation Code) o Preferred shares must be:
 a. Stated in the Articles of Incorpo-  Can’t be issued at less than par
ration and in the certificate of value. Otherwise, it would become a wa-
stock or tered stock (§65, discussed in Chapter XII)
b. May be fixed by the BOD where  Par value is minimum issue price
authorized by the AOI, provided: of such share in the AOI which must be
such terms and conditions shall stated in the certificate
be effective upon filing of a cer-
tificate thereof with the SEC. 2.4 No-par value
 Entitles holder to some prefer-  These are shares without a stated
ences in dividends, distribution of assets value. The Corporation upon their is-
upon liquidation or both: suance will set their value, which shall not
o preference as to dividends – be less than P5.
dividends are payable only when  Shall be deemed fully paid and non-
profits are earned and as a general assessable and the holders of such shares
rule, even if there are existing prof- shall not be liable to the corporation or to
its, BOD has discretion to declare its creditors in respect thereto (§6)
dividends or not  Entire consideration received by the
a. Participating – after get- corporation for its no-par value shares
ting their fixed dividend prefer- shall be treated as capital and shall not be
ence ahead of CS, they share available for distribution as dividends
with the CS the rest of the divi- (Ibid)
dends  Cannot be issued as Preferred Shares
UNLESS expressly provided, they (Ibid)
are non-participating  AOI must state the fact that corp is-
b. Cumulative – dividends sues no-par shares and the number of
in arrears accrue, must be paid shares
first before common stock divi-  Three ways of determining value of no
dends are paid. par value shares (§62):
c. Non cumulative – con- o By majority vote of the outstanding
tract makes dividends depend shares (issued shares) in a meeting
upon existence of profits for the called for the purpose
year o By BOD pursuant to authority con-
o as to ferred upon it by the AOI
voting rights – usually does not have o By amendment of the AOI
voting rights; but unless clearly with-  Corporations which cannot issue no-
held, PS would have right to vote par value shares (§6):
Note: even if deprived of voting o Banks
rights, PS holders are entitled to o Insurance Companies
vote on the matters enumerated
o Trust Companies
under §6
o Building and Loan Associations
o preference upon liquidation – in the
o Public utilities
absence of provision, participate pro
rata with common stock
o not a creditor; there’s no assurance 2.5 Founder‘s (§7)
that you will get back investments  Those shares, classified
but if the corporation profits, you as such in the AOI, which are given certain
participate in the profits rights and privileges not enjoyed by the
owners of other stocks. (§7)
2.3 Par value  Where exclusive right to
 These are shares with a stated vote and be voted for in the election of di-
value set out in the AOI. This remains rectors is granted, such right must be for a
the same regardless of the profitability limited period not to exceed 5 years sub-
of the corporation. This gives rise to fi- ject to approval by SEC. 5 year period
nancial stability and is the reason why shall commence from date of approval by
banks, trust corporations, insurance SEC. (Ibid)
companies and building and loan associ-
ations must always be organized with 2.6 Redeemable
par value shares.  Those shares, expressly so provided in the
 One in the certificate of stock of AOI, which may be purchased or taken up
which appears an amount in pesos as by the corporation upon the expiration of
the nominal value of the shares a fixed period regardless of the existence
of unrestricted retained earnings in the
books of the corporation and upon such
 terms and conditions stated in the AOI o Adoption and amendment of by-laws
and in the certificate of stock (§8) o Sale, lease, exchange, other disposi-
 Redemption is repurchase, a reacquisi- tion of all or substantially all of the
tion of stock by a corporation which is- corporate property
sued the stock in exchange for property, o Incurring, creating or increasing
whether or not the acquired stock is can- bonded indebtedness
celled, retired or held in the treasury. o Increase or decrease of capital stock
Essentially, the corporation gets back o Merger and consolidation
some of its stock, distributes cash or o Investment of corporate funds in an-
property to the shareholder in payment other corporation or business
for the stock, and continues in business o Dissolution of the corporation
as before. The redemption of stock divi-
dends previously issued is used as a veil CLASSES OF SHARES
for the constructive distribution of cash
dividends. (CIR v CA, 1999) A. Common
 While redeemable shares may be re-
deemed regardless of the existence of
unrestricted retained earnings, this is No-par Par
subject to the condition that the corpora-
tion has, after such redemption, assets
in its books to cover debts and liabilities Multiple par value Single par value
inclusive of capital stock. Redemption,
therefore, may not be made where the
corporation is insolvent or if such re- B. Preferred
demption will cause insolvency or inabil-
ity of the corporation to meet its debts
as they mature. (Republic Planters Bank Liquidation Dividends
v Agana, 1997)

2.7 Treasury Cumulative/non-cumulative Participating/non-

 These are shares of stock which participating
have been issued and fully paid for, but
subsequently re-acquired by the issuing
corporation by purchase, redemption, C. Redeemable
donation or through some other lawful
means. Such shares may again be dis-
posed of for a reasonable price fixed by With floating coupon rate With guaranteed
the BOD. (§9) coupon rate
 Note: delinquent stocks, which are
stocks that have not been fully paid, D. Convertibles
may become treasury stocks upon bid of
the corporation in absence of other bid- E. Combo of B+C+D
ders (§68)
 May be sold at less than par, re- F. Founder’s shares
garded as corporate property
 In this manner, stocks can be retired G. Treasury Shares
gradually, even those which aren’t re-
deemable
 No limit as to how many shares can 3. Nature of Subscription
be retired
Contract
2.8 Convertible
3.1 Subscription Contract
A type of preferred stock that the holder can ex-  Any contract for the acquisition of
change for a predetermined number of the cor- unissued stock in an existing or a corpora-
poration’s common shares at a specified time tion still to be formed shall be deemed a
subscription contract, notwithstanding the
fact that the parties may refer to it as a
2.9 Non-voting shares (§6) purchase or some other contract. (§60)
 Transfer for consideration of treasury
 Shares which have, generally, no
shares is a sale by the corporation (not
voting rights; except in the following cir-
subscription). A transfer of fully paid
cumstances:
shares by a stockholder to a third person
o Amendment of the AOI
 is a sale. But it seems that assignment  Includes not only new shares in pursuance
by a subscriber of his unpaid subscrip- of an increase of capital stock but would
tion would require that the requisites for cover the issue of previously unissued
valid release from subscription must be shares which form part of the existing cap-
complied with ital stock as well as treasury shares
 Shareholders are not creditors of the  Where the shares are issued in exchange
corporation with respect to their share- for property needed for corporate pur-
holdings thereto and the principle of poses or for debt previously granted, SH
compensation or set-off has no applica- cannot demand his pre-emptive right for
tion right may prejudice corporate interest
 Not necessarily required to be in (§39)
writing
 Once subscription contract is per- 4.2 Limitation to exercise of pre-emp-
fected, SH becomes the debtor of the tive right (§39):
corporation. He is liable to pay any un- a. Such pre-emptive
paid portion of the subscription. He can right shall not extend to shares to be is-
also be made personally liable to the sued in compliance with laws requiring
creditors of the corporation to the extent stock offerings or minimum stock owner-
of his unpaid subscription ship by the public;
 General Rule: SH is not liable to pay b. Not extend to shares
interest on his unpaid subscription. Ex- to be issued in good faith with the ap-
ception: if required by the by-laws (§66) proval of the stockholders representing
two-thirds (2/3) of the outstanding capital
3.2 Pre-incorporation subscription stock, in exchange for property needed for
(§61) corporate purposes or in payment of a
 Pre-incorporation subscription is a sub- previously contracted debt
scription for shares of stock of a corpora- c. Shall not take effect
tion still to be formed. if denied in the AOI or an amendment
 It shall be irrevocable for a period of at thereto.
least six (6) months from the date of
subscription. 4.3 Remedies in case of unwarranted
 It can only be revoked, when: denial:
o when all of the other subscribers a. Injunction
consent to the revocation, or b. Mandamus
o when the incorporation of the corpo-  in any case, the suit should be individ-
ration fails to materialize within six ual and not derivative because the wrong
(6) months or within a longer period done is to the stockholders individually
as my be stipulated in the contract c. SEC can cancel shares if the third party is
of subscription. not innocent
 After the submission of the AOI to the
SEC, no pre-incorporation subscription CAPITAL CONTRIBUTIONS
may be revoked. (Money + Proprietary rights)
+
LOAN ACCOMMODATIONS
4. Pre-emptive Right to
Shares (Cf §39, 102) CORPORATION

4.1 Definition of pre-emptive rights –

option privilege of an existing stockholder to sub- PROPERTY/ASSETS A
scribe to a proportionate part of shares subse- a
quently issued by the corp before the same can
be disposed of in favor of the others; includes all LIABILITY:
issues and disposition of shares of any class
 All stockholders of a stock corpora- Obligation to pay:
tion shall enjoy pre-emptive right to sub-  Principal + Interest
scribe to all issues or disposition of  Security Interest over Property and Assets
shares of any class, in proportion to their  Preferences vis-à-vis SH
respective shareholdings, unless such
right is denied by the AOI or an amend-
ment thereto A
 This is to prevent dilution in sharehold- a
ing
 sory notes or future service (because realiza-
EQUITY INTEREST tion is uncertain)
(Shares of Stock, Inchoate Rights)  Future service may be used as consideration
Return of Equity Interest: provided that certificates of stock will be is-
 Dividends sued only after the performance of such ser-
 Proceeds realized from sale of shares vices.
 Liquidity dividends  Same consideration applies for the issuance of
bonds by the corporation.
 Fixing of issued price of no-par value shares:
The issued price of no-par value shares may
be fixed:
CONTROL ECON BENEFITS CLASSIFICATION OF a) in the AOI or
SHARES b) by the BOD pursuant to authority con-
ferred upon it by the AOI or the by-laws, or
c) in the absence thereof, by the SHs repre-
senting at least a majority of the outstand-
ing capital stock at a meeting duly called
Chapter XII for the purpose.
 The value of the consideration re-
CONSIDERATION FOR ceived must be equal to the issue price of the
ISSUANCE OF SHARES shares of stocks which in no case shall be less
than par

1. Form of consideration (§62)

2. Liability on watered stocks
 Stocks shall not be issued for a con-
sideration less than the par or issued price Watered stock – shares issued as fully paid-up
thereof. when in fact the consideration agreed to and
 Consideration for the issuance of accepted by the directors of the corporation was
stock may be any or a combination of any something known to be much less than the par
two or more of the following: value or issued value of the shares.
a) Actual cash paid to the corpora-
tion; Water in stock refers to the difference between the
b) Property, tangible or intangible, fair market value at the time of the issuance and
actually received by the corporation and the par or issued value of said stock. Subsequent
necessary or convenient for its use and increase in the value of the property used in
lawful purposes at a fair valuation equal paying the stock does not do away with the water
to the par or issued value of the stock is- in the stock. The existence of such water is
sued determined at the time of issuance of the stock.
o Valuation of consideration other
than actual cash, or consists of in-  Evils: deprives corp of needed capital; dilutes
tangible property such as patents of proportionate interest of existing and future
copyrights – initially be determined SH; injures present and future creditors be-
by the incorporators or the board of cause it reduces value of corp assets
directors, subject to approval by the
SEC.  Any director or officer of a corporation
o Note: Property should not be en- consenting to the issuance of stocks or who,
cumbered. Otherwise, it would im- having knowledge thereof, does not forthwith
pair the consideration express his objection in writing and file the
c) Labor performed for or services same with the corporate secretary (§65)
actually rendered to the corporation o for a consideration less than its par or is-
(must be capable of being valuated); sued value or
d) Previously incurred indebted- o for a consideration in any form other than
ness of the corporation; cash, valued in excess of its fair value,
e) Amounts transferred from unre-  shall be solidarily liable with the stock-
stricted retained earnings to stated capi- holder concerned to the corporation and its
tal (declaration of stock dividends); and creditors for the difference between the fair
f) Outstanding shares exchanged value received at the time of issuance of the
for stocks in the event of reclassification stock and the par or issued value of the same.
or conversion.
 Prohibited consideration: Shares of stock
shall not be issued in exchange for promis- 3. How Payment of Shares
Enforced plus accrued interest, and the date,
time and place of the sale which shall
not be less than 30 days nor more
3.1 Delinquency sale than 60 days from the date the stocks
become delinquent.
a. How do shares become delinquent (§67)  The amount due in the notice
 Payment of any unpaid must include all expenses: publica-
subscription or any percentage tion, legal, etc.
thereof, together with the interest o Note: the notices are jurisdic-
accrued, if any, shall be made on the tional.
date specified in the contract of sub-  In the public auction, the highest
scription or on the date stated in the bidder is one who is willing to pay the
call made by the board. balance of the subscription for the
 Failure to pay on such least number of shares. The corpora-
date shall render the entire balance tion will give the highest bidder the
due and payable and shall make the certificate of stock in the number of
stockholder liable for interest at the his bid; the remaining number will be
legal rate on such balance, unless a issued a certificate of stock in favor of
different rate of interest is provided the subscriber as fully paid. If there
in the by-laws, computed from such are no bidders, the corporation must
date until full payment. bid for the whole number of shares re-
 If within thirty (30) days gardless of how much the SH has
from the said date no payment is paid. Such stocks will pertain to the
made, all stocks covered by said corporation as fully paid treasury
subscription shall thereupon become stocks.
delinquent and shall be subject to
sale as hereinafter provided, unless c. When sale may be questioned (§69)
the BOD orders otherwise.
 Despite the fact that  No action to recover
the subscription is partially paid, the delinquent stock sold can be sus-
entire subscription becomes delin- tained upon the ground of irregularity
quent or defect in the notice of sale, or in
 Subscriber is not barred the sale itself of the delinquent stock,
from paying the balance plus the ex- unless the party seeking to maintain
penses incurred by the corp before such action first pays or tenders to the
the date of the delinquency sale party holding the stock the sum for
(§68). which the same was sold, with interest
from the date of sale at the legal rate;
b. Procedure for delinquency sale (§68) and
 The BOD must make a call by  No such action shall be
resolution demanding the payment maintained unless it is commenced by
of the balance of the subscription the filing of a complaint within six (6)
("notice of call"). months from the date of sale.
 The notice of call shall be served
on each stockholder either person-  Issuance of Certificate – Once full payment
ally or by registered mail. At this for the stocks have been tendered to the
point, there is no need for publica- corporation in any of the valid forms of
tion. consideration for the issuance of stocks,
 If the stockholder does not pay the purchaser or the subscribers entitled
the amount on the date designated to be issued the corresponding certificate
in the notice, the Board shall issue, of stock which evidences their ownership
by resolution, a "notice of delin- of shares in a particular corporation (§64)
quency."
 Notice of delinquency shall be
served on the non-paying subscriber Apocada v NLRC
either personally or by registered
mail, PLUS publication in a newspa- Apocada was employed in Intans Phil wherein he
per of general circulation in the subscribed to 1500 shares. He subsequently
province or city where the principal resigned and instituted a complaint with NLRC
office of the corporation is located, against corporation for payment of unpaid
once a week for two (2) consecutive wages, COLA, balance of gasoline and
weeks. The notice shall state the representation expenses, bonus. Corporation
amount due on each subscription applied what is due to Apocada the balance of
his unpaid subscription.  Note that the provision on dividends
HELD: Set-off is not proper. Unpaid pertain to delinquent stock hence a
subscriptions are not yet due and payable. They call must have been made
become due and payable when a call is made by  Stock dividends on delinquent shares
the corporation. There is no such call yet. Set- are not applied but are included in
off against wages is not valid under labor code. delinquency sale wherein it is liqui-
dated

3.2 Court Action (§70) 5. Rights and Obligations of

Gen. Rule A valid call is a prerequisite to Holders of Unpaid But Non-
liability where court action is the remedy Delinquent Stock
chosen (Da Silva v. Aboitiz, 1923).  Holders of subscribed shares not fully paid
Exceptions: which are not delinquent shall have ALL the
rights of a stockholder. (§72)
1. the subscription contract specifies a date  Subscribers for stock shall pay to the corpora-
of payment tion INTEREST on all unpaid subscriptions from
2. the corp. has become insolvent  all un- the date of subscription, if so required by, and
paid subscriptions are immediately re- at the rate of interest fixed in the by-laws. If
coverable in a court action by the as- no rate of interest is fixed in the by-laws, such
signee in insolvency [Velasco vs. Poizat, rate shall be deemed to be the legal rate.
1918] (§66) General rule: unpaid subscriptions can
As a defense to a court action, the SH may not be charged with interest. Exception: when
contend that the subscription was induced required by the by-laws.
by fraudulent misrepresentation, provided he  No certificate of stock shall be issued to a sub-
is not barred by ratification, or guilty of scriber until the full amount of his subscription,
laches. together with the interest and expenses (in
case of delinquent shares) if any is due, has
Stockholders cannot escape liability on their
been paid. (§64)
unpaid subscription on the ground that these
 No shares of stock against which the corpora-
were induced by an unfulfilled commitment
tion holds any unpaid claim shall be transfer-
of the President of the Phil. that the Phil.
able in the books of the corporation (§63).
government would invest P9.00 for every
peso subscribed (PNB v. Bitulok Sawmill Inc.,
 Attributes of a subscription contract: uncondi-
1968)
tional (obligation to pay must not be subject to
any contingencies) and indivisible (as to the
amount and transferability—Fua Cun v. Sum-
mers, 1923)
4. Effect of Delinquency
a) Any cash dividends due on 6. Issuance of Certificate
delinquent stock shall first be applied to the
unpaid balance on the subscription plus
costs and expenses, while stock dividends A certificate of stock is the best evidence of the
shall be withheld from the delinquent stock- rights and status of a SH (although not a condition
holder until his unpaid subscription is fully precedent to the acquisition of such rights), and is
paid. (§43) convenient for the purposes of transfer (Campos).
b) No delinquent stock shall be:
o voted for or
o be entitled to vote or to Contents of a certificate:
o representation at any stock-
holder's meeting, - certifies that the person named is a holder
o nor shall the holder thereof be or owner of a stated number of shares
entitled to any of the rights of a stock- - kind of shares issued
holder (§71) - date of issuance
 Except the right to dividends in ac- - par value, if par value shares
cordance with the provisions of this - signed by the proper officer of the corp.
Code, (usually the pres., and the sec.)
 until and unless he pays the amount - bears the corporate seal
due on his subscription with accrued
interest, and the costs and expenses
Over-issue of shares occurs when certificates are
of advertisement, if any.
issued for more than the number of shares
authorized by the articles. Any share certificate
w/c represents an over-issue would be void. No be suspended until the final decision of the court
rights or liabilities can arise therefrom in favor or regarding the ownership of the certificate of stock.
against the holders and bona fide purchasers o Note: Except in cases of fraud, bad faith,
would have the right to damages for or negligence on the part of the corpora-
misrepresentation against the corp. but can’t tion and its officers, no action may be
acquire the rights of stockholders. brought against the corp which shall have
issued certificates of stock in lieu of those
lost, stolen or destroyed pursuant to the
General rule: entire subscription must be paid above procedure.
first before the certificates of stock can be
issued. Partial payments are to be applied pro
rata to each share of stock subscribed. (Nava v
Peers Mktg Corp and Fua Cun v Summers). Chapter XIII
DIVIDENDS AND PURCHASE OF
Exception: in the Baltazar v Lingayen Gulf CORPORATION OF ITS OWN
Electric Power Co case, it was the practice of the SHARES
corp to issue certificates of stock to its individual
SHs for unpaid shares of stock and to give full
voting power to shares fully paid.
1. Form of Dividends (§43)

7. Lost or Destroyed 1.1 CASH – most common form.

1.2 STOCK – a distribution to the stockholders
Certificate (§73) of the company’s own stock. The corporate profits
Procedure for re-issuance in case of loss, stolen are transferred to capital stock and shares of stock
or destroyed certificates: representing the increase in capitalization are dis-
1. The registered owner of certificates of stock tributed.
or his legal representative shall file with the
corporation an affidvit setting forth as far as These do not represent income on the part
possible: of the SH. Investment and proportional
a) the circumstances as to how the certifi-
cates were lost, stolen or destroyed;
interest in the corp remain the same
b) the number of shares represented by Lincoln Phil. Life v CA (1998)
each certificate, the serial numbers of
the certificates; Stock dividends are in the nature of shares of
c) the name of the corp which issued the stock, the consideration for which is the amount
same; of unrestricted retained earnings converted into
d) such other information and evidence equity in the corporation’s books. “A stock
which he may deem necessary. dividend of a corporation is a dividend paid in
2. The corp shall publish a notice in a newspaper shares of stock instead of cash, and is properly
of general circulation published in the place only out of surplus profits. So, a stock dividend is
where the corp has its principal office, once a actually two things: (1) a dividend: and (2) the
week for 3 consecutive weeks at the expense of enforced use of the dividend money to purchase
the owner of the certificate of stock, which has additional shares of stock at par.”
been lost, stolen or destroyed.
3. After the expiration of one (1) year from the
date of the last publication and if no contest has  Limitation on the issue of stock
been presented, the corp shall cancel in its books dividends:
the certificate of stock and issue in lieu thereof o there must be unissued
new certificates of stock. The right to make such shares of the corporation. If there are
contest shall be barred after the expiration of the none, there must be an increase in
one-year period. capital stock first, which requires an
4. Even before the one year period expires, the amendment of the AOI
new certificates may be issued if the registered o there must be unrestricted re-
owner files a bond or other security, running for a tained earnings
period of one (1) year for a sum and in such form o cannot be issued to non-
and with such sureties as may be satisfactory to stockholders even for services ren-
the BOD. Provided, that if there is a pending dered (Nielson v. Lepanto Consoli-
contest regarding the ownership of said dated Mines, 1968)
certificates, the issuance of new certificates shall 1.3 PROPERTY – Although the corp. may have
a big amount of earnings available for dividends,
they may not all be in cash.
 c. when it can be
clearly shown that such retention is neces-
2. Source of Dividends (§43) sary under special circumstances obtain-
ing in the corporation, such as when there
“Unrestricted retained earnings” (URE) is need for special reserve for probable
(definition by the SEC) the undistributed earnings contingencies.
of the corp. w/c have not been allocated for any
managerial, contractual or legal purposes and
which are free for distribution to the SHs as 3.3 When Right to Dividends Vests
dividends.  General rule: as soon as the same
 The only fund out of w/c dividends can be have been lawfully declared by the BOD, be-
legally paid. comes a debt owing to the SH. No revocation
 Should there be any capital deficit, can be made
subsequent profits, if any, during succeeding  Exceptions:
periods must 1st be applied to cover the deficit, o not yet announced or commu-
and only the profits remaining after eliminating nicated to the public, revocable before an-
the deficit, can be considered as URE. nouncement to SHs
o when stock dividends are de-
Dividends can not be declared out of increase in clared since these are not distributions but
valuation of existing assets. This is subject to merely represent changes in the capital
fluctuation and is not yet realized. structure, may be revoked prior to actual
issuance
3. Declaration of Dividends  Rights of transferee to dividends –
Right to dividends vests upon declaration so
3.1 How Dividends are declared whoever owns the stock at time or stockhold-
ers of record also owns the dividend. Subse-
quent transfer of stock would not carry with it
Approval & voting requirement: right to dividends UNLESS agreed upon by the
a) Approval of BOD parties
b) In case of stock dividend: must be approved
by SHs representing not less than two-thirds
(2/3) of the outstanding capital stock at a 3.4 Liability for Illegal Dividends
regular or special meeting duly called for the
purpose. Directors not personally liable  if unintentionally
declare illegal dividends, such as when the
directors, in declaring dividends:
3.2 Dividend Declaration - rely on financial statements prepared by a
Discretionary with the Board dishonest EE whom they had no reason to
suspect
Gen. Rule WON there should be a distribution of - rely on advice of legal counsel that certain
dividends to the SHs in any given year & the proceeds or profits are available for divi-
form of such dividends are matters addressed to dends
the business judgment of the BOD
Directors liable under §31 if found negligent or in
Exceptions: bad faith to the (1) corp; or (2) its creditors, if
1. When the decision is tainted w/ bad faith, insolvent
fraud or gross negligence
2. If the court finds, upon complaint of a SH,
that a surplus was unreasonably accumu- 4. Purchase by the Corporation
lated (profits accumulated in excess of 100%
of the corp’s paid-in capital stock), it may or- of its Own Shares (§41)
der the corp. to distribute dividends
Exceptions to the exception (§43):  A stock corporation shall have the power to
a. when justified by purchase or acquire its own shares for a legiti-
definite corporate expansion projects or mate corporate purpose or purposes (treasury
programs approved by the board of di- shares) provided, that the corporation has un-
rectors; or restricted retained earnings in its books to
b. when the corpo- cover the shares to be purchased or acquired
ration is prohibited under any loan  Treasury shares are shares of stocks which
agreement with any financial institution have been issued and fully paid for, but subse-
or creditor, whether local or foreign, quently reacquired by the issuing corporation
from declaring dividends without its/his by purchase, redemption, donation or through
consent, and such consent has not yet some other lawful means (§9)
been secured; or
 Treasury shares have no voting rights as 1. Amendment of the Articles
long as such shares remain in the treasury
(§57) of Incorporation, Generally
 May be issued as property dividends pro-
vided that the retained earnings has not 1.1 Procedure for amendment of articles of
been subsequently impaired by losses incorporation (§16)
 “Trust Fund doctrine” – the requirement of
unrestricted retained earnings is because a) The amendment must be for a legitimate pur-
subscription to the capital of a corporation pose; and must be approved by a majority
constitute a fund to which creditors have a vote of the Board; and vote (in a meeting) or
right to look for the satisfaction of their mere written assent (no meeting) of 2/3 of the
claims (Phil. Trust Co. v. Rivera, 1923) outstanding stock, or in case of a non-stock
 Legitimate purpose includes: corporation, by the members of the corpora-
a) To eliminate fractional shares arising out tion.
of stock dividends;  Once the amendment is ap-
b) To collect or compromise an indebted- proved, dissenting stockholders may exer-
ness to the corporation, arising out of cise their rights of appraisal if it involved
unpaid subscription, in a delinquency diminishing of substantial rights previously
sale, and to purchase delinquent shares granted or creating a new set of shares
sold during said sale; and with priority rights.
c) To pay dissenting or withdrawing stock- b) The original and amended articles together
holders entitled to payment for their shall contain all provisions required by law to
shares under the provisions of this Code be set out in the articles of incorporation. Such
(appraisal right, Cf §81). articles, as amended shall be indicated by un-
 Improper purpose includes: raising of price derscoring the change or changes made
of stock by making it appear that it is being c) A copy thereof duly certified under oath by the
actively traded (prohibited under Sec 24 of corporate secretary and a majority of the di-
the Securities Regulations Code) and prefer- rectors or trustees stating the fact that said
ring some SHs to the prejudice of other SHs amendment or amendments have been duly
and creditors (may be viewed as early liqui- approved by the required vote of the stock-
dation of the investment of some of the SHs) holders or members, shall be submitted to the
 Remedies in case of improper purchase: Securities and Exchange Commission.
a) Creditors prejudiced by the repurchase d) The amendment of the Articles of Incorpora-
can go after the selling SHs to recover tion will be effective only upon approval of the
what was paid to them SEC; but should no action be taken by the SEC
b) Directors who were negligent or in BF for within 6 months from the date of filing, then
approving the repurchase can also be automatically, the amendment is deemed ef-
held personally responsible fective, provided that delay is not attributable
c) Prejudiced SH can also go after BOD who to the corporation.
approved purchase (when their
dividends are reduced, remaining assets 1.2 Grounds for disapproving amendment
can’t cover debts, etc)
 A corporation must have unre- (§17)
stricted retained earnings in acquiring own
shares except:  The SEC may disapprove any amendment
a) shares are acquired in the redemption of thereto if the same is not in compliance with
redeemable shares (§8) the requirements of this Code
b) shares are re-acquired to effect a de-  The SEC shall give the incorporators a reason-
crease in capital stock approved by the able time within which to correct or modify the
SEC (§38) objectionable portions of the articles or
shares are reacquired by a close corporation amendment.
pursuant to the order of the SEC acting to  The following are grounds for such disap-
arbitrate a deadlock (§104) proval:
a) Amendment is not substantially
with the form prescribed
b) Purpose or purposes is/are
patently unconstitutional, illegal, immoral,
Chapter XIV contrary to government rules and regula-
AMENDMENTS OF CHARTER tions
c) Treasurer’s Affidavit concerning
the amount of capital stock subscribed
and/or paid is false
 d) Percentage requirement of own-  De-
ership by Filipino citizens as required by crease of capital stock: No decrease of the
the Constitution not complied with capital stock shall be approved by the
Commission if its effect shall prejudice the
rights of corporate creditors
2. Special Amendments
Effectivity
From and after approval by the Securities and
Exchange Commission and the issuance by the
2.1 Increase or decrease of capital Commission of its certificate of filing, the
stock (§38) capital stock shall stand increased or
decreased
Approval and Voting Requirement
a) Approved by a majority vote of Treasurer’s Affidavit:
the board of directors The Securities and Exchange Commission shall
b) Two-thirds (2/3) of the outstand- not accept for filing any certificate of increase
ing capital stock shall favor the increase of capital stock unless accompanied by the
or diminution of the capital stock at a sworn statement of the treasurer of the
meeting duly called for the purpose corporation lawfully holding office at the time
of the filing of the certificate, showing that at
Certificate of Filing least twenty-five (25%) percent of such
 A certificate in duplicate must increased capital stock (should be understood
be signed by a majority of the directors as proposed increase-Campos) has been
of the corporation and countersigned by subscribed and that at least twenty-five (25%)
the chairman and the secretary of the percent of the amount subscribed has been
stockholders' meeting, setting forth: paid either in actual cash to the corporation or
a) That the requirements of voting that there has been transferred to the
and notice have been complied with; corporation property the valuation of which is
b) The amount of the increase or equal to twenty-five (25%) percent of the
diminution of the capital stock; subscription
c) If an increase of the capital
stock, the amount of capital stock or Appraisal right (§81¶1)
number of shares of no-par stock Appraisal right may be exercised where the
thereof actually subscribed, the increase in capital stock results in the creation
names, nationalities and residences of shares with preferences superior to those of
of the persons subscribing, the existing ones.
amount of capital stock or number of
no-par stock subscribed by each, Note: Proposing amendments is a way of
and the amount paid by each on his easing out the minority stockholders because
subscription in cash or property, or it compels them to exercise their appraisal
the amount of capital stock or num- rights
ber of shares of no-par stock allotted
to each stock-holder if such increase
is for the purpose of making effec- 2.2 Reduction of capit al stock
tive stock dividend therefor autho-
rized; - Although the requirements in Section 38
d) The amount of stock repre- have been met, no reduction of capital
sented at the meeting; and stock will be approved by the SEC if it will
e) The vote authorizing the in- prejudice the rights of corporate creditors.
crease or diminution of the capital - There can be no reduction of capital stock
stock which will in effect release the stockhold-
 One of the duplicate certificates ers from the payment of the balance of
shall be kept on file in the office of the their subscription if it will adversely affect
corporation and the other shall be filed the right of he creditors in collecting their
with the Securities and Exchange Com- claims (Phil. Trust Co. vs. Rivera (1923)
mission and attached to the original arti- - Appraisal Right—Although Section 38 does
cles of incorporation. not grant the appraisal right in case of re-
duction of capital stock, when it has the
Approval of SEC effect of altering the rights of any stock-
 Any in- holder or class of stockholders, the ap-
crease or decrease in the capital shall praisal right may be exercised under sec-
require prior approval of the Securities tion 81 (1) (Campos)
and Exchange Commission.
 - Except by decrease of capital stock and the bank refused. Mandamus filed by Melania to
as otherwise allowed by this Coded, no compel bank to register the transfer.
corporation shall distribute any of he as-
sets or property except upon lawful dis- HELD: Transfer before death valid, stock not yet
solution and after payment of all its part of estate. Shares of stock are personal
debts and liabilities. (§122) property and may be transferred by delivery.
o Campos—It seems that under Registration in corporate books is not necessary.
the exception, a reduction sur- The transfer effected in this case is valid. The
plus may be distributed as divi- corporation may not impose any restriction on
dends to the stockholders, as such transfer. The right of transferee/assignee to
long as SEC approval has been have stocks transferred to his name is inherent
obtained and the rights of credi- right, duty of the corporation to register the
tors is not prejudiced. transfer is ministerial.

2.3 Change in corporate term (§37) Rural Bank of Lipa v. CA (2001)

For the valid transfer of stocks, there must be

Approval and Voting Requirement strict compliance with the mode of transfer
a) Approved by a majority vote of the board prescribed by law, which are:
of directors or trustees and a) there must be delivery of the stock certificate;
b) Ratified at a meeting by the stockholders b) the certificate must be endorsed by the owner
representing at least two-thirds (2/3) of or his attorney-in-fact or other persons legally
the outstanding capital stock or by at authorized to make the transfer; and
least two-thirds (2/3) of the members in c) to be valid against third parties, the transfer
case of non-stock corporations. must be recorded in the books of the corporation.
Conflict in the availability of appraisal right
YES only for extension of corporate term Razon v IAC
(§37)
YES for both shortening and extension Chudian was issued 1,500 shares at E Razon Inc
(§81) with the corresponding stock certificate no 3.
Said stock certificates were delivered to Enrique
Razon allegedly because it was the latter who
paid for all the subscription on the shares of
Chapter XV stock in defendant corporation with the
TRANSFER OF SHARES understanding that has was the owner of said
shares of stock and was to have possession until
such time as he was paid by other nominal
1. Manner and Effec- incorporators/stockholders. Later on, parties
tivity of Transfer delivered it for deposit with bank under the joint
custody of the parties. Administrator of the
estate of Chudian filed a complaint against
1.2 Indorsement and delivery Enrique Razon et al praying that the said stock
 Shares of stock may
certificates be delivered to estate of Chudian
be transferred as follows (§63):
along with all cash and stock dividends and pre-
a) delivery of the certificate or cer-
emptive rights accruing thereto.
tificates and
b) indorsed by the owner or his at-
HELD: Chudian is still owner
torney-in-fact or other person legally
a) Shares of stock is transferred by delivery
authorized to make the transfer
and endorsement of the stock certificate
b) Such mode of transfer is not complied
Rural Bank of Salinas v CA with in this case
c) In the books of the corporation, Chudian
Clemente, President of Rural Bank of Salinas and is still the owner of the stocks. He was
owner of shares in said corporation executed a even elected member of the board which
Special Power of Attorney to his wife Melania proves that he is a stockholder
giving her full power to sell or otherwise dispose d) One who claims ownership should show
of shares of stock of the Bank. Before death of that the same was transferred to him in
Clemente, Melania, pursuant to said SPA, accord with the valid mode of transfer.
executed deed of Assignment of former’s shares. This petitioner failed to show
After death of Clemente, Melania presented to Endorsement is a mandatory requirement of law
bank deed of assignment for registration which for an effective transfer
 tion there can be no stock certificate on
Tan v SEC (1992) which indorsement can be made. The
shares are thus not transferable on the
Alfonso Tan is owner of 400 shares in Visayan corporate books. (§63)
Educational Supply Corp evidenced by certificate  However, the stock-
No. 2. Alfonso transferred 50 shares to Angel. holder can still transfer his interest in the
Certificate No. 2 was cancelled and Certificate corporation by way of a deed of assign-
No. 6 was issued to Angel and Certificate No. 8 ment.
was issued to Alfonso. However, Alfonso did not
make the proper endorsement and did not make Sunset View Condominium Corp v Campos
delivery of certificate no. 2. Later on, Alfonso
Tan elected to withdraw from the corporation. In Sunset View Condominium corporation filed suit
exchange for his shares, he received stocks in against Aguilar-Bernares Realty and Lim Siu Leng
trade. Certificate No. 8 was later on cancelled for collection of assessments levied on their
due to above. After several years, Alfonso Tan respective condominium units which they bought
filed a case with Cebu SEC questioning the on installments and had not yet fully paid
cancellation of his stock certificates despite non-
endorsement and lack of delivery HELD: Respondents not shareholders of
condominium corporation because they are not
HELD: Delivery and endorsement under Section yet fully paid
63 of the corporation code is not mandatory a) Sec 5 Condominium Act – shareholding in a
because of the use of the word may. Delivery is condominium corporation will be conveyed
not essential where it appears that the persons only in a proper case
sought to be held as stockholders are officers of b) Sec 4 of Condominium Act leaves to Master
the corporation and have custody of the stock Deed the determination of when sharehold-
book as in this case. To hold that cancellation of ing will be transferred to purchaser of a unit
certificate of stock of Alfonso is null and void c) Master Deed provides that only owner of unit
because of lack of delivery and endorsement of is a shareholder and that ownership of unit is
mother certificate of stock no. 2 which was acquired by purchaser subject to conditions
deliberately withheld is to prescribe restrictions and terms of the instrument conveying the
on the transfer of stock in violation of corporation unit to such purchaser.
law d) Deed of Conveyance provide that ownership
is conveyed only upon full payment of pur-
chase price
1.2 Registration e) Sec 10 Condominium Act – Membership in
 Purpose of registration Condominium corporation shall not be trans-
a) enable the ferable separately from condominium unit of
transferee to exercise all the rights which it is an appurtenance
of a stockholder
b) to inform the
corporation of any change in share Remedy if registration refused – Transferee
ownership so that it can ascertain may petition the court for a writ of mandamus
the persons (a) entitled to the rights to compel the corporation to do so (Price v.
(b) subject to the liabilities of a SH Sulu Development Corp., 1933)
c) until registra-
tion is accomplished, the transfer,
though valid between the parties, Rivera v Florendo (1986)
cannot be effective against the cor-
Rivera is the registered owner of 4899 shares of
poration
stock of Fujiyama Hotel & Restaurant Inc. It is
 Effect of lack of registration:
alleged that one Akasako is the real owner of the
a) transferee cannot vote
4899 shares under Rivera’s name, and as such
b) transferee cannot be voted for
owner he sold 2550 shares to Milagros. Rivera
c) transferee cannot prevail over
refused to indorse the certificates to Milagros
rights of a subsequent attaching
despite the assurance he gave to Milagros before
creditor (Uson v. Diosomito, 1935)
the sale was consummated. The other
d) transferee not entitled to divi-
incorporators also sold their shares to Milagros
dends
and one Jureidini. As regards these transfers, the
e) stockholder on record has the
certificates were properly indorsed by their
right to participate in meetings.
respective owners. Milagros and Jureidini
attempted to have all the certificates registered
No registration of transfer of unpaid shares
in their names but the corporation refused to do
 If there is any unpaid so.
balance on the stockholder’s subscrip-
HELD: Mandamus will not lie where the shares of a. If the stock certificate CONSPICU-
stock are not even indorsed by the registered OUSLY shows the restriction, the pur-
owner Rivera who is specifically resisting the chaser or transferee is conclusively
registration thereof in the books of the corp. presumed to have notice of the re-
Even the shares of stock sold by the other striction, provided this appears in the
incorporators cannot be also the subject of AOI. He cannot prove that he acted in
mandamus on the strength of the mere good faith.
indorsement of the supposed owners of said Where a conclusive presumption of
shares in the absence of express instructions notice arises, the corporation may, at
from them. The right of the parties will have to its option, refuse to register the
be threshed out in an ordinary action. transfer, unless
(1) all the stockholders have con-
sented to the transfer, or
(2) the AOI have been properly
2. Restrictions on Transfer; amended to remove the restric-
tion.
Close Corporations b. If it appears in the certificate, but NOT
CONSPICUOUSLY, then although he
may be presumed to have notice of
2.1 General Rule: Free transferability the restriction, he can prove the con-
trary.
of shares
Shares are personal property – Shares of
stock so issued are personal property and 3. Unauthorized Transfers
may be transferred (§63)
3.1 certificates indorsed in blank –
2.2 Exception: In close corporations where the stockholder indorses his certificate in
blank in such a manner as to clothe whoever may
Considering the special circumstances be in possession of it with apparent authority to
attending a close corporation (e.g. formed by deal with the shares as the latter’s own, he will be
persons who know each other well, thus they estopped from claiming the shares as against a
would want to choose the persons who will bonafide purchaser. This is called the theory of
be allowed in their group), it is justifiable and quasi-negotiability (Santamaria v. Hongkong &
even imperative for its stockholders to Shanghai Bank, 1951)
protect themselves from future conflicts by
placing restrictions on the right of each one 3.2 forged transfers – if the corporation
of them to transfer his shares to an outsider should issue a new certificate pursuant to a forged
(§97 & 98). transfer, it incurs no liability to the person in
whose favor it issued it and may demand its return
for cancellation (Hodges v. Lezama, 1965). It is
Validity of restrictions on transfer of shares the duty of the purchaser to determine that the in-
(§98) dorsement was genuine. But with respect to a sub-
 Restrictions on the right to sequent purchaser in good faith and for value, the
transfer shares must appear in the arti- corporation is estopped from denying the validity
cles of incorporation and in the by-laws of the newly issued certificate because by issuing
as well as in the certificate of stock; oth- such, it has represented that the person named
erwise, the same shall not be binding on therein is a stockholder of the corporation. Except
any purchaser thereof in good faith. where recognition of the original and new sub-
 Restrictions shall not be more scriber will result to an overissue of shares. The
onerous than granting the existing stock- new SH would now have right to damages against
holders or the corporation the option to the corporation and the latter against those who
purchase the shares of the transferring made false representation.
stockholder with such reasonable terms,
conditions or period stated therein. If
upon the expiration of said period, the 4. Collateral Transfers
existing stockholders or the corporation
fails to exercise the option to purchase,  Subject to collateral transfers: Shares
the transferring stockholder may sell his of stock being personal property, may be
shares to any third person. the subject matter of
 Presumptions: a. pledge or
b. chattel mortgage.
  Registration in corporate books not recording of the transfer in the books of the
necessary: Such collateral transfers are corporation, and not elsewhere, to be valid as
not covered by Sec. 63 of the Code since against third parties.
such provision applies only to absolute
transfer (Monserrat v. Ceron, 1933).
Thus, the registration in the corporate
books of pledges and chattel mortgages
of shares CANNOT have any legal effect. Chapter XVI
 DISSOLUTION
Lim Tay v CA (1998) 1. Causes of Dissolution
Sy Guiok and Sy Lim pledged their shares in Go
Fay and Co to Lim Tay. They endorsed their
1.1 Expiration of original, extended or
respective share in blank and delivered the same shortened term
to Lim Tay. Sy Guiok and Sy Lim failed to pay  The term
hence Lim Tay went to the corporate secretary to within which the corporation is to exist
ask the registration of the shares in his name. (which cannot be more than 50 years)
Corporate secretary refused. Lim Tay instituted must be stated in its AOI. Once such
an action for mandamus at SEC to compel period expires, the corporation is au-
corporate secretary to register. tomatically dissolved without any
other proceeding and it cannot there-
HELD: Corporate’s secretary cannot be after be considered a de facto corpo-
compelled to record transfer. The duty of a ration.
corporate secretary to record transfers of stocks  A volun-
is ministerial. However, he cannot be compelled tary dissolution may be effected by
to do so when the transferees title to said shares amending the articles of incorporation
has no prima facie validity or is uncertain. to shorten the corporate term pur-
Mandamus will not issue to establish a right but suant to the provisions of the Code.
only to enforce one already established. Lim Tay Upon approval of the amended arti-
failed to establish a legal right to have the shares cles of incorporation or the expiration
registered in his name. Lim Tay failed to of the shortened term, as the case
establish a legal right. He is not owner of the may be, the corporation shall be
shares without foreclosure and purchase at deemed dissolved without any further
auction. He is merely a pledgee. proceedings (§120)

1.2 Voluntary dissolution when no

Attachment of shares
creditors are affected (§118)
 Dissolu-
Garcia vs. Jomouad, (2000)
tion may be effected by majority vote
of the board of directors or trustees,
FACTS: Dico lost a collection case and the and by a resolution duly adopted by
Proprietary Ownership Certificate (POC) in the the affirmative vote of the stockhold-
Cebu Country Club in his name was levied on and ers owning at least two-thirds (2/3) of
scheduled for public auction. Garcia claimed the outstanding capital stock or of at
ownership over the certificate and filed the least two-thirds (2/3) of the members.
action for injunction to enjoin the auction. Dico  Meeting
had executed a Deed of Transfer in favor of to be held upon call of the directors or
petitioner which was furnished to The Club but trustees after publication of the notice
the transfer was not recorded in the books of the of time, place and object of the meet-
Club because petitioner failed to present proof of ing for three (3) consecutive weeks in
payment of the requisite capital gains tax. a newspaper published in the place
HELD: The transfer of the subject certificate where the principal office of said cor-
made by Dico to petitioner was not valid as to poration is located; and if no newspa-
the judgment creditors, as the same still stood in per is published in such place, then in
the name of Dico, the judgment debtor, at the a newspaper of general circulation in
time of the levy on execution. In addition, as the Philippines, after sending such no-
correctly ruled by the CA, the entry in the tice to each stockholder or member
minutes of the meeting of the Club's board of either by registered mail or by per-
directors noting the resignation of Dico as sonal delivery at least thirty (30) days
proprietary member thereof does not constitute prior to said meeting.
compliance with Section 63 of the Corporation  A copy
Code. Said provision of law strictly requires the of the resolution authorizing the disso-
 lution shall be certified by a majority to hear the petition and try any issue
of the board of directors or trustees made by the objections filed; and if no
and countersigned by the secretary such objection is sufficient, and the
of the corporation. material allegations of the petition are
 The Se- true, it shall render judgment dissolv-
curities and Exchange Commission ing the corporation and directing such
shall thereupon issue the certificate disposition of its assets as justice re-
of dissolution. Thus, except for the quires, and may appoint a receiver to
expiration of its term , no dissolution collect such assets and pay the debts
can be effective without some act of of the corporation
the state (Daguhoy Enterprises v.  In this
Ponce, 1954) method of dissolution, SEC may direct
the manner in which the liquidation of
1.3 Voluntary dissolution when the corporate assets should be made
creditors are affected (§119) by assigning this task to the corpora-
 Petition tion itself, or if it deems proper, to a
for dissolution shall be filed with the receiver appointed by it (Campos).
Securities and Exchange Commis-
sion. 1.4 Dissolution by minority in close
 The pe- corporations Voluntary dissolution
tition shall be signed by a majority when creditors are affected (§105)
of its board of directors or trustees Any stockholder of a close corporation
or other officers having the manage- may, by written petition to the Securities
ment of its affairs, verified by its and Exchange Commissions, compel the
president or secretary or one of its dissolution of such corporation whenever
directors or trustees, and shall set any of the acts of the directors, officers or
forth all claims and demands against those in control of the corporation is
it, and that its dissolution was re- illegal, or fraudulent, or dishonest, or
solved upon by the affirmative vote oppressive or unfairly prejudicial to the
of the stockholders representing at corporation or any stockholder or
least two-thirds (2/3) of the out- whenever corporate assets are being
standing capital stock or by at least misapplied or wasted.
two-thirds (2/3) of the members at a
meeting of its stockholders or mem- 1.5 Failure to organize and com-
bers called for that purpose.
mence business; cessation of busi-
 If the
petition is sufficient in form and sub- ness for 5 years (§22)
stance, the Commission shall, by an  Failure to formally organize and
order reciting the purpose of the pe- commence the transaction of its busi-
tition, fix a date on or before which ness or construction of its works
objections thereto may be filed by within two years its corporate pow-
any person, which date shall not be ers shall cease and the corporation is
less than thirty (30) days nor more deemed dissolved
than sixty (60) days after the entry o Transacting busi-
of the order. Before such date, a ness – implies a continuity of acts
copy of the order shall be published or dealings in the accomplishment
at least once a week for three (3) of the purpose for which the cor-
consecutive weeks in a newspaper poration was formed (Menthola-
of general circulation published in tum v. Mangaliman, 1946)
the municipality or city where the o Formally orga-
principal office of the corporation is nize includes not only the adop-
situated, or if there be no such tion of the by-laws but also the
newspaper, then in a newspaper of establishment of the body which
general circulation in the Philippines, will administer the affairs of the
and a similar copy shall be posted corporation and exercise its pow-
for three (3) consecutive weeks in ers
three (3) public places in such mu-  Com-
nicipality or city. menced transaction of its business but
 Upon subsequently becomes continuously
five (5) day's notice, given after the inoperative for a period of at least five
date on which the right to file objec- years ground for suspension or re-
tions as fixed in the order has ex- vocation of its corporate franchise or
pired, the Commission shall proceed certificate of incorporation
1.6 Involuntary dissolution 2. Effects of Dissolution;
Revocation of certificate of registration
Winding-Up and Liquidation
by the SEC (§121)
 A corporation may be dis- 2.1 Loss of juridical personality
solved by the Securities and Ex-  Corporation loses its ju-
change Commission upon filing of a ridical personality and can no longer
verified complaint and after proper lawfully continue its business except
notice and hearing on grounds pro- for the purpose of winding up. For
vided by existing laws, rules and this purpose, it may sue and be sued,
regulations although upon the expiration of three
 Grounds for revocation (Sec. years, all pending actions by or
6, par i, PD 902-A) against the dissolved corporation
o Fraud in procuring its certificate abate (National Abaca Corp. vs. Pore,
of registration 1961)
o Serious misrepresentation as to  cannot even be a de facto
what the corporation can or is corporation, hence subject to collat-
doing to the great prejudice of eral attack (Buenaflor vs. Camarines
or damage to the general public Sur Industry Corp., 1960)
o Refusal to comply or defiance of  cannot enter into new
any lawful order of the Commis- contracts which would have the effect
sion restraining commission of of continuing the business (Cebu Port
acts which would amount to a Labor Union vs. States Marine Co,
grave violation of its franchise 1957)
o Continuous inoperation for a pe-
riod of at least five years 2.2 Executory contracts
o Failure to file by-laws within the  No right or remedy in fa-
required period vor of or against any corporation, its
o Failure to file required reports in stockholders, members, directors,
appropriate forms as deter- trustees, or officers, nor any liability
mined by the Commission within incurred by any such corporation,
the prescribed period stockholders, members, directors,
 Other grounds trustees, or officers, shall be removed
o Sec. 144 BP 68 – Viola- or impaired either by the subsequent
dissolution of said corporation or by
tion by the corporation of any
any subsequent amendment or repeal
provision of the Corporation
of this Code or of any part thereof.
Code
(§145)
o Sec. 104 BP 68 – In case
 The prevailing view is
of a deadlock in a close corpora-
that executory contracts are not extin-
tion, and the SEC deems it
guished. However, some authorities
proper to order the dissolution
make an exception of contracts for
of the corporation as the only
personal services such as employment
practical solution to the dispute
contracts of officers and employees
where the dissolution is involuntary or
Quo Warranto Proceedings (Sec. 2, Rule
the result of merger or consolidation
66 ROC)
in which case the contracts are
 When it has offended
deemed terminated.
against a provision of an Act for its
creation and renewal
 When it has forfeited its 2.3 Winding-Up and Liquidation
privileges and franchises by nonuser  Definition: The winding up and turning
 When it has committed assets of corporation into cash for dis-
or omitted an act which amounts to tribution
a surrender of its corporate rights,  A liquidation proceeding is a proceed-
privileges or franchise ing in rem so that all other interested
 When it has misused a persons whether known to the parties
right, privilege, or franchise con- or not may be bound by such proceed-
ferred upon it by law or when it has ings (Chua vs. NLRC, 1990)
exercised a right, privilege or fran-  For how long may the liquidation of a
chise in contravention of law corporation be undertaken?
 o Every corporation whose charter
expires by its own limitation or is
 annulled by forfeiture or other-  What happens if an asset cannot be
wise, or whose corporate exis- distributed to the person entitled to it?
tence for other purposes is ter- o Upon the winding up of the corpo-
minated in any other manner, rate affairs, any asset dis-
shall nevertheless be continued tributable to any creditor or stock-
as a body corporate for three (3) holder or member who is un-
years after the time when it known or cannot be found shall be
would have been so dissolved escheated to the city or munici-
o However, in case the corporate pality where such assets are lo-
assets are conveyed to a trustee cated.
or a receiver appointed by the  Who may undertake the liquidation of
SEC, the three year limitation a corporate (Methods of Liquidation)?
will not apply (Sumera v. Valen- o By the corporation itself through
cia, 1939) the board of directors – the board
o Although the three year period of directors serve as trustees
may have expired, it does not o Conveyance of all corporate as-
necessarily follow that a creditor sets to trustees who will take
who was unable to collect his charge of the liquidation. From
claim before three years would and after any such conveyance by
lose is rights. It is still possible the corporation of its property in
for him to sue the trustee, if trust for the benefit of its stock-
there be one, or if the circum- holders, members, creditors and
stances so warrant, to follow the others in interest, all interest
assets in the hands of the stock- which the corporation had in the
holders who nay have received property terminates, the legal in-
the same as liquidating divi- terest vests in the trustees, and
dends (Tan Tiong Bio v. Comm. the beneficial interest in the
of Int. Rev., 1962) stockholders, members, creditors
or other persons in interest.
Gelano v. CA (1981) o Liquidation by a receiver who may
have been appointed by the SEC
Even if no trustee is appointed or designated upon its decreeing the dissolution
during the 3-year period of the liquidation of the of the corporation (§119). 3-year
corporation, a suit pending prior to the expira- period does not apply because
tion of the period may still be prosecuted with the corporation is substituted by
the counsel of record being considered as the the receiver (Sumera v. Valencia,
“trustee” required by law. Debtors of the corpo- Supra). However, the mere ap-
ration may not take advantage of the failure of pointment of a receiver, without
the corporation to transfer its assets to a anything more does not result in
trustee; otherwise, it would constitute undue en- the dissolution of the corporation
richment to dismiss the case as against the de- nor bar it from the existence of its
fendant. corporate rights (Leyte Asphalt &
Mineral Oil Co. Ltd., v. Block John-
 What could and should be done dur- ston & Breenbrawn, 1928)
ing the period of liquidation?  A corporation cannot dis-
o For the purpose of prosecuting tribute any of its assets or property
and defending suits by or except upon lawful dissolution and
against it and enabling it to set- only after payment of all its debts and
tle and close its affairs, to dis- liabilities, after which the remaining
pose of and convey its property assets must be distributed to the
and to distribute its assets, but stockholders in proportion to their in-
not for the purpose of continu- terest in the corporation.
ing the business for which it was  Exceptions:
established.  decrease in c/s resulting in a
o Except by decrease of capital surplus which can then be distrib-
stock and as otherwise allowed uted to stockholders provided no
by this Code, no corporation creditors are prejudiced
shall distribute any of its assets  as otherwise allowed by the
or property except upon lawful code:
dissolution and after payment of o Appraisal right
all its debts and liabilities. o Deadlock in a close corporation
 o SH of a close corporation may of the corporation may be considered a trustee of
compel corporation to buy his the corporation at least with respect to the matter
shares at fair value in litigation only.
o Corporation repurchases shares
for any legitimate corporate pur- Liquidation v. Rehabilitation
pose
o Corporation validly distributes Phil. Veterans Bank v. Employees Union
dividend (2001)

Liquidation, in corporation law, connotes a

CLEMENTE, ET. AL. v. CA (1995): winding up or setting with creditors and debtors.
It is the winding up of a corporation so that
The termination of the life of a juridical entity assets are distributed to those entitled to receive
does not by itself cause the extinction or them. It is the process of reducing assets to
diminution of the rights and liabilities of such cash, discharging liabilities and dividing surplus
entity, nor those of its owners and creditors. If or loss.
the three-year extended life has expired without On the opposite end of the spectrum is
a trustee or receiver having been expressly rehabilitation which connotes a reopening or
designated by the corporation within that period, reorganization. Rehabilitation contemplates a
the board of directors (or trustees) itself, may be continuance of corporate life and activities in an
permitted to so continue as "trustees" by legal effort to restore and reinstate the corporation to
implication to complete the corporate liquidation. its former position of successful operation and
Still in the absence of a board of directors or solvency.
trustees, those having any pecuniary interest in It is crystal clear that the concept of liquidation
the assets, including not only the shareholders is diametrically opposed or contrary to the
but likewise the creditors of the corporation, concept of rehabilitation, such that both cannot
acting for and in its behalf, might make proper be undertaken at the same time. To allow the
representation with the Securities and Exchange liquidation proceedings to continue would
Commission, which has primary and sufficiently seriously hinder the rehabilitation of the subject
broad jurisdiction in matters of this nature, for bank.
working out a final settlement of the corporate
concerns.

Dissolved corporation’s capacity to sue:

Reburiano vs. CA, GR 102965, Jan 21, 1999 Chapter XVII

CORPORATE COMBINATION
Corporation amended its AoI to shorten its
corporate existence while the case was pending
in court. SEC approved the amendment but the
trial court was not notified. After the trial court
rendered judgment against corporation, it filed 1. Merger and Consolidation
motion to quash writ of execution because the
corporation lacked juridical personality to sue or 1.1 What is a merger / consolidation?
be sued.  Merger
SC held that it was erroneous to contend that o One of the constituent corpora-
a dissolved and non-existing corporation could no tions remains as an existing juridi-
longer be represented by a lawyer and cal person, whereas the other cor-
concomitantly a lawyer could not appear as poration shall cease to exist.
counsel for a non-existing judicial person. A Merger is the disappearance of
corporation that has a pending action and which one of the corporations with the
cannot be terminated within the three-year other corporation acquiring all the
period after its dissolution is authorized under assets, rights of action, and as-
Sec. 78 [now §122] of the Corporation Law to suming all the liabilities of the dis-
convey all its property to trustees to enable it to appearing corporation.
prosecute and defend suits by or against the o Of course, there is an arrange-
corporation beyond the three-year period. ment as to the shares of stocks
Although private respondent did not appoint any that will be issued to the former
trustee, yet the counsel who prosecuted and stockholders of the two (2) corpo-
defended the interest of the corporation in the rations which were merged. Said
instant case and who in fact appeared in behalf stockholders are now stockhold-
ers of the corporation which sur-
 vives. The proportion between 4. Any dissenting stockholder in stock
the two (2) corporations will be corporations may exercise his ap-
the basis of the shares of stocks praisal right in accordance with the
that will be issued to the stock- Code. Provided, that if after the ap-
holders under the surviving cor- proval by the stockholders of such
poration. plan, the board of directors decides to
 Consolidation abandon the plan, the appraisal right
o If there is consolidation, there shall be extinguished.
will be disappearance of both 5. Amendment to the plan of merger or
the constituent corporations consolidation may be made by ap-
with the emergence of a new proved of the majority vote of the re-
corporate entity, called the con- spective boards of directors or
solidated corporation, which trustees of all the constituent corpora-
shall obtain all the assets of the tions and ratified by the affirmative
disappearing corporations, and vote of stockholders representing at
likewise shall assume all their li- least two-thirds (2/3) of the outstand-
abilities. ing capital stock or of two-thirds (2/3)
o Also, the number of shares that of the members of each of the con-
will be issued to each of the stituent corporations. Such plan, to-
stockholders under the new cor- gether with any amendment, shall be
poration is determined by the considered as the agreement of
ration between the assets of the merger or consolidation.
two (2) corporations.
1.4 What is a plan of merger or
1.2 What is a “constituent corpo- consolidation? (§76)
ration”? A “consolidated corpora- The board of directors or trustees of each
tion”? (§76) corporation, party to the merger or
Two or more corporations may merge consolidation, shall approve a plan of
into a single corporation which shall be merger or consolidation setting forth the
one of the constituent corporations or following:
may consolidate into a new single  The names of the corporations propos-
corporation which shall be the ing to merge or consolidate, here-
consolidated corporation. inafter referred to as the constituent
corporations;
1.3 What corporate approvals are  The terms of the merger or consolida-
tion and the mode of carrying the
required? (§77) same into effect;
1. Approval by majority vote of each of
 A statement of the changes, if any, in
the board of directors or trustees of
the articles of incorporation of the sur-
the constituent corporations of the
viving corporation in case of merger;
plan of merger or consolidation.
and, with respect to the consolidated
2. Approval by the stockholders or
corporation in case of consolidation,
members of each of such corpora-
all the statements required to be set
tions in separate meetings. The af-
forth in the articles of incorporation
firmative vote of stockholders repre-
for corporations organized under this
senting at least two-thirds (2/3) of
Code; and
the outstanding capital stock of each
 Such other provisions with respect to
corporation in the case of stock cor-
the proposed merger or consolidation
porations or at least two-thirds (2/3)
as are deemed necessary or desirable.
of the members in the case of non-
stock corporations shall be neces-
sary for the approval of such plan 1.5 What are articles of merger or
3. Notice of such meetings shall be consolidation? (§78)
given to all stockholders or mem-  After the approval by the stockholders
bers of the respective corporations, or members, articles of merger or arti-
at least two (2) weeks prior to the cles of consolidation shall be executed
date of the meeting, either person- by each of the constituent corpora-
ally or by registered mail. Said no- tions:
tice shall state the purpose of the 1) to be signed by the president or
meeting and shall include a copy or vice-president and
a summary of the plan of merger or 2) certified by the secretary or assis-
consolidation. tant secretary of each corporation
  The articles of merger or consolida-  In case of merger, shall be the
tion shall set forth: surviving corporation designated
1) The plan of the merger or the in the plan of merger; and
plan of consolidation;  In case of consolidation, shall be
2) As to stock corporations, the the consolidated corporation des-
number of shares outstanding, ignated in the plan of consolida-
or in the case of non-stock cor- tion;
porations, the number of mem- 2) The separate existence of the con-
bers; and stituent corporations shall cease, ex-
3) As to each corporation, the cept that of the surviving or the con-
number of shares or members solidated corporation;
voting for and against such plan, 3) The surviving or the consolidated cor-
respectively. poration shall possess all the rights,
privileges, immunities and powers and
1.6 When is the effectivity of shall be subject to all the duties and li-
merger or consolidation? (§79) abilities of a corporation organized un-
 Effectivity: Upon issuance by the der this Code;
SEC of the certificate of merger and 4) The surviving or the consolidated cor-
consolidation poration shall thereupon and there-
 If the Commission is satisfied that after possess:
the merger or consolidation of the  all the rights, privileges, immuni-
corporations concerned is not incon- ties and franchises of each of the
sistent with the provisions of this constituent corporations; and
Code and existing laws, it shall issue  all property, real or personal, and
a certificate of merger or of consoli- all receivables due on whatever
dation, at which time the merger or account, including subscriptions
consolidation shall be effective. to shares and other choses in ac-
 The articles of merger or of consoli- tion, and all and every other inter-
dation shall be submitted to the Se- est of, or belonging to, or due to
curities and Exchange Commission each constituent corporation
in quadruplicate for its approval.  these shall be deemed transferred
 In the case of merger or consolida- to and vested in such surviving or
tion of banks or banking institutions, consolidated corporation without
building and loan associations, trust further act or deed; and
companies, insurance companies, 5) The surviving or consolidated corpora-
public utilities, educational institu- tion shall:
tions and other special corporations  be responsible and liable for all
governed by special laws, the favor- the liabilities and obligations of
able recommendation of the appro- each of the constituent corpora-
priate government agency shall first tions in the same manner as if
be obtained. such surviving or consolidated
 If, upon investigation, the Securities corporation had itself incurred
and Exchange Commission has rea- such liabilities or obligations; and
son to believe that the proposed  any pending claim, action or pro-
merger or consolidation is contrary ceeding brought by or against any
to or inconsistent with the provisions of such constituent corporations
of this Code or existing laws, it shall may be prosecuted by or against
set a hearing to give the corpora- the surviving or consolidated cor-
tions concerned the opportunity to poration.
be heard. Written notice of the date,  The rights of creditors or liens
time and place of hearing shall be upon the property of any of such
given to each constituent corpora- constituent corporations shall not
tion at least two (2) weeks before be impaired by such merger or
said hearing. The Commission shall consolidation
thereafter proceed as provided in
this Code.
Babst v. CA (2001)
1.7 What are the effects of a
merger or consolidation? (§80) It is settled that in the merger of two existing
1) The constituent corporations shall corporations, one of the corporations survives
become a single corporation which: and continues the business, while the other is
dissolved and all its rights, properties and
liabilities are acquired by the surviving constituent corporations, signed by
corporation. president or VP and certified by secre-
tary or assistant secretary, setting
ASSOCIATED BANK v. CA (1998) forth:
 plan of merger or consolidation
Ordinarily, in the merger of two or more existing  in stock corporation, the number
corporations, one of the combining corporations of shares outstanding; in non-
survives and continues the combined business, stock, the number of members
while the rest are dissolved and all their rights,  as to each corporation, number of
properties and liabilities are acquired by the shares or members voting for and
surviving corporation. Although there is against such plan, respectively
dissolution of the absorbed corporations, there is 8) Four copies of the Articles of Merger
no winding up of their affairs or liquidation of or Consolidation shall be submitted to
their assets, because the surviving corporation the SEC for approval. Special corpora-
automatically acquires all their rights, privileges tions like banks, insurance companies,
and powers, as well as their liabilities. building and loan associations, etc.,
need the prior approval of the respec-
tive government agency concerned.
1.8 Procedure for Merger or Consoli- 9) If SEC is satisfied that the merger or
dation (Villanueva) consolidation is legal, it shall issue the
1) Board of each corporation shall draw Certificate of Merger or the Certificate
up a plan of merger or consolidation, of Incorporation, as the case may be.
setting forth: 10) If the SEC is not satisfied, it shall set a
 names of corporations involved hearing, giving due notice to all the
(constituent corporations) corporations concerned. (§76-79)
 terms and mode of carrying it
out 1.9 Limitation on the right to
 statement of changes, if any, in merge / consolidate
the present articles of surviving
corporation; or the articles of 1) Should not create monopolies
the new corporation to be 2) Should not eliminate free and healhty
formed in case of consolidation. competition
2) Plan for merger or consolidation 3) Act 3518 Sec 20 inhibits illegal combi-
shall be approved by majority vote nations
of each board of the concerned cor-
porations at separate meetings. 1.10 Appraisal right – any dissenting
3) The same shall be submitted for ap- stockholder may exercise his appraisal right
proval by the stockholders or mem- under the conditions provided in the Code
bers of each such corporation at
separate corporate meetings duly
called for the purpose. Notice
should be given to all stockholders 2. Sale of substantially all as-
or members at least two (2) weeks sets (§40)
prior to date of meeting, either per-
sonally or by registered mail. 2.1 Restrictions: Subject to the provisions
4) Affirmative vote of 2/3 of the out-
of existing laws on illegal combinations and
standing capital stock in case of
monopolies
stock corporations, or 2/3 of the
members of a non-stock corporation
shall be required. 2.2 Scope of power: To sell, lease, ex-
5) Dissenting stockholders may exer- change, mortgage, pledge or otherwise dis-
cise the right of appraisal. But if pose of all or substantially all of its property
Board abandons the plan to merge and assets, including its goodwill, upon such
or consolidate, such right is extin- terms and conditions and for such considera-
guished. tion, which may be money, stocks, bonds or
6) Any amendment to the plan must be other instruments for the payment of money
approved by the same votes of the or other property or consideration, as its board
board members of trustees and of directors or trustees may deem expedient
stockholders or members required  Meaning of disposition of substantially
for the original plan. all of the corporate property and as-
7) After such approval, Articles of sets- if thereby the corporation would
Merger or Articles of Consolidation be rendered incapable of continuing
shall be executed by each of the
 the business or accomplishing the Advantage of merger and consolidation
purpose for which it was incorpo- over sale:
rated. - furnish a short cut to the accomplish-
ment of various transactions
2.3 Approval, voting and notice - may avoid the difficulty, delay and ex-
requirement: pense which usually accompany disso-
 Majority vote of its board of directors lution, winding up and distribution of
or trustees, assets to its SH by a selling corp
 Authorized by the vote of the stock- - automatic assumption of liabilities of
holders representing at least two- the absorbed corp (in sale, there must
thirds (2/3) of the outstanding capi- be sufficient funds reserved by the ab-
tal stock, or in case of non-stock cor- sorbed corp to pay its liabilities, other-
poration, by the vote of at least to wise the sale may be attacked by
two-thirds (2/3) of the members, in a Compared the creditors as a fraudu-
stockholder's or member's meeting lent conveyance)
duly called for the purpose. - transfer or exchange of shares is ex-
 Written notice of the proposed ac- empt from registration under Securi-
tion and of the time and place of the ties Act (in sale, registration with SEC
meeting shall be addressed to each required)
stockholder or member at his place
of residence as shown on the books Advantage of sale of substantially all
of the corporation and deposited to assets: Where the absorbing corp
the addressee in the post office with foresees problems in securing
postage prepaid, or served person- stockholders’ approval and in granting the
ally appraisal right of dissenters, it may decide
o When SH approval not neces- that its purchase of the assets of the
sary - If disposition is necessary absorbed corp would be more convenient
in the usual and regular course and practical than merger
of business of said corporation
or if the proceeds of the sale or
other disposition of such prop-
erty and assets be appropriated Chapter XVIII
for the conduct of its remaining FOREIGN CORPORATIONS
business.
o In non-stock corporations where
there are no members with vot-
ing rights - the vote of at least a 1. Definition (§123)
majority of the trustees in office
will be sufficient authorization
for the corporation to enter into Foreign corporation is one formed,
any transaction authorized by organized or existing under any laws
this section.
other than those of the Philippines and
2.4 Appraisal right: any dissenting whose laws allow Filipino citizens and
stockholder may exercise his appraisal right corporations to do business in its own
under the conditions provided in the Code
country or state.
2.5 Abandonment of the sale,
lease… - After such authorization or ap- 2. “Doing business” (Sec. 3(d)
proval by the stockholders or members, the
board of directors or trustees may, neverthe- RA 7042, Foreign Investments
less, in its discretion, abandon such sale, Act of 1991)
lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to  Soliciting orders
the rights of third parties under any contract  Service contracts
relating thereto, without further action or ap-  Appointing representatives or distribu-
proval by the stockholders or members. tors domiciled in the Philippines or who in
any calendar year stay in the country for a
2.6 Compared to merger and con- period or periods totaling 180 days or
solidation more
 Opening offices, whether called liason
offices or branches
  Establishing a factory, workshop or from it and turned it over to another. The term
processing plant implies a continuity of commercial dealings and
 Undertaking building construction or arrangements, and contemplates to that extent
erection projects the performance of acts or works or the exercise
 Opening a store, whether wholesale of the functions normally incident to and in the
or retail without prejudice to the provi- progressive prosecution of the purpose and ob-
sions of the Retail Trade Act ject of its organization.
 Maintaining or operating a ware-
house for business purposes including Necessity of obtaining a license to do business:
the storage, display or delivery of its
own products The reason for the license is to subject the
 Participating in the management, foreign corporation doing business in the
supervision or control of any domestic Philippines to the jurisdiction of the courts,
business, firm, entity or corporation in otherwise a foreign corporation illegally doing
the Philippines business here may successfully though
 Any other act or acts that imply a unfairly plead such neglect or illegal act so as
continuity of commercial dealings or ar- to avoid service and thereby impugn the
rangements, and contemplate to that ex- jurisdiction of the local courts.
tent, performance normally incident to ,
and in progressive prosecution of, com-
mercial gain or of the purpose and object
of the business organization
3. Requirements for the is-
 It shall not include: suance of a license
 Mere investment as a shareholder
by a foreign entity in domestic cor- 3.1. Documentary requirements
porations duly registered to do busi-
ness and/or the exercise of such
(§125)
 A foreign corporation applying for a li-
rights as such investor
cense to transact business in the
 Having a nominee director or officer
Philippines shall submit to the SEC:
to represent its interests in such cor-
o Copy of its articles of incorpora-
porations
tion and by-laws, certified in ac-
 Appointing a representative or dis-
cordance with law
tributor domiciled in the Philippines
o Their translation to an official lan-
which transacts business in its own
guage of the Philippines, if neces-
name and for its own account
sary.
 The following acts by themselves
 The application shall be under oath
shall not be deemed doing business in
and, unless already stated in its arti-
the Phil:
cles of incorporation, shall specifically
 The publication of a general adver-
set forth the following:
tisement through newspapers,
brochures or other publication media o The date and term of incorpora-
or through radio or television tion;
 Maintaining the stock of goods in o The address, including the street
the Phil solely for the purpose of number, of the principal office of
having the same processed by an- the corporation in the country or
other entity in the Phil. state of incorporation;
 Collecting information in the Phil. o The name and address of its resi-
 Performing services auxiliary to an dent agent authorized to accept
existing contract or sale, which are summons and process in all legal
not on a continuing basis proceedings and, pending the es-
tablishment of a local office, all
notices affecting the corporation;
Mentholatum Co., Inc., v. Mangaliman
o The place in the Philippines where
(1941)
the corporation intends to oper-
ate;
No general rule or governing principle can be
o The specific purpose or purposes
laid down as to what constitutes “doing” or “en-
which the corporation intends to
gaging” in or ‘transacting” business. Indeed,
pursue in the transaction of its
each case must be judged in the light of its pe-
business in the Philippines: Pro-
culiar environmental circumstances. The true
vided, That said purpose or pur-
test, however, seems to be whether the foreign
poses are those specifically stated
corporation is continuing the body or substance
in the certificate of authority is-
of the business or enterprise for which it was or-
sued by the appropriate govern-
ganized, or whether it has substantially retired
ment agency;
 o The names and addresses of the  In the case of all other foreign corpo-
present directors and officers of rations, no application for license to
the corporation; transact business in the Philippines
o A statement of its authorized shall be accepted by the SEC without
capital stock and the aggregate previous authority from the appropri-
number of shares which the cor- ate government agency, whenever re-
poration has authority to issue, quired by law.
itemized by classes, par value of
shares, shares without par 3.2 Deposit requirements (§126)
value, and series, if any;  Upon issuance of the license, such for-
o A statement of its outstanding eign corporation may commence to
capital stock and the aggregate transact business in the Philippines
number of shares which the cor- and continue to do so for as long as it
poration has issued, itemized by retains its authority to act as a corpo-
classes, par value of shares, ration under the laws of the country or
shares without par value, and state of its incorporation, unless such
series, if any; license is sooner surrendered, re-
o A statement of the amount actu- voked, suspended or annulled in ac-
ally paid in; and cordance with this Code or other spe-
o Such additional information as cial laws.
may be necessary or appropri-  Within sixty (60) days after the is-
ate in order to enable the Secu- suance of the license to transact busi-
rities and Exchange Commission ness in the Philippines, the license, ex-
to determine whether such cor- cept foreign banking or insurance cor-
poration is entitled to a license poration, shall deposit with the SEC
to transact business in the for the benefit of present and future
Philippines, and to determine creditors of the licensee in the Philip-
and assess the fees payable. pines, securities satisfactory to the
 Attached to the application for li- SEC, consisting of :
cense shall be a duly executed cer- o Bonds or other evidence of in-
tificate under oath by the authorized debtedness of the Government of
official or officials of the jurisdiction the Philippines, its political subdi-
of its incorporation, attesting to the visions and instrumentalities, or of
fact that: government-owned or controlled
o The laws of the country or state corporations and entities,
of the applicant allow Filipino o Shares of stock in "registered en-
citizens and corporations to do terprises" as this term is defined
business therein in Republic Act No. 5186,
o The applicant is an existing cor- o Shares of stock in domestic corpo-
poration in good standing. rations registered in the stock ex-
 If such certificate is in a foreign lan- change, or
guage, a translation thereof in Eng- o Shares of stock in domestic insur-
lish under oath of the translator shall ance companies and banks, or
be attached thereto. o Any combination of these kinds of
 The application shall likewise be ac- securities,
companied by a statement under  With an actual market value of at
oath of the president or any other least one hundred thousand
person authorized by the corpora- (P100,000.) pesos;
tion, showing to the satisfaction of  Provided, however, That within six (6)
the SEC and other governmental months after each fiscal year of the li-
agency in the proper cases that the: censee, the SEC shall require the li-
o Applicant is solvent and in censee to deposit additional securities
sound financial condition, and equivalent in actual market value to
o Setting forth the assets and lia- two (2%) percent of the amount by
bilities of the corporation as of which the licensee's gross income for
the date not exceeding one (1) that fiscal year exceeds five million
year immediately prior to the fil- (P5,000,000.00) pesos.
ing of the application.  The SEC shall also require deposit of
 Foreign banking, financial and insur- additional securities if the actual mar-
ance corporations shall, in addition ket value of the securities on deposit
to the above requirements, comply has decreased by at least ten (10%)
with the provisions of existing laws percent of their actual market value at
applicable to them. the time they were deposited.
  The SEC may at its discretion re- said corporation, in form and sub-
lease part of the additional securi- stance as follows:
ties deposited with it if the gross in- o "The (name of foreign corpora-
come of the licensee has decreased, tion) does hereby stipulate and
or if the actual market value of the agree, in consideration of its be-
total securities on deposit has in- ing granted by the Securities and
creased, by more than ten (10%) Exchange Commission a license
percent of the actual market value to transact business in the Philip-
of the securities at the time they pines, that if at any time said cor-
were deposited. poration shall cease to transact
 The SEC may, from time to time, al- business in the Philippines, or
low the licensee to substitute other shall be without any resident
securities for those already on de- agent in the Philippines on whom
posit as long as the licensee is sol- any summons or other legal pro-
vent. Such licensee shall be entitled cesses may be served, then in
to collect the interest or dividends any action or proceeding arising
on the securities deposited. out of any business or transaction
 In the event the licensee ceases to which occurred in the Philippines,
do business in the Philippines, the service of any summons or other
securities deposited as aforesaid legal process may be made upon
shall be returned, upon the li- the SEC and that such service
censee's application therefor and shall have the same force and ef-
upon proof to the satisfaction of the fect as if made upon the duly-au-
SEC that the licensee has no liability thorized officers of the corpora-
to Philippine residents, including the tion at its home office."
Government of the Republic of the  Whenever such service of summons or
Philippines. other process shall be made upon the
SEC, the Commission shall, within ten
(10) days thereafter, transmit by mail
3.3 Appointment of resident a copy of such summons or other le-
agent (§128) gal process to the corporation at its
 A resident agent may be either an (§ home or principal office.
127):  The sending of such copy by the Com-
o Individual residing in the Philip- mission shall be necessary part of and
pines of good moral character shall complete such service. All ex-
and of sound financial standing penses incurred by the Commission
o Domestic corporation lawfully for such service shall be paid in ad-
transacting business in the vance by the party at whose instance
Philippines: the service is made.
 The SEC shall require as a condition
precedent to the issuance of the li-  In case of a change of address of the
cense to transact business in the resident agent, it shall be his or its
Philippines by any foreign corpora- duty to immediately notify in writing
tion that such corporation file with the SEC of the new address.
the SEC a written power of attorney:
o Designating some person who 3.4 Summary: Requisites for the Is-
must be a resident of the Philip- suance of License
pines, on whom any summons  The SEC will issue a license to the for-
and other legal processes may eign corporation to do business in the
be served in all actions or other Philippines, provided the following
legal proceedings against such conditions are met:
corporation, and o Appointment of a Resident Agent:
o Consenting that service upon  Either a Filipino or domestic
such resident agent shall be ad- corporation; and
mitted and held as valid as if  Power of Attorney to SEC to
served upon the duly authorized receive process
officers of the foreign corpora- o Must prove that the foreign corpo-
tion at its home office. ration's country grants reciprocal
 Any such foreign corporation shall rights to Filipinos and Philippine
likewise execute and file with the corporation.
SEC an agreement or stipulation, ex- o Establish an office in the Philip-
ecuted by the proper authorities of pines
o Bring in its assets
 o Undertaking that Filipino credi-  Such corporation may be sued or pro-
tors will be preferred in the ceeded against before Philippine courts or
event of insolvency administrative tribunals on any valid
o Notice of six (6) months should cause of action recognized under Philip-
there be desire to terminate op- pine laws.
erations  In addition, Sec. 134 makes it a
o Franchise and patents must re- ground for revocation of license when a
main in the Philippine, if this is foreign corporation transacts business in
possible the Philippines as agent of or acting for
o Must file a bond of P100,000 and in behalf of any foreign corporation or
which may be in the following entity not duly licensed to do business in
form: the Philippines.
 surety bond  Status of Contracts entered into with-
 government securities out the requisite license
 securities of political subdi- o The failure to obtain a license by
visions a foreign corporation doing business
 shares of stock of registered in the Philippines does not affect the
enterprises with the SEC validity of contracts entered into by
 shares of stock of any cor- such foreign corporation, but merely
poration being sold at the removes its legal standing to sue in lo-
stock exchange cal tribunals. However, the defect
o Provided, that within six (6) may be cured by subsequent registra-
months after each fiscal year, tion by the foreign corporation to ob-
the SEC shall require the deposit tain the necessary license to do busi-
of additional securities equiva- ness in the Philippines. [Home Insur-
lent to 2% of the amount in ex- ance Co. v. Eastern Shipping Lines,
cess of P500,000 of the gross in- 123 SCRA 424 (1983)]
come. [Sec. 125, 126, Corpora- o Although the law does not declare
tion Code] as void or invalid the contracts en-
tered into by a foreign corporation
5. What laws are applicable to with a local corporation without the
former first securing a license or cer-
foreign corporations licensed tificate to do business in the Philip-
to transact business in the pines, the parties in this case cannot
obtain relief on the contracts entered
Philippines? (§129) into because they are charged with
the knowledge of the existing law at
 Any foreign corporation lawfully do- the time they entered into such con-
ing business in the Philippines shall be tract and at the time it is to be opera-
bound by all laws, rules and regulations tive. [Top-Weld Mfg. v. ECED, S.A.,
applicable to domestic corporations of 138 SCRA 118 (1985)]
the same class, EXCEPT such only as pro- o However, in the case of Merrill
vide for the: Lynch Futures, Inc. v. CA, 211 SCRA
o Creation, formation, organiza- 824 (1992), the SC held that although
tion or dissolution of corporations or the foreign corporation has engaged
o Those which fix the relations, li- in business in the Philippines without a
abilities, responsibilities, or duties of license, the dismissal of the suit would
stockholders, members, or officers not be proper on the ground that if
of corporations to each other or to the local investors knew that the for-
the corporation. eign corporation had no license to do
business, then they are estopped from
6. What are the consequence using the lack of license to avoid their
obligations.
of doing business in the Philip-  Legal standing of foreign corporations
pines without a license? (§133) to sue on their corporate names, trade
names, and trademarks
 No foreign corporation transacting o A foreign corporation although not
business in the Philippines without a li- doing business in the Philippines has a
cense, or its successors or assigns, shall personality to sue to oppose the regis-
be permitted to maintain or intervene in tration of a trademark when it is
any action, suit or proceeding in any shown that its products using such
court or administrative agency of the trademark are being imported and
Philippines; sold in the Philippines, pursuant to the
 terms of RA 166. [General Garments for which such corporation is authorized to
v. Director of Patents, 41 SCRA 50 transact business in the Philippines.
(1971)]
o A foreign corporation has a right 9. Amended license (§131)
to maintain an action in Philippine
courts even if it is not licensed to do
 A foreign corporation authorized to
business and is not actually doing
transact business in the Philippines shall
business on its own therein to pro-
obtain an amended license in the event it :
tect its corporate and trade names,
o Changes its corporate name, or
since it is a property right in rem,
o Desires to pursue in the Philippines
which it may assert to protect
other or additional purposes
against all the world, in any of the
 By submitting an application therefor
courts of the world--even in jurisdic-
to the SEC, favorably endorsed by the ap-
tion where it does not transact busi-
propriate government agency in the
ness--just the same as it may pro-
proper cases.
tect its tangible property, against
trespass or conversion. This is in
consonance with the Convention of 10. Merger or consolidation in-
the Union of Paris for the Protection volving a foreign corporation
of Industrial Property to which the
Phils. is a party. Article 8 thereof licensed in the Philippines
provides, "A trade name shall be (§132)
protected in all the countries of the
Union without the obligation of filing  One or more foreign corporations au-
or registration, whether or not it thorized to transact business in the Philip-
forms part of the trademark." The pines may merge or consolidate with any
mandate is contained in RA 166, or domestic corporation or corporations if :
the Trademark Law. [Converse Rub- o Such is permitted under Philippine
ber Corp. v. Universal Rubber Prod- laws and by the law of its incorpora-
ucts, 147 SCRA 154 (1987)] tion
o The requirements on merger or
7. Application to existing for- consolidation as provided in this Code
are followed
eign corporations (§148)  Whenever a foreign corporation au-
thorized to transact business in the Philip-
 Every foreign corporation which on the pines shall be a party to a merger or con-
date of the effectivity of the Code is au- solidation in its home country or state as
thorized to do business in the Philippines permitted by the law of its incorporation,
under a license issued to it, shall con- such foreign corporation shall, within sixty
tinue to have such authority under the (60) days after such merger or consolida-
terms and condition of its license, sub- tion becomes effective, file with the SEC,
ject to the provisions of this Code and and in government agency, a copy of the
other special laws. articles of merger or consolidation duly au-
thenticated by the proper official or offi-
8. Amendments to articles of cials of the country or state under the laws
of which merger or consolidation was ef-
incorporation or by-laws of for- fected
eign corporations (§130)  Provided, however, that if the ab-
sorbed corporation is the foreign corpora-
 Within sixty (60) days after the amend- tion doing business in the Philippines, the
ment becomes effective, file with the latter shall at the same time file a petition
SEC, and in the proper cases with the for withdrawal of its license.
appropriate government agency, a duly
authenticated copy of the articles of in- 11. Revocation of license
corporation or by-laws, as amended, in-
dicating clearly in capital letters or by (§134)
underscoring the change or changes
made, duly certified by the authorized  Without prejudice to other grounds
official or officials of the country or state provided by special laws, the license of a
of incorporation. foreign corporation to transact business in
 The filing thereof shall not of itself en- the Philippines may be revoked or sus-
large or alter the purpose or purposes pended by the SEC upon any of the follow-
ing grounds:
 o Failure to file its annual report  If a foreign corporation duly licensed
or pay any fees as required by this to do business desires to withdraw, it must
Code; file a petition for withdrawal, and must
o Failure to appoint and maintain meet the following requirements:
a resident agent in the Philippines as o All claims accrued in the Philip-
required by this Title; pines must be settled
o Failure, after change of its resi- o All taxes must be paid
dent agent or of his address, to sub- o Petition must be published once a
mit to the Securities and Exchange week for three (3) consecutive weeks.
Commission a statement of such (§136)
change as required by this Title;
o Failure to submit to the Securi- Doing business in the Philippines without a license:
ties and Exchange Commission an
authenticated copy of any amend- Communications Materials vs. CA, (1996)
ment to its articles of incorporation
or by-laws or of any articles of
In determining whether a corporation does
merger or consolidation within the
business in the Philippines or not, aside from their
time prescribed by this Title;
activities within the forum, reference may be made
o A misrepresentation of any ma-
to the contractual agreements entered into by it
terial matter in any application, re-
with other entities in the country. A scrutiny of the
port, affidavit or other document
different contracts and agreements entered into
submitted by such corporation pur-
with various business contacts in the country
suant to this Title;
indicate convincingly a purpose to convey to
o Failure to pay any and all taxes,
customers and the general public that they are
imposts, assessments or penalties, if
dealing directly with the foreign corporation, and
any, lawfully due to the Philippine
that foreign corporation is actively engaging in
Government or any of its agencies
business in the country. These agreements also
or political subdivisions;
contain provisions which are highly restrictive in
o Transacting business in the
nature, reducing the local signatory to be a mere
Philippines outside of the purpose or
extension or instrument of the foreign corporation.
purposes for which such corporation
Hence, the foreign corporation is deemed to be
is authorized under its license;
doing business in the Philippines without a license.
o Transacting business in the
Philippines as agent of or acting for Nonetheless, petitioner is estopped from raising
and in behalf of any foreign corpora- this fact to bar the foreign corporation from suing.
tion or entity not duly licensed to do One who has dealt with a corporation of foreign
business in the Philippines; or origin as a corporate entity is estopped to deny its
o Any other ground as would ren- corporate existence and capacity. And the doctrine
der it unfit to transact business in of estoppel to deny corporate existence applies to
the Philippines. (n) a foreign as well as to domestic corporations. The
principle will be applied to prevent a person
contracting with a foreign corporation from later
12. Issuance of certificate of taking advantage of its noncompliance with the
revocation (§135) statutes chiefly in cases where such person has
received the benefits of the contract.
 Upon the revocation of any such li-
cense to transact business in the Philip- MR Holdings, Ltd vs. Bajar,( 2002)
pines, the Securities and Exchange Com-
mission shall issue a corresponding cer- The question whether or not a foreign
tificate of revocation, furnishing a copy corporation is doing business is dependent
thereof to the appropriate government principally upon the facts and circumstances of
agency in the proper cases. each particular case, considered in the light of the
 The Securities and Exchange Com- purposes and language of the pertinent statute or
mission shall also mail to the corporation statutes involved and of the general principles
at its registered office in the Philippines governing the jurisdictional authority of the state
a notice of such revocation accompanied over such corporations
by a copy of the certificate of revocation. CAB, the CA categorized as “doing business”
petitioner’s participation under the “Assignment
13. Withdrawal by a foreign Agreement” and the “Deed of Assignment.” This is
corporation (Section 136) simply untenable. The expression “doing
business” should not be given such a strict and
literal construction as to make it apply to any
corporate dealing. At this early stage and with
petitioner’s acts or transactions limited to the o Corporations declared to be
assignment contracts, it cannot be said that it vested with public interest in ac-
had performed acts intended to continue the cordance with the provisions of
business for which it was organized. It may not this Code.
be amiss to point out that the purpose or
business for which petitioner was organized is 1.3 Validity of restrictions on
not discernible in the records. No effort was transfer of shares (§98)
exerted by the CA to establish the nexus  Restrictions on the right to transfer
between petitioner’s business and the acts shares must appear in the:
supposed to constitute “doing business.” Thus, o Articles of incorporation
whether the assignment contracts were o By-laws
incidental to petitioner’s business or were o Certificate of stock
continuation thereof is beyond determination.  OTHERWISE, the same shall not be bind-
ing on any purchaser in good faith.
 Said restrictions shall not be more
onerous than granting the existing
Chapter XIX stockholders or the corporation the
option to purchase the shares of the
SPECIAL CORPORATIONS transferring stockholder with such rea-
sonable terms, conditions or period
stated therein.
1. Close Corporations  If upon the expiration of said period,
the existing stockholders or the corpo-
ration fails to exercise the option to
1.1 What is a close corporation? purchase, the transferring stockholder
(§96) may sell his shares to any third per-
son.
 A close corporation is one whose ar-
ticles of incorporation provide that:
o All the corporation's issued 1.4 Effects of issuance or transfer
stock of all classes, exclusive of of stock in breach of qualifying
treasury shares, shall be held of conditions (§99)
record by not more than a speci-  A person is conclusively presumed to
fied number of persons, not ex- have notice of the fact of ineligibility
ceeding twenty (20); to be a stockholder:
o All the issued stock of all classes o If stock of a close corporation is
shall be subject to one or more issued or transferred to any per-
specified restrictions on transfer son who is not entitled under any
permitted by this Title; and provision of the articles of incor-
o The corporation shall not list in poration to be a holder of record
any stock exchange or make of its stock, and
any public offering of any of its o If the certificate for such stock
stock of any class. conspicuously shows the qualifica-
 A corporation shall not be deemed a tions of the persons entitled to be
close corporation when at least two- holders of record thereof
thirds (2/3) of its voting stock or vot-  A person to whom stock is issued or
ing rights is owned or controlled by transferred is conclusively presumed
another corporation which is not a to have notice of these facts:
close corporation. o If the articles of incorporation of a
close corporation states the num-
1.2 What entities may not be or- ber of persons, not exceeding
ganized as closed corpora- twenty (20), who are entitled to
be holders of record of its stock,
tions?
and
 Any corporation may be incorpo-
o If the certificate for such stock
rated as a close corporation, except:
conspicuously states such num-
o Mining
ber, and
o Oil companies
o If the issuance or transfer of stock
o Stock exchanges
to any person would cause the
o Banks
stock to be held by more than
o Insurance companies
such number of persons.
o Public utilities
 If a stock certificate of any close cor-
o Educational institutions
poration conspicuously shows a re-
 striction on transfer of stock of the sions of such agreements are con-
corporation, the transferee of the tained, except those required by
stock is conclusively presumed to this Title to be embodied in said
have notice of the fact that he has articles of incorporation.
acquired stock in violation of the re- 2. An agreement between two or more
striction, if such acquisition violates stockholders, if in writing and signed
the restriction. by the parties thereto, may provide
 Whenever any person to whom that in exercising any voting rights,
stock of a close corporation has the shares held by them shall be
been issued or transferred has, or is voted as therein provided, or as they
conclusively presumed under this may agree, or as determined in accor-
section to have, notice either dance with a procedure agreed upon
o That he is a person not eligible by them.
to be a holder of stock of the 3. No provision in any written agreement
corporation, or signed by the stockholders, relating to
o That transfer of stock to him any phase of the corporate affairs,
would cause the stock of the shall be invalidated as between the
corporation to be held by more parties on the ground that its effect is
than the number of persons per- to make them partners among them-
mitted by its articles of incorpo- selves.
ration to hold stock of the corpo- 4. A written agreement among some or
ration, or all of the stockholders in a close cor-
o That the transfer of stock is in poration shall not be invalidated on
violation of a restriction on the ground that it so relates to the
transfer of stock, the corpora- conduct of the business and affairs of
tion may, at its option, refuse to the corporation as to restrict or inter-
register the transfer of stock in fere with the discretion or powers of
the name of the transferee. the board of directors:
 The provisions of subsection (4) shall  Provided, That such agreement
not be applicable if the transfer of shall impose on the stockholders
stock, though contrary to subsec- who are parties thereto the liabili-
tions (1), (2) or (3), has been con- ties for managerial acts imposed
sented to by all the stockholders of by this Code on directors.
the close corporation, or if the close 5. To the extent that the stockholders
corporation has amended its articles are actively engaged in the manage-
of incorporation in accordance with ment or operation of the business and
this Title. affairs of a close corporation, the
 The term "transfer", as used in this stockholders shall be held to strict
section, is not limited to a transfer fiduciary duties to each other and
for value. among themselves. Said stockholders
 The provisions of this section shall shall be personally liable for corporate
not impair any right which the trans- torts unless the corporation has ob-
feree may have to rescind the trans- tained reasonably adequate liability
fer or to recover under any applica- insurance.
ble warranty, express or implied.
1.6 Amendment of articles of incor-
1.5 Agreements by stockholders poration (§103)
(Section 100) Any amendment to the articles of
1. Agreements by and among stock- incorporation which seeks to delete or
holders: remove any provision required by this Title
 Executed before the formation to be contained in the articles of
and organization of a close cor- incorporation or to reduce a quorum or
poration, voting requirement stated in said articles
 Signed by all stockholders of incorporation shall not be valid or
 Shall survive the incorporation effective unless approved by the
of such corporation and shall affirmative vote of at least two-thirds (2/3)
continue to be valid and binding of the outstanding capital stock, whether
between and among such stock- with or without voting rights, or of such
holders, if such be their intent, greater proportion of shares as may be
 To the extent that such agree- specifically provided in the articles of
ments are not inconsistent with incorporation for amending, deleting or
the articles of incorporation, ir- removing any of the aforesaid provisions,
respective of where the provi- at a meeting duly called for the purpose.
1.7 Deadlocks 3. Provisional Director
 An impartial person who is neither
1. Deadlocks, Defined: a stockholder nor a creditor of the
corporation or of any subsidiary or
 Notwithstanding any contrary affiliate of the corporation, and
provisions in the articles of in- whose further qualifications, if
corporation or by-laws or agree- any, may be determined by the
ment of stockholders of a close Commission.
corporation  A provisional director is not a re-
 The directors or stockholders ceiver of the corporation and does
are so divided respecting the not have the title and powers of a
management of the corpora- custodian or receiver.
tion's business and affairs  A provisional director shall have
 The votes required for any cor- all the rights and powers of a duly
porate action cannot be ob- elected director of the corpora-
tained tion, including the right to notice
 The consequence is that the of and to vote at meetings of di-
business and affairs of the cor- rectors, until such time as he shall
poration can no longer be con- be removed by order of the Com-
ducted to the advantage of the mission or by all the stockholders.
stockholders generally  His compensation shall be deter-
mined by agreement between him
2. Resolution of deadlocks and the corporation subject to ap-
 The SEC, upon written petition proval of the Commission, which
by any stockholder, shall have may fix his compensation in the
the power to arbitrate the dis- absence of agreement or in the
pute. event of disagreement between
 In the exercise of such power, the provisional director and the
the Commission shall have au- corporation.
thority to make such order as it
deems appropriate, including an San Juan Structural and Steel Fabricatiors
order: vs. CA (1998)
o Cancelling or altering any
provision contained in the Motorich entered into agreement with San Juan
articles of incorporation, by- for the transfer of a parcel of Land to latter. San
laws, or any stockholder's Juan already paid downpayment. When San Juan
agreement; was ready to pay the balance, Motorich refused
o Cancelling, altering or en- to sell. Motorich contend that Nenita
joining any resolution or act Gruenberg’s, treasurer of Motorich, signature is
of the corporation or its not sufficient to bind Motorich, and that the
board of directors, stock- signature of Reynaldo Gruenberg, president of
holders, or officers; Motorich is required. Nenita Gruenberg is the
o Directing or prohibiting any spouse of Reynaldo Gruenberg and both owns
act of the corporation or its 99.866% of the shares of stock of the
board of directors, stock- corporation.
holders, officers, or other HELD: Motorich is not a close corporation. The
persons part to the action; mere ownership by a single stockholder or by
o Requiring the purchase at another corporation of all or nearly all of the
their fair value of shares of capital stock of a corporation is not of itself
any stockholder, either by sufficient ground for disregarding their separate
the corporation regardless personalities. A narrow distribution of ownership
of the availability of unre- does not of itself make a close corporation.
stricted retained earnings in There are exceptional cases where an action by a
its books, or by the other director who is singly is the controlling
stockholders; stockholder may be considered as a binding
o Appointing a provisional di- corporate act and a board action is a mere
rector; formality. However, Nenita is not the sole
o Dissolving the corporation; controlling stockholder.
or
o Granting such other relief as
the circumstances may war-
rant.
 CLOSE CORPORATIONS REGULAR CORPORATIONS
1. Management / Board Authority

 There can be classification of directors into one  There are no classification of board of directors
or more classes, each of whom may be voted
for and elected solely by a particular class of
stock; and
 Corporate Powers devolved upon board of direc-
 The articles of incorporation of a close corpora- tors whose powers are executed by officers.
tion may provide that the business of the cor- Cannot provide that it be managed by stock-
poration shall be managed by the stockholders holders
of the corporation rather than by a board of di-
rectors. So long as this provision continues in
effect:
 Board of directors must be elected in a stock-
1. No meeting of stockholders need be called holders meeting
to elect directors
2. Unless the context clearly requires other-  Stockholders of a corporation are separate and
wise, the stockholders of the corporation distinct from directors
shall be deemed to be directors for the pur-
pose of applying the provisions of this Code
3. The stockholders of the corporation shall
be subject to all liabilities of directors.
 Officers must be elected by the Board of Direc-
 The articles of incorporation may likewise pro- tors
vide that all officers or employees or that speci-
fied officers or employees shall be elected or
appointed by the stockholders, instead of by
the board of directors.

2. Meetings  The directors or trustees shall not act individu-

ally nor separately but as a body in a lawful
 Unless the by-laws provide otherwise, any ac- meeting. They will act only after discussion and
tion by the directors of a close corporation deliberation of matters before them. Contracts
without a meeting shall nevertheless be entered into without a formal board resolution
deemed valid if: does not bind the corporation except when rati-
fied or when majority of the board has knowl-
1. Before or after such action is taken, written edge of the contract and the contract benefited
consent thereto is signed by all the direc- the corporation.
tors; or
 Absence of a prompt objection in writing does
2. All the stockholders have actual or implied not ratify acts done by directors without a valid
knowledge of the action and make no meeting. There must be express or implied rati-
prompt objection thereto in writing; or fication.

3. The directors are accustomed to take infor-  Express ratification may consist of a Board Res-
mal action with the express or implied ac- olution to that effect
quiescence of all the stockholders; or
 Implied ratification may consist of acceptance of
4. All the directors have express or implied benefits from said unauthorized act while hav-
knowledge of the action in question and ing knowledge of said act
none of them makes prompt objection
thereto in writing.  Failure to give notice would render a meeting
voidable.
 If a director's meeting is held without proper
call or notice, an action taken therein within the  Attendance to a meeting despite want of notice
corporate powers is deemed ratified by a direc- will be deemed implied waiver
tor who failed to attend, unless he promptly
files his written objection with the secretary of  All proceedings had and any business trans-
the corporation after having knowledge acted at any meeting of the stockholders or
thereof. members, if within the powers or authority of
the corporation, shall be valid even if the meet-
 CLOSE CORPORATIONS REGULAR CORPORATIONS
ing be improperly held or called, provided all the
stockholders or members of the corporation are
present or duly represented at the meeting.
(§51)

3. Voting / Quorum  No share may be deprived of voting rights, ex-

cept Preferred or Redeemable shares, unless
 The AOI may provide for a classification of di- otherwise provided by the Code
rectors into one or more classes, each of which
may be voted for and elected solely by a partic-  There shall always be a class/series of shares
ular class of stock. which have a COMPLETE VOTING RIGHTS

 EACH SHARE SHALL BE EQUAL IN ALL RESPECTS

TO EVERY OTHER SHARE, except as otherwise
provided in the AOI

 For Board of directors, the by-laws or AOI can

 The AOI may provide for a greater quorum or provide for a greater majority in quorum
voting requirements in meetings of stockhold-
ers or directors than those provided in this  For stockholders, the AOI can provide for a dif-
Code. ferent percentage in quorum

4. Pre-emptive Right  Limitations on the exercise of pre-emptive right:

 The pre-emptive right of stockholders in close a. Such pre-emptive right shall not extend to
corporations shall extend to all stock to be is- shares to be issued in compliance with laws re-
sued, including reissuance of treasury shares, quiring stock offerings or minimum stock own-
whether for money, property or personal ser- ership by the public;
vices, or in payment of corporate debts, unless
the articles of incorporation provide otherwise. b. Not extend to shares to be issued in good faith
with the approval of the stockholders repre-
senting two-thirds (2/3) of the outstanding capi-
tal stock, in exchange for property needed for
corporate purposes or in payment of a previ-
ously contracted debt

c. Shall not take effect if denied in the Articles of

Incorporation or an amendment thereto.

5. Transferability

 Restrictions on the right to transfer shares  Restrictions on the right to transfer not allowed
must appear in the AI and in the by-laws as
well as in the certificate of stock otherwise the
same shall not be binding on any purchaser
thereof in good faith
6. Withdrawal Right

 Any stockholder of a close corporation may, for  Stockholders may require the corporation to
any reason, compel the said corporation to pur- buy-back their shares at fair value when the
chase his shares at their fair value, which shall Corporation has unrestricted Retained Earnings:
not be less than their par or issued value, when a. In case any amendment to the articles of
the corporation has sufficient assets in its incorporation which has the effect of:
books to cover its debts and liabilities exclusive  changing or restricting the rights of
of capital stock any stockholder or class of shares, or
 authorizing preferences in any re-
 Any stockholder of a close corporation may, by spect superior to those of outstanding
written petition to the SEC, compel the dissolu- shares of any class, or
tion of such corporation whenever:  extending or shortening the term of
 CLOSE CORPORATIONS REGULAR CORPORATIONS
1. Any of acts of the directors, officers or corporate existence
those in control of the corporation is illegal, b. In case of sale, lease, exchange, transfer,
or fraudulent, or dishonest, or oppressive mortgage, pledge or other disposition of all
or unfairly prejudicial to the corporation or or substantially all of the corporate prop-
any stockholder, or erty and assets as provided in the Code;
2. Corporate assets are being misapplied or and
wasted. c. In case of merger or consolidation
d. Extension or shortening of the term of the
corporation (§37)
e. Diversion of funds of corporation from pri-
mary purpose to secondary purpose (§41)

 The corporation may buy-back shares of stock-

holders subject to the following limitations
(Treasury shares):
a. There must be unrestricted retained earn-
ings
b. Must be for a legitimate purpose
2. Educational Corporations a. Who may form—The chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of
such religious denomination, sect or church.
2.1 Incorporation (§110)

a. Governing Laws: Special Laws and the b. Filling of Vacancies (§114)

Corporation Code (§106)
1. The successors in office concerned
shall become the corporation sole on
b. Pre-requisites to Incorporation: Except upon
their accession to office and shall be
favorable recommendation of the (Ministry of
permitted to transact business as such
Education and Culture), the SEC shall not accept
on the filing with the Securities and
or approve the articles of incorporation and by-
Exchange Commission of a copy of their
laws of any educational institution (§107)
commission, certificate of election, or
letters of appointment, duly certified by
2.2 Board of Trustees (§108) any notary public.
2. During any vacancy in the office, the
a. Non-stock
person or persons authorized and
empowered by the rules, regulations or
1. Composition—not less than 5 nor more than
discipline of the religious denomination,
15 trustees, but always in multiples of five.
sect or church represented by the
Unless otherwise provided in the articles of
corporation sole to administer the
incorporation or the by-laws, the board or
temporalities and manage the affairs,
trustees of incorporated schools, colleges, or
estate and properties of the corporation
other institutions of learning shall:
sole during the vacancy shall exercise all
a. So classify themselves that the term
the powers and authority of the
of office of one-fifth (1/5) of their
corporation sole during such vacancy.
numbers shall expire every year.
b. Trustees thereafter elected to fill
c. Purpose-- For the purpose of administering and
vacancies, occurring before the
managing, as trustee, the affairs, property and
expiration of a particular term shall hold
temporalities of any religious denomination, sect
office only for the unexpired period
or church. (§110)
c. Trustees elected thereafter to fill
vacancies caused by expiration of term shall
d. The Articles of Incorporation must set forth
hold office for five (5) years
that (§111):
1. The presiding elder of such religious
2. Quorum—Majority of the trustees
denomination, sect or church is the chief
3. Powers and Authority of trustees shall be
archbishop, bishop, priest, minister,
defined in the by-laws
rabbi or presiding elder of his religious
denomination, sect or church and that
b. Stock—The number and erm of directors shall
he desires to become a corporation sole;
be governed by the provisions on stock
corporations. 2. The rules, regulations and discipline of
his religious denomination, sect or
church are not inconsistent with his
becoming a corporation sole and do not
3. Religious Corporations forbid it;

3.1 Classes of Religious Corporations 3. As such chief archbishop, bishop,

(§ 109) priest, minister, rabbi or presiding elder,
he is charged with the administration of
a. Corporation Sole the temporalities and the management
of the affairs, estate and properties of
b. Religious Corporations—governed by the his religious denomination, sect or
Corporation Code and the general provisions on church within his territorial jurisdiction,
non-stock corporations insofar as thye may be describing such territorial jurisdiction;
applicable.
4. The manner in which any vacancy
occurring in the office of chief
3.2 Corporation Sole (§ 110) archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be
filled, according to the rules, regulations
or discipline of the religious
 denomination, sect or church to which been given by
he belongs; and publication or otherwise
in such manner and for
5. The place where the principal office of such time as said court
the corporation sole is to be established may have directed, and
and located, which place must be within *that it is to the interest
the Philippines. of the corporation that
leave to sell or
The articles of incorporation may include any mortgage should be
other provision not contrary to law for the granted.
regulation of the affairs of the corporation. ii. The application for leave to
sell or mortgage must be made
e. Filing/submission of the Articles of
by petition, duly verified, by the
Incorporation (§112):
chief archbishop, bishop, priest,
1. Verification before filing, by affidavit minister, rabbi or presiding elder
or affirmation of the chief archbishop, acting as corporation sole, and
bishop, priest, minister, rabbi or may be opposed by any
presiding elder, as the case may be, member of the religious
denomination, sect or church
2. Accompanied by a copy of the represented by the corporation
commission, certificate of election or sole:
letter of appointment of such chief
archbishop, bishop, priest, minister, 3. When the Intervention of the Courts
rabbi or presiding elder, duly certified to shall not be necessary—In cases where
be correct by any notary public. the rules, regulations and discipline of
the religious denomination, sect or
f. Effect of the Filing of the Articles (§112):
church, religious society or order
1. Such chief archbishop, bishop, priest,
concerned represented by such
minister, rabbi or presiding elder shall
corporation sole regulate the method of
become a corporation sole.
acquiring, holding, selling and
mortgaging real estate and personal
2. All temporalities, estate and
property, such rules, regulations and
properties of the religious
discipline shall control.
denomination, sect or church
theretofore administered or
h. Dissolution (§115):
managed by him as such chief
archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held 1. A corporation sole may be dissolved
in trust by him as a corporation sole, and its affairs settled voluntarily by
for the use, purpose, behalf and sole submitting to the Securities and
benefit of his religious Exchange Commission a verified
denomination, sect or church, declaration of dissolution.
including hospitals, schools,
colleges, orphan asylums, 2. The declaration of dissolution shall
parsonages and cemeteries thereof. set forth:
a. The name of the corporation;
g. Acquisition and Alienation of Property (§113):
1. Purpose for holding and purchasing b. The reason for dissolution and
the real and personal property, or winding up;
receiving gifts and bequests—For its
church, charitable, benevolent or c. The authorization for the
educational purposes. dissolution of the corporation by
the particular religious
2. Conditions for sale or mortgage of real denomination, sect or church;
property held by it:
i. By obtaining an order for that d. The names and addresses of
purpose from the Court of First the persons who are to
Instance of the province where supervise the winding up of the
the property is situated upon affairs of the corporation.
proof made to the satisfaction of
3. Effect of approval of declaration of
the court that:
dissolution by the Securities and
*notice of the
Exchange Commission—the corporation
application for leave to
shall cease to carry on its operations
sell or mortgage has
 except for the purpose of winding up its f. The names, nationalities, and
affairs. residences of the trustees elected by the
religious society or religious order, or the
diocese, synod, or district organization
3.3 Religious Societies (§ 116) to serve for the first year or such other
period as may be prescribed by the laws
of the religious society or religious order,
a. Who may form a Religious Society: or of the diocese, synod, or district
organization, the board of trustees to be
Any religious society or religious order, or any not less than five (5) nor more than
diocese, synod, or district organization of any fifteen (15).
religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, d. Purpose of incorporation
or discipline of the religious denomination, sect
or church of which it is a part, or by competent For the administration of its temporalities or for
authority. the management of its affairs, properties and
estate.
b. Internal Requirement

Upon written consent and/or by an affirmative

vote at a meeting called for the purpose of at b.
least two-thirds (2/3) of its membership, THE SECURITIES
c. SEC Requirement REGULATION CODE
1. Filing with the Securities and (RA 8799)
Exchange Commission, articles of
incorporation verified by the affidavit of
the presiding elder, secretary, or clerk or
other member of such religious society
or religious order, or diocese, synod, or Chapter I
district organization of the religious
denomination, sect or church.
OVERVIEW:
THE FINANCIAL MARKETS
2. The Articles must set forth the ff:
a. That the religious society or religious
order, or diocese, synod, or district 1. Capital Markets
organization is a religious organization of
a religious denomination, sect or church; The places to go if you want to raise new
money
b. That at least two-thirds (2/3) of its
membership have given their written
consent or have voted to incorporate, at 1.1 Equity Capital – for the investor,
a duly convened meeting of the body; the stock market provides a variable return
a. Stock Market –
c. That the incorporation of the religious Security – eg, shares of stock
society or religious order, or diocese,
synod, or district organization desiring to 1.2 Debt Capital – for the lender, the
incorporate is not forbidden by money or bond market provides a fixed
competent authority or by the return
constitution, rules, regulations or
discipline of the religious denomination, b. Money Market – for short term
sect, or church of which it forms a part; debts, ie, those normally maturing
within 1 year from date of issuance –
d. That the religious society or religious
order, or diocese, synod, or district Security – commercial paper (an
organization desires to incorporate for unsecured IOU of a company,
the administration of its affairs, issued on a discount basis,
properties and estate; promising to pay the holder the
full face value thereof upon
e. The place where the principal redemption)
office of the corporation is to be
established and located, which place
must be within the Philippines; and
 c. Bond Market – for long term debts,
ie, those normally maturing after a The State shall establish a socially conscious,
year from date of issuance free market that regulates itself, encourages
the widest participation of ownership in
Security – junk bonds (high yield enterprises, enhances the democratization of
bonds having high interest rates wealth, promotes the development of the
and are issued by lower credit capital market, protect investors, ensures full
rated companies or companies and fair disclosure about securities,
with no credit rating) minimizes if not totally eliminates insider
trading and other fraudulent or manipulative
devices and practices which create
2. Non-Capital Markets distortions in the free market.

PSE vs. Court of Appeals (1997)

The places to go if you want to hedge or
mitigate the risks attached to holding capital
The Securities Act is designed not only to provide
assets
investors with adequate information upon which
to base their decision to buy and sell securities,
2.1 Commodity Market – The but also to protect legitimate business seeking o
instruments traded in this market are not obtain capital through honest representation
present assets like shares of stock, against competition from crooked promoters and
commercial papers or bonds but future prevent fraud in sale of securities.
contracts calling for delivery of an asset ; for
this reason, a commodity market is usually The intended effects of the Securities Act are
referred to as a futures market. (eg, chiefly the following:
agricultural products, metals and financial a. Prevention of excesses and fraudulent
instruments) transactions, merely by requirement
that their details be revealed;
Security – a futures contract (one b. Placing the market during the early
which entitles the holder to buy or stages of the offering of security a body
sell a specific amount of the of information, which operating
underlying commodity represented indirectly through investment services
by the contract in a prearranged, and expert investors, will intend to
deliverable grade at a specific date produce a more accurate appraisal of a
in the future at a specified price. security.

2.2 Foreign Exchange Market – This The Code is self-executory, and failure of SEC to
market is an over-the-counter market issue rules and regulations shall not in any
conducted by international banks and does manner affect its self-executroy nature (Sec.
not have a central location 72.1)

Security – a forward exchange

contract 2. Powers and Functions of the
SEC (Sec. 5)
2.3 Options Market – It enables an
investor to purchase an option giving him 1. Have jurisdiction and supervision over
the right to buy or sell a specific number of all corporations, partnerships or
shares at a future date, at a specific price. associations who are the grantees of
For this right, the investor either pays or primary franchises and/or a license or
receives money but (just like in a commodity permit issued by the Government;
market) the money involved is only a fraction 2. Formulate policies and
of the market value of the shares concerned. recommendations on issues concerning
the securities market, advise Congress
Security – call or put options and other government agencies on all
aspects of the securities market
3. Approve, reject, suspend, revoke or
require amendments to registration
Chapter II statements, and registration and
licensing applications;
OVERVIEW OF THE LAW 4. Regulate, investigate or supervise the
activities of persons to ensure
compliance;
1. State Policy (Sec.2)
 5. Supervise, monitor, suspend or take 3.1 Securities - are shares, participation
over the activities of exchanges, or interests in a corporation or in a
clearing agencies and other SROs; commercial enterprise or profit-making
6. Impose sanctions for the violation of venture and evidenced by a certificate,
laws, rules, regulations and orders contract, instrument, whether written or
issued pursuant thereto; electronic in character. It includes:
7. Prepare, approve, amend or repeal
rules, regulations and orders, and issue (a) Shares of stock, bonds, debentures,
opinions and provide guidance on and notes, evidences of indebtedness,
supervise compliance with such rules, asset-backed securities;
regulations and orders; (b) Investment contracts, certificates of
8. Enlist the aid and support of and/or interest or participation in a profit
deputize any and all enforcement sharing agreement, certificates of
agencies of the Government civil or deposit for a future subscription;
military as well as any private (c) Fractional undivided interests in oil,
institution, corporation, firm, association gas or other mineral rights;
or person; (d) Derivatives like option and warrants;
9. Issue cease and desist orders to prevent (e) Certificates of assignments,
fraud or injury to the investing public; certificates of participation, trust
10. Punish for contempt of the Commission, certificates, voting trust certificates
both direct and indirect; or similar instruments;
11. Compel the officers of any registered (f) Proprietary or non proprietary
corporation or association to call membership certificates
meetings of stockholders or members; incorporations; and
12. Issue subpoena duces tecum and (g) Other instruments as may in the
summon witnesses to appear, order the future be determined by the
examination, search and seizure of all Commission.
documents, papers, files and records,
tax returns, and books of accounts of 3.2 Issuer - the originator, maker, obligor,
any entity or person under investigation, or creator of the security.
subject to the provisions of existing
laws;
13. Suspend, or revoke after proper notice 3.3 Broker - a person engaged in the
and hearing, the franchise or certificate business of buying and selling securities for
of registration of corporations, the account of others.
partnerships or associations, upon any
of the grounds provided by law; 3.4 Dealer - any person who buys and
14. Such other powers as may be provided sells securities for his/her own account in the
by law as well as those which may be ordinary course of business.
implied from, or which are necessary or
incidental to powers which are expressly 3.5 Associated person of a broker
granted to the Commission. or dealer - an employee thereof who,
directly exercises control of supervisory
The Commission’s jurisdiction over all cases authority, but does not include a salesman,
enumerated under Sec 5 of PD 902-A is or an agent or a person whose functions are
hereby transferred to the Courts of general solely clerical or ministerial.
jurisdiction or the appropriate Regional Trial
Court. 3.6 Clearing Agency - any person who
acts as intermediary in making deliveries
The Commission shall retain jurisdiction over upon payment to effect settlement in
pending cases involving intra-corporate securities transactions.
disputes submitted for final resolution which
should be resolved within 1 year from the
enactment of this Code. 3.7 Exchange - an organized
marketplace or facility that brings together
The Commission shall retain jurisdiction over buyers and sellers and executes trades of
pending suspension of securities and/or commodities.
payments/rehabilitation cases filed as of 30
June 2000 until finally disposed. 3.8 Insider –
(a) the issuer;
(b) a director or officer (or person
3. Definition of Terms performing similar functions) of, or a
person controlling the issuer;
 (c) a person whose relationship or companies, listed or applying for listing, are
former relationship to the issuer required to divulge truthfully and accurately, all
gives or gave him access to material material information about themselves, and the
information about the issuer or the securities they sell, for the protection of the
security that is not generally investing public, and under the pain of
available to the public; administrative, criminal and civil sanctions. A
(d) a government employee, or director, fact is deemed material if it tends to induce or
or officer of an exchange, clearing otherwise effect the sale or purchase or its
agency and/or self-regulatory securities.
organization who has access to
material information about an issuer A reading of the grounds give for rejection or
or a security that is not generally registration reveals the intention of Congress to
available to the public; or make the registration and issuance of securities
(e) a person who learns such dependent, to a certain extent, on he merits of
information by a communication the securities themselves, and of the issuer, to
from any of the foregoing insiders. be determined by the SEC. Consequently, the
absolute reliance on the full disclosure method is
3.9 Pre-need plans – are contracts the registration of securities is, therefore,
which provide for the performance of future untenable.
services or the payment of future monetary
consideration at the time of actual need, for Procedure (Sec.12)
which planholders pay in cash or installment
at stated prices, with or without interest or 4.1 Filing of Registration Statement
insurance coverage and includes life,
pension, education, interment, and other All securities shall be registered through
plans which the Commission may from time the filing by the issuer in the main office
to time approve. of the Commission, of a sworn registra-
tion statement. The registration state-
3.10 Promoter - a person who, acting ment shall include any prospectus re-
alone or with others, takes initiative in quired or permitted to be delivered.
founding and organizing the business or
enterprise of the issuer and receives The information required for registration
consideration therefor. shall include, among others the effect of
the securities issue on ownership, on the
3.11 Registration statement - is the mix of ownership, especially foreign and
local ownership.
application for the registration of securities
required to be filed with the Commission.
The registration statement shall be
signed by
3.12 Salesman - a natural person, employed  the issuer’s executive officer
as such or as an agent, by a dealer, issuer or  principal operating officer
broker to buy and sell securities.  principal financial officer
 comptroller
3.13 Uncertified Security – a security  principal accounting officer
evidenced by electronic or similar records.  corporate secretary or
 persons performing similar
3.14 Underwriter - a person who functions
guarantees on a firm commitment and/or
declared best effort basis the distribution and Accompanied By a duly verified
sale of securities of any kind by another resolution of the board of directors of the
company. issuer coporation.

The written consent of the expert named

as having certified any part of the
4. Registration of Securities registration statement or any document
used in connection therewith shall also
Securities shall not be sold or offered for sale be filed.
or distribution within the Philippines, without
a registration statement duly filed with and Where the registration statement
approved by the Commission. (Sec. 8) includes shares to be sold by selling
shareholders, a written certification by
PSE vs. Court of Appeals (1997) such selling shareholders as to the
accuracy of any part of the registration
Under the policy of ”full material disclosure,” all
 statement contributed to by such selling
shareholders shall also be filed. If any change occurs in the facts set
forth in a registration statement, the
4.2 Payment of Fee issuer shall file an amendment thereto
setting forth the change.
The issuer shall pay to the Commission a
fee of not more than 1/10 of 1% of the 4.6 Acceptance or Rejection by SEC
maximum aggregate price at which such
securities are proposed to be offered. Within 45 days after the date of filing of
The Commission shall prescribe by rule the registration statement, or by such
diminishing fees in inverse proportion to later date to which the issuer has
the value of the aggregate price of the consented, the Commission shall declare
offering. the registration statement effective or
rejected, unless the applicant is allowed
4.3 Notice of Filing to amend the registration statement.

Notice of filing shall be immediately a) Acceptance

published by the issuer in 2 newspapers
of general circulation in the Philippines, The Commission shall declare the
once a week for 2 consecutive weeks, or registration statement to be
in such other manner as the Commission effective if it finds that the
shall prescribe, reciting that: registration statement together with
all the other papers and documents
 a registration statement for the sale attached thereto, is on its face
of such security has been filed, complete and that the requirements
 the registration statement, as well have been complied with.
as the papers attached thereto are
open to inspection, b) Rejection / Revocation (Sec. 13)
 copies shall be furnished to
interested parties at such reasonable The Commission may reject a
charge as the Commission may registration statement and refuse
prescribe. registration of the security, or
revoke the effectivity of a
4.4 Withdrawal of Registration registration statement and the
Statement registration of the security
thereunder after due notice and
A registration statement may be hearing if it finds that:
withdrawn by the issuer only with the
consent of the Commission. (Sec. 13)  The issuer:
o Has been judicially declared
4.5 Amendments to Registration insolvent;
Statement (Sec. 13) o Has violated any of the
provisions of this Code, the rules
If a registration statement is on its face promulgated pursuant thereto,
incomplete or inaccurate in any material or any order of the Commission
respect, the Commission shall issue an in connection with the offering
order directing the amendment of the for which a registration
registration statement. Upon compliance statement has been filed;
with such order, the amended o Has been or is engaged or is
registration statement shall become about to engage in fraudulent
effective upon compliance with the transactions;
procedure in Section 12.6. o Has made any false or
misleading representation of
An amendment filed prior to the material facts in any prospectus
effective date of the registration concerning the issuer or its
statement shall recommence the 45 day securities;
period within which the Commission o Has failed to comply with any
shall act on a registration statement. requirement that the
Commission may impose as a
An amendment filed after the effective condition for registration
date of the registration statement shall
become effective only upon such date as  The registration statement is on its
determined by the Commission. face incomplete or inaccurate in any
 material respect or includes any
untrue statement of a material fact or 5. Suspension of Offer
omits to state a material fact
required to be stated therein or and Sale (Sec. 13)
necessary to make the statements
therein not misleading; or  If the Commission deems it necessary, it
 The issuer, any officer, director or may issue an order suspending the offer
controlling person of the issuer, or and sale of the securities pending any
person performing similar functions, investigation. The order shall state the
or any underwriter has been grounds for taking such actions, but such
convicted, by a competent judicial or order of suspension although binding
administrative body, upon plea of upon persons notified thereof, shall be
guilty, or otherwise, of an offense deemed confidential, and shall not be
involving moral turpitude and/or published.
fraud or is enjoined or restrained by  If, at any time, the Commission finds
the Commission or other competent that a registration statement contains
judicial or administrative body for any false statement or omits to state
violations of securities, commodities, any fact required to be stated therein or
and other related laws. necessary to make the statements
 If any issuer shall refuse to permit therein not misleading, the Commission
an examination to be made by the may conduct an examination, and, after
Commission, its refusal shall be due notice and hearing, issue an Order
ground for the refusal or revocation suspending the effectivity of the
of the registration of its securities. registration statement. (Sec. 14)
 Failure of the issuer, underwriter, or any
PSE vs. Court of Appeals (1997) other person to cooperate, or his
obstruction or refusal to undergo an
The SEC has no power o overturn the decision of examination, shall be a ground for the
the PSE Board to deny listing of securities. issuance of a suspension order. (Sec. 14)
Questions of policy and management are left to  If, at any time, the information contained
the honest decision of officers an directors of a in the registration statement filed is or
corporation, and courts are without authority o has become misleading, incorrect,
substitute their judgment for judgment of the inadequate or incomplete in any
Board of Directors. The Boad is the business material respect, or the sale or offering
manger of the corporation, and as long as it acts for sale of the security registered
in good faith, its orders are not reviewable by he thereunder may work or tend to work a
courts. Also, as the primary market for securities, fraud, the Commission may require from
the PSE has established its name and goodwill, the issuer such further information
and it has the right to protect such goodwill by necessary to enable the Commission to
maintaining a reasonable standard of propriety in ascertain whether the registration of
the entities who choose to transact through its such security should be revoked. The
facilities. It was reasonable for PSE, therefore, to Commission may also suspend the right
exercise its judgment in the manner it deems to sell and offer for sale such security
appropriate for its business identity, as long as pending further investigation. (Sec. 15)
no rights are trampled upon and public welfare is  The refusal to furnish information
safeguarded. required by the Commission may be a
ground for the issuance of an order of
suspension. (Sec. 15)
4.7 Oath of Issuer
The order shall be deemed confidential, and
Upon effectivity of the registration shall not be published.
statement, the issuer shall state under
oath in every prospectus that all Upon the issuance of the suspension order,
registration requirements have been met no further offer or sale of such security shall
and that all information are true and be made until the same is lifted or set aside
correct as represented by the issuer or by the Commission. Otherwise, such sale
the one making the statement. shall be void.

Any untrue statement of fact or omission Notice of issuance of such order shall be
to state a material fact required to be given to the issuer and every dealer and
stated or necessary to make the broker who shall have notified the
statement therein not misleading shall Commission of an intention to sell such
constitute fraud. security.
 delivery in the ordinary course of
6. Securities and Transactions business and not for the purpose of
avoiding the provisions of this Code,
from Registration to liquidate a bona fide debt, a
security pledged in good faith as
6.1 Exempt Securities (Sec. 9) security for such debt.
(c) An isolated transaction in which any
(a) Any security issued or guaranteed security is sold, offered for sale,
by the Government of the subscription or delivery is not being
Philippines, or by any political made in the course of repeated and
subdivision or agency thereof, or by successive transactions by the
any person acting as an owner or his representative and
instrumentality of said Government. such owner or representative not
(b) Any security issued or guaranteed being the underwriter of such
by the government of any country security.
with which the Philippines maintains (d) The distribution by a corporation to
diplomatic relations, or by any state, its stockholders or other security
province or political subdivision holders as a stock dividend or other
thereof on the basis of reciprocity. distribution out of surplus.
(c) Certificates issued by a receiver or (e) The sale of capital stock of a
by a trustee in bankruptcy duly corporation to its own stockholders
approved by the proper adjudicatory exclusively, where no commission or
body. other remuneration is paid or given
(d) Any security or its derivatives the directly or indirectly in connection
sale or transfer of which is under the with the ale of such capital stock.
supervision and regulation of the (f) The issuance of bonds or notes
Office of the Insurance Commission, secured by mortgage upon real
Housing and Land Use Regulatory estate or tangible personal property,
Board, or the Bureau of Internal where the entire mortgage together
Revenue. with all the bonds or notes secured
(e) Any security issued by a bank thereby are sold to a single
except its own shares of stock. purchaser at a single sale.
(g) The issue and delivery of any
security in exchange for any other
Union Bank vs. SEC (2001)
security of the same issuer pursuant
to a right of conversion: Provided,
Although the shares of stock of banking
That the security surrendered has
institutions are exempt from registration
been registered under this Code or
requirements, a bank whose shares are listed in
was, when sold, exempt, and that
the stock market is covered by the RSA and the
the security delivered in exchange,
implementing rule on the reportorial
if sold at the conversion price, would
requirements of listed companies. The RSA
at the time of such conversion fall
exempts from registration the securities issued
within the class of securities entitled
by banking or financial institutions, but nowhere
to registration under this Code.
does its state or even imply that bank as a listed
Upon such conversion the par value
corporation is exempt from complying with
of the security surrendered in such
reports required by the RS IRRs.
exchange shall be deemed the price
at which the securities issued and
The Commission may, by rule or regulation delivered in such exchange are sold.
after public hearing, add to the foregoing any (h) Broker’s transactions, executed
class of securities if it finds that the enforcement upon customer’s orders, on any
of this Code with respect to such securities is not registered Exchange or other trading
necessary in the public interest and for the market.
protection of investors. (i) Subscriptions for shares of the
capital stock of a corporation prior to
6.2 Exempt Transactions (Sec. 10) incorporation or in pursuance of an
increase in its authorized capital
(a) At any judicial sale, or sale by an stock, when no expense is incurred,
executor, administrator, guardian or or no commission, compensation or
receiver or trustee in insolvency or remuneration is paid or given, and
bankruptcy. only when the purpose for soliciting,
(b) By or for the account of a pledge giving or taking of such
holder, or mortgagee or similar lien subscriptions is to comply with the
holder selling or offering for sale or requirements of such law as to the
 percentage of the capital stock at such time as the Commission by rule
which should be subscribed before it may prescribe and with such notice shall
can be registered and duly pay to the Commission a fee equivalent
incorporated, or its authorized to 1/10 of 1% of the maximum
capital increased. aggregate price or issued value of the
securities.
Nestle Philippines vs. Court of Appeals
(1991)
7. Tender Offer and Proxy
The language of the RSA exempting from
registration “issuance o additional capital stock,” Solicitation
must be interpreted to cover only issuance of
shares of stock as part of and in the course of 7.1 Tender Offers (Sec. 19)
increasing he authorized capital stock of a
corporation. It does not cover issuances of Parties Required to make
shares from already authorized but still unissued Tender Offer
capital stock.
(a) Any person or group of persons
(j) The exchange of securities by the acting in concert who intends to
issuer with its existing security acquire at least 15% of any
holders exclusively, where no class of any equity security of a
commission or other remuneration is listed corporation or of any class
paid. of any equity security of a
(k) The sale of securities by an issuer to corporation with assets of at
fewer than 20 persons in the least P50,000,000 and having
Philippines during any twelve-month 200 or more stockholders with
period. at least 100 shares each or
(l) The sale of securities to any of the (b) who intends to acquire at least
following qualified buyers: 30% of such equity over a
 Bank; period of 12 months shall make
 Registered investment house; a tender offer to stockholders by
 Insurance company; filing with the Commission a
 Pension fund or retirement plan declaration to that effect; and
maintained by the Government furnish the issuer a statement
or any political subdivision or containing such of the
managed by a bank or other information as the Commission
persons authorized by the may prescribe.
Bangko Sentral to engage in
trust functions; Withdrawal of tender Offer
 Investment company; or Securities deposited pursuant to a
 Such other person as the tender offer or request or invitation
Commission determine as for tenders may be withdrawn by or
qualified buyers, on the basis of on behalf of the depositor at any
such factors as financial time throughout the period that the
sophistication, net worth, tender offer remains open and if the
knowledge, and experience in securities deposited have not been
financial and business matters, previously accepted for payment,
or amount of assets under and at any time after 60 days from
management. the date of the original tender offer
or request or invitation, except as
The Commission may exempt other the Commission may otherwise
transactions, if it finds that the prescribe.
requirement of registration is not
necessary in the public interest or for the Securities offered exceed re-
protection of the investors such as by quired quantity
reason of the small amount involved or Where the securities offered exceed
the limited character of the public that which a person or group of
offering. persons is bound or willing to take
up and pay for, the securities that
Any person applying for an exemption of are subject of the tender offer shall
a transaction shall file with the be taken up as nearly as may be pro
Commission a notice identifying the rata, disregarding fractions,
exemption relied upon on such form and according to the number of
 securities deposited by each 7.3 Fees for Tender Offers and
depositor. Certain Proxy Solicitations (Sec.
21)
The provisions of this subsection
At the time of filing with the Commission
shall also apply to securities
of any statement required for any tender
deposited within 10 days after
offer or for proxy or consent solicitation,
notice of an increase in the
the Commission may require that the
consideration offered to security
person making such filing pay a fee of
holders is first published or sent or
not more than 1/10 of 1% of:
given to security holders.
 The proposed aggregate purchase
price in the case of a transaction
Variations of Tender Offer
under Sections 20 or 72.2; or
Where any person varies the terms
 The proposed payment in cash, and
of a tender offer or request or
the value of any securities or
invitation for tenders before the
property to be transferred in the
expiration thereof by increasing the
acquisition, merger or consolidation,
consideration offered to holders of
or the cash and value of any
such securities, such person shall
securities proposed to be received
pay the increased consideration to
upon the sale or disposition of such
each security holder whose
assets in the case of a solicitation
securities are taken up and paid for
under Section 20.
whether or not such securities have
been taken up by such person
before the variation of the tender 8. Regulation of Transactions
offer or request or invitation. of Directors / Officers /
7.2 Proxy Solicitations (Sec. 20) Principal Stockholders (Sec.
Proxies must be 23)
 in writing
 signed by the stockholder or his 8.1 Filing of Statement
duly authorized representative  Every person who is directly or
and indirectly the beneficial owner of more
 filed before the scheduled than 10% of any class of any equity
meeting with the corporate security or
secretary.  who is a director or an officer of the
issuer of such security,
Period of Validity
shall file, at the time either such requirement
Unless otherwise provided in the proxy, is first satisfied or within ten days after he
it shall be valid only for the meeting for becomes such a beneficial owner, director,
which it is intended. No proxy shall be or officer, a statement with the Commission
valid and effective for a period longer and, if such security is listed for trading on
than 5 years at one time. an Exchange, also with the Exchange, of the
amount of all equity securities of such issuer
No broker or dealer shall give any proxy, of which he is the beneficial owner, and
consent or authorization to a person within ten (10) days after the close of each
other than the customer, without the calendar month thereafter, if there has been
express written authorization of such a change in such ownership during such
customer. month, shall also file a statement indicating
his ownership at the close of the calendar
A broker or dealer who holds or acquires month and such changes as have occurred
the proxy for at least 10% or such during such calendar month.
percentage as the Commission may
prescribe of the outstanding share of the 8.2 Recovery of Damages for Unfair
issuer, shall submit a report identifying
the beneficial owner within 10 days after Use of Information
such acquisition, for its own account or
customer, to the issuer of the security, a. For the purpose of preventing the unfair use of
to the Exchange where the security is information which may have been obtained by
traded and to the Commission. such beneficial owner, director, or officer by
reason of his relationship to the issuer

 any profit realized by him from any

purchase and sale, or any sale and
 purchase, of any equity security of It shall be unlawful for any person acting
such issuer within any period of less for himself or through a dealer or broker,
than six (6) months, directly or indirectly:
o unless such security was
acquired in good faith in (a) To create a false or misleading
connection with a debt appearance of active trading in any
previously contracted, listed security traded in an
 shall inure to and be recoverable by Exchange or any other trading
the issuer, irrespective of any market:
intention of holding the security
purchased or of not repurchasing  By effecting any transaction in
the security sold for a period such security which involves no
exceeding 6 months. change in the beneficial
ownership thereof;
b. Suit to recover such profit may be instituted  By entering an order or orders
before the RTC by the issuer, or by the owner of for the purchase or sale of such
any security of the issuer in the name and in security with the knowledge that
behalf of the issuer if the issuer shall fail or a simultaneous order or orders of
refuse to bring such suit within 60 days after substantially the same size, time
request or shall fail diligently to prosecute the and price, for the sale or
same thereafter. But; purchase of any such security,
No such suit shall be brought more than has or will be entered by or for
t2 years after the date such profit was the same or different parties; or
realized.  By performing similar act where
there is no change in beneficial
It shall be unlawful for any beneficial owner, ownership.
director, or officer to sell any equity security
of such issuer if the person selling the (b) To effect, alone or with others, a
security or his principal: series of transactions in securities
that:
(a) Does not own the security sold; or
(b) If owning the security, does not  Raises their price to induce the
deliver it against such sale within 20 purchase of a security;
days thereafter, or does not within 5  Depresses their price to induce
days after such sale deposit it in the the sale of a security; or
mails or other usual channels of  Creates active trading to induce
transportation; such a purchase or sale through
manipulative devices such as
But no person shall be deemed to have marking the close, painting the
violated this subsection if he proves that tape, squeezing the float, hype
notwithstanding the exercise of good faith he and dump, boiler room
was unable to make such delivery or deposit operations and such other similar
within such time, or that to do so would devices.
cause undue inconvenience or expense.
(c) To circulate or disseminate
The provisions of Subsection 23. 2 shall not information that the price of any
apply to any purchase and sale, or sale and security listed in an Exchange will or
purchase and the provisions of Subsection is likely to rise or fall because of
23.3 shall not apply to any sale, of an equity manipulative market operations of
security not then or thereafter held by him in any one or more persons conducted
an investment account, by a dealer in the for the purpose of raising or
ordinary course of his business and incident depressing the price of the security
to the establishment or maintenance by him for the purpose of inducing the
of a primary or secondary market, otherwise purchase or sale of such security.
than on an Exchange, for such security.
(d) To make false or misleading
statement with respect to any
9. Prohibitions material fact, which he knew or had
reasonable ground to believe was so
9.1 Manipulation of Security false or misleading, for the purpose
Prices of inducing the purchase or sale of
any security listed or traded in an
Exchange.
 (e) To effect any series of transactions
for the purchase and/or sale of any (b) would be considered by a reasonable
security traded in an Exchange for person important under the
the purpose of pegging, fixing or circumstances in determining his course
stabilizing the price of such security, of action whether to buy, sell or hold a
unless otherwise allowed by this security.
Code or by rules of the Commission.
Communication of the Information
9.2 Insider Trading It shall be unlawful for any insider to
communicate material non-public
Parties covered : information about the issuer or the
 Insider security to any person who, by virtue of
 insider’s spouse or relatives by the communication, becomes an insider,
affinity or consanguinity within the where the insider communicating the
second degree, legitimate or information knows or has reason to
common-law, believe that such person will likely buy
or sell a security of the issuer while in
It shall be unlawful for an insider to sell possession of such information.
or buy a security of the issuer, while in
possession of material information with Insider Trading in Relation to Ten-
respect to the issuer or the security that der Offers
is not generally available to the public,
unless: (Sec. 27) a.) It shall be unlawful where a tender
offer has commenced or is about to
(a) The insider proves that the commence for:
information was not gained from  Any person (other than the
such relationship; or tender offeror) who is in
(b) If the other party selling to or buying possession of material non-public
from the insider (or his agent) is information relating to such
identified, the insider proves: tender offer, to buy or sell the
 that he disclosed the securities of the issuer that are
information to the other party, or sought or to be sought by such
 that he had reason to believe tender offer if such person knows
that the other party otherwise is or has reason to believe that
also in possession of the o the information is non-
information. public and
o has been acquired
Presumption directly or indirectly
A purchase or sale of a security of the from the tender offeror,
issuer shall be presumed to have been those acting on its
effected while in possession of material behalf, the issuer of the
non-public information if transacted after securities, or any insider
such information came into existence of such issuer; and
but prior to dissemination of such  Any tender offeror, those acting
information to the public and the lapse on its behalf, the issuer of the
of a reasonable time for the market to securities, and any insider to
absorb such information communicate material non-public
information relating to the tender
This presumption shall be rebutted upon offer to any other person where
a showing by the purchaser or seller that such communication is likely to
he was not aware of the material non- result in a violation of subsection
public information at the time of the 27.4.
purchase or sale.
10. Regulation of Market
Material non-public information: Professionals and Other
Entities
(a) It has not been generally disclosed to
the public and would likely affect the 10.1 Registration of Brokers,
market price of the security after being
disseminated to the public and the lapse Dealers, Salesmen and Associated
of a reasonable time for the market to Persons
absorb the information; or
General Rule :
o No person shall engage in the have due regard to the
business of buying or selling requirements of the law.
securities in the Philippines as a
broker or dealer, or act as a Exception:
salesman, or an associated person The Commission may conditionally
of any broker or dealer unless or unconditionally exempt any
registered as such with the broker, dealer, salesman,
Commission. associated person of any broker or
o No registered broker or dealer dealer, or any class of the
shall employ any salesman or any foregoing, from registration as it
associated person, and no issuer deems consistent with the public
shall employ any salesman, who is interest and the protection of
not registered as such with the investors. (Sec. 28.3)
Commission.

o Nicolas vs CA (1998): Procedure (Sec. 28.5):

The futility of petitioner's action o A broker or dealer may apply

became more pronounced by the for registration by filing with the
fact that he traded securities for Commission a written application.
the account of others without the o Registration of a salesman or
necessary license from the SEC. of an associated person of a
Clearly, such omission was in registered broker or dealer
violation of Section 19 of the may be made upon written
Revised Securities Act. application filed with the
Commission by such salesman or
The purpose of the statute associated person. For purposes
requiring the registration of of this action, salesman shall not
brokers selling securities and the include any employee of an issuer
filing of data regarding securities whose compensation is not
which they propose to sell, is to determined directly or indirectly
protect the public and strengthen on sales of securities of the issuer.
the securities mechanism.
10.2 Qualifications of Market
American jurisprudence Professionals (Sec. 28.4)
emphasizes the principle that:
"an unlicensed person may not The Commission shall promulgate
recover compensation for services rules and regulations prescribing the
as a broker where a statute or qualifications for registration of each
ordinance requiring a license is category of applicant, which shall,
applicable and such statute or among other things, require as a
ordinance is of a regulatory condition for registration that:
nature, was enacted in the
exercise of the police power for (a) If a natural person, the applicant
the purpose of protecting the satisfactorily pass a written
public, requires a license as examination as to his
evidence of qualification and proficiency and knowledge in
fitness, and expressly precludes the area of activity for which
an unlicensed person from registration
recovering compensation by suit, (b) In the case of a broker or dealer,
or at least manifests an intent to the applicant satisfy a
prohibit and render unlawful the minimum net capital and
transaction of business by an provide a bond or other
unlicensed person." security as the Commission
may prescribe
We see no reason not to apply the (c) If located outside of the
same rule in our jurisdiction. Stock Philippines, the applicant files
market trading, a technical and a written consent to service of
highly specialized institution in the process upon the Commission
Philippines, must be entrusted to pursuant to Sec. 65 hereof.
individuals with proven integrity,
competence and knowledge, who
10.3 SEC Action (Sec. 28.8)
 a. Within 30 days after the filing of any
application, the Commission shall by (a) Has willfully violated any provision
order: of this Code, any rule, regulation
or order made hereunder, or any
(a) Grant registration if it other law administered by the
determines that the Commission, or in the case of a
requirements of this Section registered broker, dealer or
and the qualifications for associated person has failed to
registration have been supervise, with a view to
satisfied; or preventing such violation,
(b) Deny said registration. another person who commits
such violation;
b. The names and addresses of all (b) Has willfully made or caused to be
persons approved for registration made a materially false or
and all orders of the Commission misleading statement in any
with respect thereto shall be application for registration or
recorded in a Register of Securities report filed with the Commission
Market Professionals kept in the or a self-regulatory organization,
office of the Commission which shall or has willfully omitted to state
be open to public inspection. any material fact that is
required to be stated therein;
10.4 Continuing Requirements (c) Has failed to satisfy the
qualifications or requirements
o Every person registered shall file for registration and the rules
with the Commission information and regulations;
necessary to keep the application (d) Has been convicted by a
for registration current and competent judicial or
accurate,. administrative authority of an
o Every person registered shall pay offense involving moral
to the Commission an annual fee. turpitude, fraud, embezzlement,
Upon notice by the Commission counterfeiting, theft, estafa,
that such annual fee has not been misappropriation, forgery,
paid as required, the registration bribery, false oath, or perjury, or
of such person shall be suspended of a violation of securities,
until payment has been made. commodities, banking, real
estate or insurance laws;
10.5 Termination of Registration (e) Is enjoined or restrained by a
competent judicial or
of Salesman or Associated Person administrative body from
engaging in securities,
The registration of a salesman or commodities, banking, real
associated person shall be estate or insurance activities or
automatically terminated upon the from willfully violating laws
cessation of his affiliation with said governing such activities;
registered broker or dealer, or with an (f) Is subject to an order of a
issuer in the case of a salesman competent judicial or
employed, appointed or authorized by administrative body refusing,
such issuer. revoking or suspending any
registration, license or other
The registered broker or dealer, or permit under this Code, the
issuer, as the case may be, shall file rules and regulations
with the Commission a notice of promulgated thereunder, any
separation of such salesman or other law administered by the
associated person. Commission;
(g) Is subject to an order of a self-
10.6 Revocation, Refusal or regulatory organization
Suspension of Registration of suspending or expelling him
Brokers, Dealers, Salesmen and from membership or
participation therein or from
Associated Persons (Sec. 29)
association with a member or
participation thereof;
If, after due notice and hearing, the
(h) Has been found by a competent
Commission determines the applicant
judicial or administrative
or registrant:
authority, to have willfully
 violated any provisions of adjustment of business disputes, of acquiring and
securities, commodities, dissemination valuable commercial and
banking, real estate or economic information and generally of securing
insurance laws, or has willfully to its members the benefits of co-operation in
aided, abetted, counseled, the furtherance of their legitimate pursuits.
commanded, induced or
procured such violation; or Carolina Industries vs. CMS Stock
(i) Has been judicially declared Brokerage (1980)
insolvent.
The rules and regulations of the Exchange form
29.4. It shall be sufficient cause for refusal, part of the contract covering securities
revocation or suspension of a broker's or transacted within the facilities of Exchange.
dealer’s registration, if any associated
person thereof or any juridical entity Sec Opinion #11 (2003)
controlled by such associated person has
committed any act or omission or is subject It is important to stress that the
to any disability enumerated earlier. Securities Regulation Code (SRC) treats
exchanges as a special specie of
Transactions and Responsibility of Brokers and corporation and subjects them to rules
Dealers (Sec. 30) not otherwise applicable to regular
corporations.
a. Prohibition against dealing or
otherwise selling or buying, for its The stock exchange performs a function
account of customers, securities listed vital to the national economy, a function
on an Exchange issued by any vested with public interest. It is said that
corporation where any stockholder, the economy moves on the basis of the
director, associated person or salesman, rise and fall of the stocks traded and
or authorized clerk of said broker or thus, the integrity of the exchange
dealer and all the relatives of the overseeing these transactions can never
foregoing within the fourth civil degree o be over emphasized. It is for this reason
consanguinity or affinity, is at the time that the SRC provides for stricter rules
holding office in said issuer corporation on exchange regulation. The SRC
as a director, president, vice-president, devotes a whole chapter on exchanges
manager, treasurer, comptroller, and other securities trading markets,
secretary or any office or trust and and it is replete with provisions designed
responsibility, or is a controlling person to professionalize the exchange,
of the issuer. encourage greater public participation,
ensure increased transparency, greater
b. Prohibition against effecting any responsibility and improve corporate
transaction in securities or induce or governance. These provisions are not
attempt to induce the purchase or sale found in the Corporation Code and are
of any security except in compliance meant as additional legal requirements
with such rules and regulations as the applicable only to exchanges.
Commission shall prescribe to ensure
fair and honest dealings in securities and It is thus incorrect to argue that the
provide financial safeguards an other provisions of the Corporation Code alone
standards for the operation o brokers govern the operation of exchanges.
and dealers. While the Corporation Code applies to
corporations in general, the SRC is a
special law that primarily governs the
11. Regulation of Exchanges regulation of exchanges. As between a
specific statute and a general statute,
the former must prevail since it evinces
11.1 Nature of Stock Exchanges the legislative intent more clearly than a
general statute does.
Lopez, et. al vs. Court of Appeals (1988)
Thus the SEC has the power of
An exchange is a voluntary association or supervision over exchanges.
corporation organized for the purpose of Supervision entails overseeing or the
furnishing to its members a convenient and power or authority to see that
suitable place to transact their business of subordinate subject performs its duties.
promoting uniformity in the customs and usages If the latter fails or neglects to fulfill
of merchants, of inculcating principles of justice them the former may take such action or
and equity in trade, of facilitating the speedy
 step as prescribed by law to make them Exchange and no industry or
perform its duties. In this specific business group may beneficially
instance, the SEC can even take over the own or control more than 20% of
management of the exchange as the voting rights of the Exchange:
authorized by the SRC. Provided, however, That the
Commission may adopt rules,
11.2 Registration Procedure (Sec. regulations or issue an order, upon
33) application, exempting an
applicant from this prohibition
Any Exchange may be registered as such where it finds that such ownership
with the Commission by filing an or control will not negatively
application for registration in such form impact on the exchange’s ability
and containing such information and to effectively operate in the public
supporting documents as the interest;
Commission by rule shall prescribe, (d) The expulsion, suspension, or
including the following: disciplining of a member and
persons associated with a member
(a) An undertaking to comply and for conduct or proceeding
enforce compliance by its inconsistent with just and
members with the provisions of equitable principles of fair trade,
this Code, its implementing rules and for violations of provisions of
or regulations and the rules of the this Code or the rules of the
Exchange; Exchange;
(b) The organizational charts of the (e) A fair procedure for the disciplining
Exchange, rules of procedure, and of members and persons
a list of its officers and members; associated with members, the
(c) Copies of the rules of the Exchange; denial of membership to any
and person seeking to be a member,
(d) An undertaking that in the event a the barring of any person from
member firm becomes insolvent association with a member, and
or when the Exchange shall have the prohibition or limitation of any
found that the financial condition person from access to services
of its member firm has so offered by the Exchange;
deteriorated that it cannot readily (f) That the brokers in the board of the
meet the demands of its Exchange shall comprise of not
customers for the delivery of more than 49% of such board and
securities and/or payment of sales shall proportionately represent the
proceeds, the Exchange shall take Exchange membership in terms of
over the operation of the insolvent volume/value of trade and paid up
member firm and immediately capital, and that any natural
proceed to settle the member person associated with a juridical
firm’s liabilities to its customers. entity that is a member shall
himself be deemed to be a
Registration of an Exchange shall be granted member for this purpose;
upon compliance with the following (g) For the board of the Exchange to
provisions: include in its composition
(i) the president of the Exchange,
(a) That the applicant is organized as a and
stock corporation; (ii) no less than 51% of the
(b) That the applicant is engaged solely remaining members of the board
in the business of operating an to be comprised of 3 independent
exchange: Provided, however, directors and persons who
That the Commission may, upon represent the interests of issuers,
application, exempti an Exchange investors, and other market
organized as a stock corporation participants, who are not
and owned and controlled by associated with any broker or
another juridical person from this dealer or member of the Exchange
restriction; for a period of 2 years prior to
(c) Where the Exchange is organized as his/her appointment.
a stock corporation, that no
person may beneficially own or No officer or employee of a
control, directly or indirectly, more member, its subsidiaries or
than 5% of the voting rights of the affiliates or related interests shall
become an independent director:
 Provided, however, That the  an account with respect to which it
Commission may by rule, or an associated person thereof
regulation, or order upon exercises investment discretion
application, permit the exchange
organized as a stock corporation Provided, however, That this section shall not
to use a different governance make unlawful –
structure:
(a) Any transaction by a member-broker
Provided, further, That the acting in the capacity of a market
Commission is satisfied that the maker;
Exchange is acting in the public (b) Any transaction reasonably
interest and is able to effectively necessary to carry on an odd-lot
operate as a self-regulatory transactions;
organization under this Code. (c) Any transaction to offset a
transaction made in error; and
(h) The president and other (d) Any other transaction of a similar
management of the Exchange to nature as may be defined by the
consist only of persons who are Commission.
not members and are not
associated in any capacity, Sec Opinion #11 (2003)
directly or indirectly with any The above-quoted Sec. 33.2. of the SRC is
broker or dealer or member or not found in the old Revised Securities Act,
listed company of the Exchange: nor in the Corporation Code. Items (c), (f)
Provided, That the Exchange may and (g) thereof are all intended to encourage
only appoint, and a person may greater public participation, ensure
only serve, as an officer of the increased transparency, greater
exchange if such person has not responsibility and improve corporate
been a member or affiliated with governance.
any broker, dealer, or member of
the Exchange for a period of at Subsection (c) mandates that the ownership
least 2 years prior to such of the stocks of the exchange be broadened
appointment; and democratized, thereby ensuring greater
(i) The transparency of transactions on public participation.
the Exchange;
(j) The equitable allocation of On the other hand, Subsections (f) and (g)
reasonable dues, fees, and other mandate a board composition where no
charges among members and more than 49% of the seats shall be
issuers and other persons using occupied by brokers, and no less than 51%
any facility or system which the to be comprised of (3) independent directors
Exchange operates or controls; and persons representing other sectors of
(k) Prevention of fraudulent and the market. With respect to independent
manipulative acts and practices, directors, their election in the Board is
promotion of just and equitable intended to ensure that the Board will
principles of trade, and, in faithfully discharge its fiduciary
general, protection of investors responsibilities to its stockholders.
and the public interest; and
(l) The transparent, prompt and These provisions aim for a more
accurate clearance and settlement representative, democratic, independent
of transactions effected on the Board of Directors that is autonomous from
Exchange. the control of any sector of the market.

11.3 Segregation and Limitation of

Functions of Members, Brokers and
Dealers (Sec. 34)

It shall be unlawful for any member- 12. Independent Directors

broker of an Exchange to effect any
transaction on such Exchange for: Any corporation with

 a class of equity securities listed for

 its own account, trading on an Exchange or
 the account of an associated person,  with assets in excess of P50,000,000.00
or and having 200 or more holders, at least
 of 200 of which are holding at least 100
shares of a class of its equity securities Such association shall not be registered
or which has sold a class of equity unless the Commission determines that:
securities to the public pursuant to an
effective registration statement (a) The association is so organized and
has the capacity to be able to carry
Shall have at least 2 independent directors out the purposes of this Code and to
or such independent directors shall comply with, and to enforce
constitute at least 20% of the members of compliance by its members and
such board, whichever is the lesser. persons associated with its members
with the provisions of this Code.
An “independent director” shall mean a (b) The rules of the association,
person other than an officer or employee of notwithstanding anything in the
the corporation, its parent or subsidiaries, or Corporation Code to the contrary,
any other individual having a relationship provide that:
with the corporation, which would interfere
with the exercise of independent judgment in  Any registered broker or
carrying out the responsibilities of a director. dealer may become a
member of the association;
13. Self-Regulatory  There exist a fair
representation of its
Organizations members to serve on the
Board of Directors of the
13.1 Scope / Definition (Sec. 39) association and in the
administration of its affairs,
The Commission shall have the power to and that any natural person
register as a self-regulatory organization associated with a juridical
organizations whose operations are entity that is a member shall
related to or connected with the himself be deemed to be a
securities market such as but not limited member for this purpose;
to  The Board of Directors of
the association includes in its
 associations of brokers and dealers, composition: (a) The
 transfer agents, president of the association
 custodians, and (b) Persons who
 fiscal and paying agents, represent the interests of
 computer services, issuers and public investors
 news disseminating services, and are not associated with
 proxy solicitors, any broker or dealer or
 statistical agencies, member of the association;
 securities rating agencies, and that the president and other
 securities information processors management of the
association not be a member
Which are engaged in the business of: or associated with any
broker, dealer or member of
(a) Collecting, processing, or preparing the association;
for distribution or publication, or  For the equitable allocation
assisting, participating in, or of reasonable dues, fees, and
coordinating the distribution or other charges among
publication of, information with members and issuers and
respect to transactions in or other persons using any
quotations for any security; or facility or system which the
(b) Distributing or publishing on a association operates or
current and continuing basis, controls;
information with respect to such  For the prevention of
transactions or quotations. fraudulent and manipulative
acts and practices, the
13.2 Registration promotion of just and
equitable principles of trade,
An association of brokers and dealers and the protection of
may be registered as a securities investors and the public
association by filing with the Commission interest;
an application for registration.  That its members and
persons associated with its
 members, be appropriately  Does not meet the
disciplined for violation of standards of training,
any provision of this Code; experience, or competence
 That a fair procedure for the that are prescribed by the
disciplining of members, and rules of the association; or
the denial of membership to  Has engaged, and there is
any person seeking a reasonable likelihood he
membership therein, the will again engage, in acts
barring of any person from or practices inconsistent
becoming associated with a with just and equitable
member thereof, and the principles of fair trade.
prohibition or limitation by
the association of any person
with respect to access to 14 Margin Trading
services offered by the
association or a member
thereof. 14.1 Margin Requirements (Sec. 48)

For the purpose of preventing the

13.3 Denial of Membership /
excessive use of credit for the purchase
Employment (Sec. 39.4) or carrying of securities, the
Commission, shall prescribe rules and
(a) A registered securities association regulations with respect to the amount
shall deny membership to any of credit that may be extended on any
person who is not a registered security.
broker or dealer.
(b) A registered securities association For the extension of credit, such rules
may deny membership to, or and regulations shall be based upon the
condition the membership of, a following standard:
registered broker or dealer if such
broker or dealer: An amount not greater than whichever is
 Does not meet the the higher of –
standards of financial
responsibility, operational (a) 65% of the current market price of
capability, training, the security; or
experience, or competence (b) 100%)of the lowest market price of
that are prescribed by the the security during the preceding
rules of the association; or 36 calendar months, but not more
 Has engaged, and there is than 75% of the current market
a reasonable likelihood it price.
will again engage, in acts
or practices inconsistent 14.2 Prohibited Credit Arrangements
with just and equitable
(Sec. 48.2)
principles of fair trade.
(c) A registered securities association
No member of an Exchange or broker or
may deny membership to a
dealer shall, directly or indirectly, extend
registered broker or dealer not
or maintain credit or arrange for the
engaged in a type of business in
extension or maintenance of credit to or
which the rules of the association
for any customer:
require members to be engaged:
Provided, however, That no
(a) On any security unless such credit is
registered securities association
extended and maintained in
may deny membership to a
accordance with the rules and
registered broker or dealer by
regulations which the Commission
reason of the amount of business
shall prescribe;
done by the broker or dealer.
(b) Without collateral or on any
(d) A registered securities association
collateral other than securities,
may bar a salesman or person
except
associated with a broker or dealer
 to maintain a credit initially
from being employed by a
extended in conformity with
member or set conditions for the
the rules and regulations of
employment of a salesman or
the Commission; and
associated if such person:
 in cases where the
extension or maintenance of
 credit is not for the purpose Commission may prescribe, which shall
of purchasing or carrying in no case exceed the prescribed
securities or of evading or settlement date.
circumventing the provisions
of par (a) of this subsection. Otherwise, the broker shall sell the
security purchased starting on the next
14.3 Restrictions on Borrowings by trading day but not beyond 10 trading
Members, Brokers, and Dealers (Sec. days following the last day for the
customer to pay such purchase price,
49) unless such sale cannot be effected
within said period for justifiable reasons.
It shall be unlawful for any registered
broker or dealer, or member of an
The sale shall be without prejudice to the
Exchange, directly or indirectly:
right of the broker or dealer to recover
any deficiency from the customer. To
 To permit in the ordinary course of
prevent indirect violation of restrictions
business his aggregate indebtedness
on borrowings under Section 49, the
including customers’ credit
broker shall, unless otherwise directed
balances, to exceed such
by the customer, pay the net sales price
percentage of the net capital
of the securities sold for a customer
(exclusive of fixed assets and value
within the same period as above
of Exchange membership) employed
prescribed by the Commission
in the business, but not exceeding in
any case 2,000%, as the
Provided, That the customer shall be
Commission may prescribe.
required to deliver the instruments
 To pledge, mortgage, or otherwise
evidencing the securities as a condition
encumber any security carried for
for such payment upon demand by the
the account of any customer under
broker.
circumstances:
o That will permit the
commingling of his securities, 15. Administrative Sanctions
without his written consent, with and Settlement Offers
the securities of any customer;
o That will permit such
15.1 Administrative Sanctions (Sec.
securities to be commingled
with the securities of any person 54)
other than a bona fide
customer; or If, after due notice and hearing, the
o That will permit such Commission finds that:
securities to be pledged,
mortgaged or encumbered, or (a) There is a violation of this Code, its
subjected to any lien or claim of rules, or its orders;
the pledgee, for a sum in excess (b) Any registered broker or dealer,
of the aggregate indebtedness associated person thereof has
of such customers in respect of failed reasonably to supervise
such securities. another person subject to
 To lend or arrange for the lending of supervision, who commits any
any security carried for the account such violation;
of any customer without the written (c) Any registrant or other person has,
consent of such customer or in in a registration statement or in
contravention of such rules and other reports, applications,
regulations as the Commission shall accounts, records or documents
prescribe. made any untrue statement of a
material fact, or omitted to state
any material fact required to be
14.4 Enforcement of Margin stated therein or necessary to
Requirements and Restrictions on make the statements therein not
Borrowing (Sec. 50) misleading;
(d) or, in the case of an underwriter, has
To prevent indirect violations of the failed to conduct an inquiry with
margin requirements, the broker or reasonable diligence to insure that
dealer shall require the customer in non- a registration statement is
margin transactions to pay the price of accurate and complete in all
the security within such period as the material respects; or
 (e) Any person has refused to permit of the filing of the registration
any lawful examinations into its statement or any part,
affairs, supplement or amendment
thereof;
The imposition of administrative (c) Every person who is named in the
sanctions shall be without prejudice to registration statement as being or
the filing of criminal charges. about to become a director or a
partner;
15.2 Settlement Offers (Sec. 55) (d) Every auditor or auditing firm named
as having certified any financial
At any time, during an investigation or statements used in connection
proceeding under this Code, parties with the registration statement or
being investigated and/or charged may prospectus.
propose in writing an offer of settlement (e) Every person who, with his written
with the Commission. consent has been named as
having prepared or certified any
The Commission may consider the offer part of the registration statement,
based on timing, the nature of the or as having prepared or certified
investigation or proceeding, and the any report or valuation which is
public interest. used in connection with the
registration statement.
The Commission may only agree to a (f) Every selling shareholder who
settlement offer based on its findings contributed to and certified as to
that such settlement is in the public the accuracy of a portion of the
interest. Any agreement to settle shall registration statement.
have no legal effect until publicly (g) Every underwriter with respect to
disclosed. Such decision may be made such security.
without a determination of guilt on the
part of the person making the offer. Possible Defense :

Such person may allege that at the time

16. Civil Liabilities (Sec. 56) of such acquisition he knew of no such
untrue statement or omission:
16.1 On Account of False
Registration Statement 16.2 On Account of Insider Trading
(Sec. 61)
Who may sue?
Who may be sued?
Any person
 acquiring a security, the registration Any insider who violates Subsection 27.1
statement of which or any part and any person in the case of a tender
thereof contains on its effectivity an offer who violates Subsection 27.4 (a)(i),
untrue statement of a material fact or or any rule or regulation thereunder, by
omits to state a material fact purchasing or selling a security while in
required to be stated therein or possession of material information not
necessary to make such statements generally available to the public, shall be
not misleading, and liable in a suit brought by any investor
 who suffers damage who, contemporaneously with the pur-
chase or sale of securities that is the
If the person who acquired the security subject of the violation, purchased or
did so after the issuer has made sold securities of the same class unless
generally available to its security holders such insider, or such person in the case
an income statement covering a period of a tender offer, proves that such in-
of at least 12 months, then the right of vestor knew the information or would
recovery shall be conditioned on proof have purchased or sold at the same
that such person acquired the security price regardless of disclosure of the in-
relying upon such untrue statement. formation to him.
An insider who communicates material
Who may be sued? non-public information, shall be jointly
(a) The issuer and every person who and severally liable with and to the same
signed the registration statement; extent as, the insider, or person in the
(b) Every person who was a director or case of a tender offer.
a partner in the issuer at the time
17. Limitation of Actions (Sec.
The Court is also authorized to award
62) attorney’s fees not exceeding 30% of the
award.
No action shall be maintained to enforce any
liability created under Section 56 (false 18.2 Persons liable to pay
registration statement) or 57 (false
prospectus. Communications, reports) unless The persons specified in Sections 56, 57,
brought within 2 years after the discovery 58, 59, 60 and 61 hereof shall be jointly
of the untrue statement or the omission. and severally liable fo he payment of
damages. However, any person who
If the action is to enforce a liability created becomes liable for the payment of such
under Subsection 57.1(a) (registration of damages may recover contribution from
securities), unless brought within 2 years any other person who, if sued
after the violation upon which it is based. separately, would have been liable to
make the same payment, unless the
In no event shall any such action be brought former was guilty of fraudulent
to enforce a liability created under Section representation and the latter was not.
56 or Subsection 57.1 (a) more than 5 years
after the security was bona fide offered to All persons, including the issuer, held
the public, or under Subsection 57.1 (b) liable under the provisions of Sections
(sale based on false prospectus, 56, 57, 58, 59, 60 and 61 shall
communications, reports) more than 5 years contribute equally to the total liability
after the sale. adjudged herein.

No action shall be maintained to enforce any In no case shall the principal

liability created under any other provision of stockholders, directors and other
this Code unless brought: officers, recover their contribution to the
liability from the issuer. However, the
 within 2 years after the right of the issuer to recover from the
discovery of the facts constituting guilty parties the amount it has
the cause of action and contributed shall not be prejudiced.
 within 5 years after such cause
of action accrued.
19. Non-waiver of Provisions
18. Damages to be Awarded
(Sec. 63) Any condition, stipulation, provision binding
any person to waive compliance with any
18.1 Amounts / Kinds of Damages provision of this Code or of any rule of an
Exchange as well as the waiver itself, shal be
All suits to recover damages pursuant to void.
Sections 56 (false registration
statement), 57 (false prospectus,
communications, reports), 58 (fraud in 20. Penalties
connection with securities transactions),
59 (manipulation of prices), 60 Any person who violates any of the
(commodity futures contracts and pre- provisions of this Code or any person who, in
need plans) and 61 (insider trading) shall a registration statement makes any untrue
be brought before the RTC, which shall statement of a material fact or omits to state
have exclusive jurisdiction to hear and any material fact required to be stated
decide such suits. therein or necessary to make the statements
therein not misleading, shall, upon
The Court is hereby authorized to award conviction, suffer
damages in an amount not exceeding
triple the amount of the transaction plus  a fine of not less than P50,000.00
actual damages. nor more than P5,000,000.00 or
 imprisonment of not less than 7
Exemplary damages may also be years nor more than 21 years, or
awarded in cases of bad faith, fraud,  both in the discretion of the court.
malevolence or wantonness in the
violation of this Code, and rules and If the offender is a corporation, partnership
regulations promulgated hereunder. or association or other juridical entity, the
penalty may be imposed upon such juridical
entity and upon the officer or officers of the
corporation, partnership, association or
entity responsible for the violation. If such
officer is an alien, he shall in addition to the
penalties prescribed, be deported.